European shares fell to a two-month low on Wednesday and braced for a bumpy ride after a disappointing auction of Spanish debt reignited fears about the euro zone debt crisis after three months of calm. The pan-European FTSEurofirst 300 index closed 2 percent lower at 1,050.99, posting its biggest one-day drop in a month.
Eurozone banks, which own the bulk of the region's government debt, fell 3.1 percent after Spain sold fewer bonds than it had hoped, reflecting investor anxiety about the country's efforts to reduce its deficit. Debt fears were exacerbated by euro zone orderss data suggesting the region was likely in a mild recession, which means governments have even less room for manoeuvre if they need to implement new austerity measures.
Struggling Belgian financial group KBC Groep, which closed the first quarter up 93 percent, fell 9.3 percent in volume nearly three times its average, while France's Credit Agricole fell 5.2 percent and Italy's Banco Popolare was down 4.8 percent. "I'm just amazed at how fast the wheels have come off," Justin Haque, a pan-European trader at Hobart capital, said, adding he had witnessed heavy selling on European indexes from long-short funds. "The trouble is more austerity is impossible with Spain's level of unemployment."
The euro zone's Euro Stoxx 50 fell 2.5 percent to 2,398, testing the lower boundary of an uptrend channel started in December and the 50 percent retracement of its December-March move, both in the 2,400 region. That signalled a four-month rally supported by the European Central Bank's liquidity intervention was likely coming to an end. Investors were seeking protection against further losses on euro zone shares, sending the Euro Stoxx Volatility index, which measures put and call options on the cash index and is regarded as a gauge of investor anxiety, up 16.1 percent to 25.86.
"The euro crisis always comes in waves and this one is clearly a new wave," Holger Schmieding, chief economist at Berenberg Bank, said. "There is a lot of volatility and today it doesn't feel like it is the bottom already." Schmieding said the new wave promised to be less "vicious" than the previous one that pummelled the market in the second half of last year, given that the size of Spain's debt put it within the reach of Europe's rescue fund. He said he still expected European equities to end the year above current levels. His views were mirrored by UBS's head of thematic strategy, Karen Olney, who said global investors still saw value in European equities.