European markets fall on interest-rate worries

May 26, 1994|By Bloomberg Business News

LONDON -- Stocks and bonds tumbled across Europe yesterday amid growing concern that the long slide in interest rates is over even as some countries are struggling to get their economies moving again.

In Germany, the Bundesbank was persuaded to cancel a regularly scheduled sale of government bonds after yields climbed 10 basis points to 6.80 percent, their highest level in almost a year.

"The Bundesbank just ran into a buyer's strike at these rates, and that's very worrying for the bond market," said Jouni Kokko, economist at S. G. Warburg. The lurch in yields was partly of the Bundesbank's making as it signaled a reluctance to reduce interest rates further.

The markets were roiled in part by comments from Bundesbank council member Reimut Jochimsen about the need for caution about further interest rate cuts. He warned of the inflationary risks of raging German money supply growth and excess government borrowing.

The turmoil contributed to a domino effect: Yields on British government 10-year bonds climbed to 8.26 percent from 8.1 percent, while the yield on the benchmark French 10-year bond rose to 7.08 percent from 6.94 percent.

In Europe's stock markets, the declines were also severe. Stock averages fell more than 2 percent in Britain, Italy, France, Denmark, Finland and Spain. Averages fell more than 1 percent in Germany and Belgium.

Many European countries are still wrestling with high unemployment, industrial retrenchment and a concern that inflation may increase this year. So investors are trying to preserve gains, especially if higher interest rates dampen the outlook for stock and bond markets.

"There's been a meltdown in the asset markets, and that's triggering a run to the relative safety of Deutsche mark cash, particularly from other European countries," Mr. Kokko said.

That hurt the dollar. The U.S. currency was trading at 1.6465 marks by yesterday afternoon in New York, down almost one pfennig from 1.6547 early in Europe and from 1.6530 marks on Tuesday. The dollar was at 104.72 yen, down from 104.80 early in Europe and 104.90 late Tuesday.

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