London: European shares hit their lowest level in nine months yesterday, with banks pressured by concerns over the health of the euro zone's financial sector, and worries that the bloc's debt crisis could hamper growth.
Nervousness in the market was exacerbated by heightened geopolitical tensions on the Korean peninsula after the North Korean leader Kim Jong-il ordered his military to go on a combat footing.
The euro neared a 4-year low versus the dollar, with worries over the region's fiscal health fanning strains in money markets, boosting demand for the dollar across the board.
By 1123 GMT yesterday, the pan-European FTSEurofirst 300 index was down 3 per cent at 944.21 points after hitting a low of 939.64 earlier, its lowest since August 20, 2009.
Big losses
The index has lost more than 15 per cent since fears over the euro zone's sovereign debt problems and new fiscal austerity measures escalated in mid-April.
Banking shares lurched to a 10-month low, with sharp falls in Spanish financials after the Bank of Spain took over regional savings bank CajaSur at the weekend.
Banco Santander and BBVA shed 6.5 and 6.7 per cent respectively. Within the sector, Barclays, HSBC, Societe Generale, BNP Paribas and Deutsche Bank fell 3.7 to 7.5 per cent.
"The aftermath of the news regarding the banking sector especially in Spain seems to be dragging the market down," said Valerie Plagnol, chief strategist at CM-CIC Securities in Paris.
The banking index has lost 17 per cent so far this year, the worst performing sector in Europe in 2010. Despite last year's sharp recovery, the sector is still down 66 per cent from its peak of April 2007 before the financial crisis started to weigh on the market.
Oil majors were pressured by growing risk aversion, which pushed crude prices to below $68 a barrel. BP, BG Group, Royal Dutch Shell and Total fell 2.2 to 3.1 per cent.
Three-month dollar London Interbank Offered Rate (Libor) fixed at its highest since late July last year, signalling the rising cost of borrowing among banks.
"There is a fear that there are more worrying banking cases out there. Libor has been rising significantly telling us some banks could be in trouble," said Justin Urquhart Stewart, director at Seven Investment Management.
The yield on 10-year German government bonds sank to a record low while Bund futures extended gains to reach a record high, as risk averse investors sought safe asset classes.
The six-week strong sell-off in shares triggered by the euro zone debt crisis has pulled European stock valuations to their lowest level in 10 months.
Shares in the STOXX Europe 600 benchmark index currently trade at 12.37 times reported earnings, a level not seen since July 2009. This compares with an average price-to-earnings (P/E) ratio of 15.74 for US S&P 500.
Across Europe, the FTSE 100, Germany's DAX and France's CAC 40 fell 2.7 to 3.5 per cent.
Spain's IBEX lost 4.3 per cent, Portugal's PSI 20 fell 3.1 per cent and Italy's benchmark was down 4.5 per cent.
