Euro Crisis Deja Vu Sends Stocks Skidding

A flare up in the European sovereign debt crisis is singeing U.S. stocks and sending investors into the safety of bonds.

European stock markets, particularly Italy and Spain, were sharply lower in a pan-European sell off led by the banking sector. The U.S. Treasury marketwas a beneficiary, as buyers rushed in driving the yield on the 10-year below 2 percent for the first time since March 12.

Simone Brandt | Getty Images

Global Market Decline

U.S. stocks saw triple digit losses, as the stock market pullback that began last week accelerated as the selling in Europe intensified into the European markets close.

Italy’s stock market fell nearly 5 percent; Spain was off nearly 3 percent and France was also down 3 percent. Germany and the U.K. were down more than 2 percent, but ironically, the Greek stock market was up 3 percent.

“For the most part the key drivers were Spain officially unilaterally not going to meet the budget requirement and Italy having trouble trying to move forward with labor market reform. Both of those were in early March, and yields have been rising pretty steadily ever since,” said Mark McCormick, currency strategist at Brown Brothers Harriman.

European bank shares led the decline, and peripheral bond yields snapped wider. The German bund yield sunk to an all-time low 1.64, while the Spanish 10-year yield rose to nearly 6 percent, and the Italian 10-year was yielding 5.687 percent.

• Track: Sovereign Credit-Default Swaps

U.S. Treasury prices moved higher—and yields moved lower—on buying inspired by Europe but also on the view that the Fed may consider another round of quantitative easing, said Ian Lyngen, senior Treasury strategist at CRT Capital.

“It seems to be a resurfacing of the ongoing concerns that have plagued the European markets for a long time,” said Lyngen.

“There was no new news,” said Peter Boockvar, market strategist with Miller Tabak. But the rising yields in Spain and Italy were a catalyst, as were concern that Italy’s Prime Minister Mario Monti is facing difficulties getting labor reform.

Wall Street stocks opened mixed but gave in to selling, on concerns about the health of the global economy, apprehension about the U.S. earningsreporting season and renewed fears about Europe’s debt crises.

The S&P 500 broke down through 1370, an important technical level, and the CBOE’s VIX jumped nearly 9 percent, above 20. The VIX is viewed as a fear meter for equities. U.S. stocks in the past week have lost more than 4 percent, and the pullback gathered momentum with Tuesday’s decline. Stocks had been up more than 30 percent since October, with no significant correction and many strategists have been expecting a modest correction, of under 10 percent.

European markets had been closed Friday and Monday for the Easter holiday, and had their first opportunity to respond to disappointing U.S. jobs dataTuesday. Also, Spanish Prime Minister Mariano Rajoy announced further fiscal measures in an effort to boost confidence, including a plan to cut 10 billion euros in health care and education spending. At the same, Miguel Angel Fernandez Ordonez, head of the Bank of Spain, said Spanish banks may need more capital if the economy contracts further than the 1.7 percent expected by the government.

“Spain is trying to meet the budget requirements and trying at least to achieve some level of economic growth that allows them to tackle their debt problem, “ said McCormick. “It’s a problem. The issue for them isn’t the budget—it’s how do they improve growth fundamentals.” Italy, on the other hand, has a surplus but Monti’s efforts at reform are running into difficulty, and rising yield makes debt payments more difficult.

European bank shares had big losses, with the European STOXX Europe 600 banking indexdown 4 percent. The euro hung at the key 1.30 levelbut it was under pressure as the dollar rose in a safety play.

Europe's debt woes have not been a significant issue for U.S. markets since late last year when the European Central Bank launched its LTRO liquidity program, alleviating concerns about bank capital levels.

“Spanish yields have been rising for weeks. The Spanish stock market has been in decline for weeks,” said Boockvar, noting the U.S. stock market correction should continue. “The internals in this market have been deteriorating for weeks. If you look beyond the action in the indices, which had been boosted by Apple , the health of the market has deteriorated.”

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