World stocks and the euro fell Tuesday as the massive relief rally triggered by a $1-trillion plan to contain Europe's debt crisis fizzled out.
In Europe, the FTSE 100 index of leading British shares was down 84.80 points, or 1.6 per cent, at 5,302.62 while Germany's DAX fell 79.98 points, or 1.3 per cent, to 5,937.93. The CAC-40 in France was 56.41 points, or 1.5 per cent, lower at 3,663.88.
All three indexes enjoyed one of their best days in months Monday after the European Union unveiled a massive €750-billion financial support package to defend the euro and prevent the debt crisis that started in Greece from spreading to other big debtor countries like Portugal and Spain.
A pullback is expected when Wall Street opens later, too – Dow futures were down 97 points, or 0.9 per cent, to 10,644 while the broader Standard & Poor's 500 futures fell 12.60 points, or 1.1 per cent, to 1,144.
“Yesterday's burst higher is already looking short lived amidst concern over a wide range of issues,” said Ben Potter, research director at IG Markets. “Without doubt when gains of 5 per cent or more are seen in a single day a degree of reversion is perhaps to be expected.”
Though the package has helped ease near-term concerns about a wave of defaults across Europe, concerns about the solvency of the indebted countries remain – whether governments, which are still running sky-high deficits, will be able to push through massive austerity measures for years to come remain.
“Progress has been made, but the whole sovereign debt looks very like a can of worms,” said David Buik, markets analyst at BGC Partners.
Moreover, the European Central Bank's new role in sweeping up government bonds has stoked concerns about its independence from politicians – Axel Weber, president of Germany's central bank and a leading member of the ECB's governing council, appeared cautious about the bank's new responsibility.
Whatever divisions exist within the ECB and whatever pressure may have been put on its President Jean-Claude Trichet to intervene directly in the debt markets, the central bank is on a different course from that being pursued elsewhere – while the ECB is expanding monetary policy, other banks like the U.S. Federal Reserve and the Bank of England are starting to normalize it.
That may explain why the euro has given up most of the gains it garnered from late Friday when the markets were first alerted to the possibility of a bigger than expected EU plan – by late morning, the euro was down 0.8 per cent on the day at $1.2691.
“As the dust settles from yesterday's shock and awe bailout package, the realization that this is a sticking plaster to a much deeper rooted problem has slowly permeated through and the euro has given up most of yesterday's gains,” said Michael Hewson, analyst at CMC Markets.
The other major currency in focus Tuesday is the British pound, amid growing uncertainty about what the next government will look like. The currency has been under pressure ever since the Liberal Democrats said late Monday they were opening discussions with the Labour Party as well as the Conservatives, who won most seats and votes.
By late-morning London time, the pound was 0.3 per cent lower at $1.4814.
So far, bond investors don't appear to be worried – a £2.25-billion 17-year auction went smoothly for the government as the issue was covered nearly two and a half times by bids.
Earlier in Asia, stocks gave up much of their previous day's advance.
Japan's Nikkei 225 stock average fell 1.1 per cent to 10,411.10 while South Korea's Kospi dropped 0.4 per cent and Australia's S&P/ASX 200 shed 1.1 per cent. Benchmarks in mainland China, Taiwan, India, and Singapore also slid, while Hong Kong's Hang Seng index retreated 1.4 per cent to 20,146.51.
Stocks in the Philippines bucked the regional trend, surging 3.9 per cent as Sen. Benigno Aquino III, son of Philippine democracy icon Corazon Aquino, opened up a commanding lead in presidential elections after campaigning on an anti-graft platform.
Oil prices also lost their shine, with benchmark crude for June delivery down $1.03 to $75.77 a barrel in electronic trading on the New York Mercantile Exchange. The contract rose $1.69 to $76.80 per barrel on Monday.