The European Central Bank (ECB) has revised down its eurozone growth forecasts for 2012 and 2013 as “economic weakness extends into 2013”.
ECB President Mario Draghi said the bank expected the bloc’s economy to shrink by about 0.5% this year, before recovering later in 2013.
He said weak consumer and investor sentiment was weighing on growth.
Earlier, the ECB held the benchmark eurozone interest rate at the record low of 0.75%, as had been expected.
Mario Draghi said rates had been left unchanged due to higher energy prices, rising taxes and the fact inflation fell from 2.5% to 2.2% last month.
Interest rates are the main tool used by central banks to influence demand and therefore prices in the economy.
Mario Draghi said the bank expected inflation to fall below 2% next year. The target rate is below but close to 2%.
Interest rates have been at 0.75% for five months, after July’s cut from 1%.
ECB has revised down its eurozone growth forecasts for 2012 and 2013
The ECB revised down is forecast for the eurozone economic growth in 2013 to between minus 0.9% and plus 0.4%.
For 2014, it forecast growth of between 0.2% and 2.2%.
Mario Draghi said “persistent uncertainty” was weighing on economic activity.
He said the bank continued to see “downside risks”, in particular “uncertainties about the resolution of sovereign debt issues in the euro area, geopolitical issues and fiscal policy decisions in the United States”.
He was referring to the so-called fiscal cliff of automatic spending cuts and tax rises which kick in the new year and which will push the US economy back into recession. US policymakers are trying to agree a way to avoid the cliff.
However, Mario Draghi said a “strengthening global demand and a significant improvement in financial market confidence” would help fuel a recovery later in 2013.
The eurozone is back in recession as austerity measures designed to reduce debt levels continue to undermine demand and confidence.
The economy of the 17-member bloc contracted by 0.1% between July and September, after shrinking 0.2% in the previous three months.
Meanwhile, the unemployment rate is at a record high of 11.7%.
The eurozone was last in recession in 2009, when the economy contracted for five consecutive quarters.
Signs of economic weakness around the globe and Europe’s intensifying debt crisis are unnerving investors, who have been piling out of riskier investments like commodities and equities for the perceived safety of higher-rated government bonds.
U.S. banking stocks are heading into a bear market as Europe’s debt crisis pressures the sector. The KBW Bank index , which measures the performance of 24 U.S. banks, is down 16 percent from a peak in March. The index was down 1.2 percent just after the open on Monday.
Morgan Stanley has come under pressure as bond markets treat the bank as a junk-rated company, and the higher borrowing costs could already be putting it at a disadvantage even before an expected ratings downgrade. The bank’s stock is off 40 percent since late March.
“We may well have a snap back rally on the equity side but I don’t think it will be a big one, there is still a lot of caution out there,” said Frank Lesh, a futures analyst and broker at FuturePath Trading LLC in Chicago.
“All we’ve really done is seen some short covering here in the stock indexes and we are just stable, bonds are still very elevated.”
With little on the economic or corporate calendar Monday, investors are taking most of their cues from any comments out of Europe.
“Europe is front and center, back, left and right,” said Dan Greenhaus, chief global strategist at BTIG.
Germany’s DAX lost 0.9% to 5,993 and Switzerland’s SMI shed 0.6% to 5,741, though France’s CAC-40 managed to rise 0.5% to 2,968.49. Markets in Britain were closed for a holiday.
Peter Cardillo, chief market economist at Rockwell Global Capital in New York said he was watching 1,275 as a support level on the S&P 500 after the index broke through its 200-day moving average on Friday following the worst decline for the index in 7 months.
“If we close under that tonight, then the market is headed lower in the short-term, possibly by 3 or 4 percent,” he said.
In a potential boost for markets looking for measures to end the debt crisis, German Chancellor Angela Merkel is pressing for much more ambitious measures, including a central authority to manage euro-area finances, and major new powers for the European Commission, European Parliament and European Court of Justice.
Three leading Portuguese banks said on Monday they would draw on funds provided under the country’s 78 billion-euro ($96-billion) international bailout to meet tough new capital requirements as they struggle with the country’s debt crisis.
Investors sold shares in Asia as well, including stock in Sony, which fell below 1,000 yen for the first time since 1980 — the year after it introduced the iconic Walkman portable cassette player.
Japan’s Nikkei 224 index dropped 1.7% to close at 8,295.63, its lowest finish since Nov. 28, 2011. The broader Topix index ended below the 700 mark for the first time since December 1983, Kyodo News Agency said.
Japan’s shares fell sharply on Monday, with the broader Topix index hitting a 28-year low as investors reacted to the disappointing Friday U.S. jobs data.
“While we are not down 20 percent and in official bear market territory, we believe that we have entered a bear market,” wrote Wayne Kaufman, chief market analyst at John Thomas Financial in a note on Monday.
“Equities have not responded to oversold conditions or to very attractive valuations versus bonds, and we must take that as a warning,” he said.
There are also worries about slowing growth in emerging markets such as China and India. Recent reports out of China last week showed the manufacturing sector contracted more than expected in May.
The S&P 500 (SPX) lost 3 points, or 0.1%. The Nasdaq (COMP) moved down 3 points, or 0.1%. The Dow Jones industrial average (INDU) dropped 24 points, or 0.2%.
Facebook IPO aftermath
Companies: Shares of Facebook (FB), which have gotten hammered since the company’s IPO, edged slightly lower.
Groupon (GRPN) shares added 0.6% after dropping sharply Friday. The online discount service, which has been dogged with questions about its accounting practices since its initial public offering in November, ended its lock-up period Friday, meaning that insiders who own shares are now able to sell them.
Currencies and commodities
The dollar rose against the euro and Japanese yen, but fell versus the British pound.
Oil for July delivery lost 23 cents to $83.47 a barrel.
Gold futures for August delivery lost $2.60 to $1,614.60 an ounce.