World stocks fall as European debt problem rears again

World stock markets have fallen on Thursday after news of a weak Spanish bond auction increased fears about the European debt crisis. In addition to this, hopes of continued support from the Federal Reserve for the U.S. economy have been weakened.

Two key factors instigating world stock decline

The key factor in remerging fears over the European debt crisis came from the weak Spanish auction on Wednesday, which displayed a weaker investor confidence in the Spanish governments finances. This made the future global outlook worse when compounded with the minutes released on Tuesday that indicated no intention of  a third round of U.S. bond purchases. These bond purchases, also known as quantitative easing III, is thought by many to be essential to the U.S. economy’s recovery and growth.

The Federal Reserve executed two previous rounds of bond buying; The most recent was in August 2010. These bond purchases are done in order to drive down long term interest rates. Low bond interest rates typically encourages investors to move money into stocks.

“The recurring fear is that Fed quantitative easing through asset purchases is off the table for now. Basically the Fed pulled the rug from under investors’ feet and seems there is a lot of profit-taking now,” said Stan Shamu, market analyst with IG Markets in Melbourne.

Bank stocks dropped sharply on Thursday, this is due tot he fact that bank stocks normally fall when problems are revealed in the European debt crisis. Hong Kong-listed Industrial & Commercial Bank of China, the biggest bank when considering market value, fell 1.6 percent. Mitsubishi UFJ Financial Group ,of Japan, fell 1.2 percent.

The Euro fell from $1.3139 to $1.3119 and the dollar fell in comparison to the yen, from 82.58 to 82.20 yen.

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