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BES, dive in German sentiment hit stocks

US Federal Reserve Chair Janet Yellen was to testify to Congress on monetary policy later yesterday. A surprise jump in British inflation in June sent sterling higher and gilts lower.

European stocks and the euro fell on Tuesday after shares in Portugal’s biggest listed bank hit a record low, while a plunge in German economic sentiment pushed up borrowing costs for some peripheral eurozone countries.

Global stock markets have recently been supported by dovish policy measures from major central banks and signs that economies are recovering, though worries persist over the pace of growth in Europe and the health of the region’s banks.

US Federal Reserve Chair Janet Yellen was to testify to Congress on monetary policy later yesterday. A surprise jump in British inflation in June sent sterling higher and gilts lower. The 1.9 per cent reading was the highest since January.

The pan-European FTSEurofirst 300 share index slipped 0.1 per cent, with benchmark indexes in Frankfurt, Paris and London trading 0.1 to 0.5 per cent lower after German economic morale sank to its lowest level since January 2013. The weaker-than-exected ZEW survey also pushed the euro to a one-month low versus the dollar.

The banking sector was a sharp underperformer, with Portugal’s Banco Espirito Santo slumping 17.5 per cent to a fresh record low. Traders blamed concerns over the bank’s Angolan loan portfolio and the sale of a stake at a low price by the bank’s founding family on Monday.

The MSCI All-Country World index traded flat, near record highs hit earlier this month.

“The key takeaway is that the banking sector globally continues to struggle despite time having been bought, and policy being tremendously supportive,” said Jeremy Batstone-Carr, head of private client research at Charles Stanley.

German bund futures gained 0.2 per cent and the US dollar index rose against a basket of currencies including the euro and yen after ECB chief Mario Draghi said a stronger euro was a risk to the sustainability of the recovery. Draghi said on Monday the European Central Bank’s Governing Council was unanimous on the use of unconventional measures if inflation stayed too low.

“With the ECB signalling that it will continue to maintain an easing bias, with the possibility of quantitative easing in coming months, peripheral (bond) spreads probably have scope to come further in,” said Nick Stamenkovic, bond strategist at RIA Capital Markets.

The Bank of Japan maintained its stimulus programme and stuck to a forecast that inflation will approach its two per cent target next year, unfazed by recent data.

In Asia, Japan’s Nikkei average rose 0.7 per cent while South Korea’s Kospi gained 1.0 per cent. MSCI’s broadest index of Asia-Pacific shares outside Japan gained 0.2 per cent.

The MSCI Emerging Market index, MSCI’s benchmark emerging equity index, inched up to a 16-month high.