BREAKINGVIEWS-A lot of little bad news turns markets to jelly

— The authors are Reuters Breakingviews columnists. The
opinions expressed are their own —

By Peter Thal Larsen and Edward Hadas

LONDON, Feb 4 (Reuters Breakingviews) – Market sentiment
can be fragile. For months, investors on both sides of the
Atlantic were not too worried — and then they suddenly were.
Major stock indices in Europe and the United States have fallen
by some 7 percent in a fortnight, dropping sharply on Thursday.
Despite the absence of a significant single shock, there are
good reasons for the darker mood.

The first is economic. A recovery has really arrived, but
it still looks anaemic. Poor U.S. employment data were among
the triggers for Thursday’s sell-off. The most recent GDP
figures for the UK showed Britain is only crawling out of
recession. German manufacturing orders are also down.
Meanwhile, strong-looking corporate profits have been driven
mostly by cost-cutting rather than revenue growth.

Support from central banks and governments is also drying
up. The Bank of England’s decision to put its money-printing
operation on hold was expected, but the market will miss a
buyer which has spent about 200 billion pounds on UK government
bonds in a little under a year.

The European Central Bank and the U.S. Federal Reserve are
also slowing down their emergency programmes, while China is
trying to tighten monetary policy. Even Western governments,
the spenders of last resort throughout the crisis, are no
longer able to throw cash around. The emphasis now is on
cutting back spending and tackling deficits.

Meanwhile, the economic future looks darker. It is still
unlikely that Greece will default or be expelled from the euro
zone — but a little less unlikely than it did a few weeks ago.
Sovereign jitters have spread to Portugal. Spain might be next,
and a fiscal crisis in Britain or the United States cannot be
ruled out.

All this does not bode well for the banks, which have been
the main beneficiaries of the monetary pump-priming, and which
still account for a large chunk of the capitalization of
Western stock markets.

Of course, sentiment could easily turn. The economic news
could improve again, or the authorities could conclude that the
outlook is so bleak that more money needs to be sprayed at
financial markets. But for now, investors have stopped ignoring
the warning signs.

CONTEXT NEWS

— The pan-European FTSE Eurofirst 300 index of top shares
fell on Feb. 4 by 2.8 per cent to 992.96 points, its lowest
level since Nov. 30 and its biggest one-day percentage fall in
10 weeks.

— By late afternoon in New York, the S&P 500 index was
down more than 30 points, or almost 3 percent, at 1,066.

— The drop in Europe came amid continued concerns that
euro zone countries including Greece, Portugal and Spain would
struggle to fix their public finances, or would require a
bailout from other EU countries. The SovX credit default swap
index, which measures the credit risk of 15 Western European
countries, rose to 94 basis points.

— Concerns over fiscal problems in Greece and Portugal
pushed their debt protection costs to new highs on Feb. 4 of
406 basis points and 223 basis points, respectively, according
to Markit Intraday. That means it would cost investors $406,000
to insure $10 million of Greek debt against default.

— The share price of Santander, the Spanish bank, fell 9
percent. Shares of BBVA, Barclays, Credit Suisse, HSBC and
Lloyds Banking Group also declined.

— In the United States, data showed new applications for
jobless insurance rose unexpectedly last week.

— For previous columns by the authors, Reuters customers
can click on [LARSEN/]

Stock Investing

(Editing by Edward Hadas and Martin Langfield)

BREAKINGVIEWS-A lot of little bad news turns markets to jelly