LONDON (SHARECAST) - European markets declined sharply on Wednesday ahead of a controversial Spanish budget tomorrow and following comments last night from a member of the US Federal Reserve who cast doubts over the efficacy of the Fed's asset purchase programme.
We are unlikely to see much benefit to growth or employment from further asset purchases, said Charles Plosser, the President of the Philadelphia Fed Bank.
Plosser also suggested that short-term interest rates will need to be hiked earlier than the currently envisaged time frame of the middle of 2015.
Meanwhile, three of the strongest Eurozone members met on Tuesday and appeared to gather their resolve to oppose the use of the European Stability Mechanism (ESM) for direct bank recapitalisation.
The finance ministers of Germany, the Netherlands and Finland issued a joint statement, saying that national governments should remain responsible for the banking problems made before the creation of a new bank supervisor.
"The ESM can take direct responsibility of problems that occur under the new supervision, but legacy assets should be under the responsibility of national authorities," reads the statement by the the three countries.
Talking of legacy assets, the Spanish government is facing a severe test of its resolve tomorrow as it prepares to submit a new austerity budget. Unions are demanding a referendum on the measures. Today the yield on Spanish 10 year bonds rose a whopping 32 basis points to 6.07%.
Banks under the cosh
Banks were friendless throughout Wednesday with Deutsche Bank and Commerzbank the two worst performing blue-chips in Germany. In France. Credit Agricole, Societe Generale and BNP Paribas featured among the worst performing heavyweight stocks.
Spanish construction companies such as Acciona and Actividades de Construccion & Servicios are under intense selling pressure ahead of tomorrow's austerity budget.
German chip maker Infineon Technologies has been downgraded to "under-perfOrm" from "hold" by broker Jefferies, after the company predicted a decline in fourth quarter sales and profits yesterday.
DAX - Risers
Fresenius Medical Care +2.2%
DAX - Fallers
Deutsche Bank -6.5%