Europe midday: Stocks slump as banking sector remains under pressure

European equities slumped on Wednesday as the banking sector remained under pressure and concerns about Brexit continued to drag on investor sentiment.

Germany's DAX fell 2.25%, France's CAC 40 dropped 2.29%, Italy's FTSE MIB shed 2.27% and Spain's IBEX 25 dripped 2.07% at 1154 BST.

UBS, Credit Suisse and Deutsche Bank shares declined amid worries about the health of Europe’s banks and negative yields in the wake of Britain’s vote to leave the European Union. About $11.7trn bonds have negative yields in Europe, according to Fitch Ratings.

Investors have been seeking the safety of government bonds amid Brexit, which has sent yields to record lows. The yield on the benchmark German 10-year bund touched a record low of minus 0.19%, TradeWeb said.

In the UK, the Bank of England on Tuesday announced that it will loosen banks’ requirements to hold extra capital to encourage continued lending in Britain after the EU referendum. He also warned that the risks of Brexit had already begun to “crystallise”.

“Bank of England Governor Mark Carney may well be the only adult in the room when it comes to managing the UK economy at the moment, as speculation rises about the prospect of a UK rate cut next week, there is little he can do to stop the contagion seeping into Europe’s sclerotic banking system,” said Michael Hewson, chief market analyst at CMC Markets.

“At the beginning of this year European banks were already facing a host of problems, including falling profits, a slowing global economy and negative rates reducing their ability to boost their profitability, at a time when a lot of them were being encouraged to boost lending to the wider economy as well as improve their capital buffers. Quite simply it isn’t possible to do all of them at the same time.”

The euro was trading at $1.1057, down from $1.1076 on Tuesday.

Meanwhile, Sweden’s central bank on Wednesday said it would delay future interest rate hikes due to uncertainty following the Brexit vote. Riksbank decided to keep its key interest rate at negative 0.5%.

In economic data, Germany factory orders unexpectedly fell in May. Orders dropped 0.2% year-on-year, compared to forecasts for a 0.9% rise and the previous month’s 0.4% decline.

Markit’s purchasing managers index on eurozone retail fell to 48.5 in June from 50.6 in May, signalling a contraction in sector activity. The report blamed the contraction on a sharp drop in sales in Italy.

Still to come, US services data from Markit and ISM will be published at 1445 BST and 1500 BST respectively.

The main focus in the US, however, will be the Federal Reserve’s minutes of its policy meeting on 15 June when the central bank decided to keep interest rates unchanged after a weak May job report and amid uncertainty leading up to the 23 June European referendum. While the Fed’s stance on interest rates may have changed since Brexit, the minutes will reveal more details behind the decided to leave policy on hold.

“The Fed is now unlikely to consider rate hikes in the coming months as it analyses the impact of Brexit but the minutes could still provide insight into how close they were to raising and how much of a deterrent the UK’s decision could be. For another hike to remain on the table this year, the jobs data will have to remain strong overall and rebound from last month’s disappointment," said Craig Erlam, senior market analyst at Oanda.

The US non-farm payrolls report will be released on Friday.

Among corporate stocks, Standard Life continued to drop after announcing it had suspended dealing in its UK Real Estate fund following a rapid increase in redemption requests.

Prudential declined after its fund management arm M&G suspended trading in its UK property portfolio.