European markets declined sharply in the morning session ahead of the presentation of the Spanish budget tomorrow and after comments last night from a non-voting member of the US Federal Reserve member 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.

Although Plosser is a known hard-liner and his comments therefore did not come as too much of a surprise, they weren't what the market wanted to hear; asset purchases - or quantitative easing (QE)

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 recaptalisation in a retroactive manner. 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. The statement adds that the recapitalisation should always occur using estimated real economic values and that the ESM should be only used as a last resort.

Banks under the cosh

Banks were friendless in the morning session with Spanish lenders Banco Santander and BBVA sharply lower, while in Germany Deutsche Bank and Commerzbank were the two worst performing blue-chips. In France. Credit Agricole, Societe Generale and BNP Paribas featured among the four 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.

Chip maker Infineon Technologies has been downgraded to "under-perofrm" from "hold" by broker Jefferies, after the company predicted a decline in fourth quarter sales and profits yesterday.

Other markets

Spanish government bonds were about as popular as a pebble inside your shoe on Wednesday morning, with the yield on 10-year bonds rising more than a quarter of a percentage point above 6%, after the hardline statement on the ESM from the finance ministers of Germany, the Netherlands and Finland.

On the foreign exchange markets the euro dropped to a two-week low of $1.2860 from $1.29 overnight.

DAX - Risers
Fresenius Medical Care € 56.45 +2.02%
Deutsche Telekom € 9.79 +0.24%
Merck € 94.67 +0.23%

DAX - Fallers
Deutsche Bank € 30.87 -5.87%
Commerzbank € 1.43 -5.50%
ThyssenKrupp € 16.32 -3.12%

CAC 40 - Risers
Essilor International (EI) € 74.01 +0.14%

CAC 40 - Fallers
Credit Agricole (ACA) € 5.33 -6.84%
Societe Generale (GLE) € 22.73 -5.13%
Carrefour (CA) € 16.63 -4.37%
BNP Paribas (BNP) € 37.80 -4.33%
Peugeot (UG) € 6.09 -4.32%
Renault (RNO) € 37.45 -4.22%
ArcelorMittal SA (MT) € 11.68 -3.43%
Alcatel-Lucent (ALU) € 0.87 -3.43%
Veolia Environnement (VIE) € 8.75 -3.41%
AXA (CS) € 12.07 -3.21%

JH

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