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Eurozone bank worries hit world stocks

London - Worries over the eurozone debt crisis and the region’s banks hit global stocks and boosted the dollar on Wednesday, after Italian lender UniCredit priced a rights issue at a huge discount and a German bond auction failed to impress.

Wall Street stocks opened lower after a sharp market rally in the previous session, as investors’ focus again returned to the eurozone’s debt problems.
The Dow Jones industrial average shed 25.27 points, or 0.20%, Standard & Poor’s 500 Index lost 2.65 points, or 0.21% and the Nasdaq Composite Index fell 0.32 percent%.

The US dollar index, which tracks the greenback against a basket of currencies, gained 0.6% to 80.10 points.

Banking sector fears were ignited by news UniCredit had launched a €7.5bn ($9.8bn) two-for-one rights issue at a discount of 69% to its closing share price on Tuesday.

The capital increase, meant to shore up its ravaged balance sheet, sent shares in Italy’s largest bank by assets down 8.5%.

The FTSEurofirst 300 index of top European shares was down 0.6% at 1021.70 points after hitting a five-month high on Tuesday, when strong manufacturing data from the United States and China helped boost risk appetite.

The STOXX Europe 600 Banking eurozone index, which has many constituents exposed to the eurozone debt crisis, fell 2.9%.

“Whatever way you slice and dice it, UniCredit’s discount is much bigger than for the other banks and that being the case, I think it’s come as a bit of a shock to some investors, and I think some of them are just bailing out,” said Andrew Lim, banks analyst at Espirito Santo.

The MSCI world equity index edged down 0.2% after starting the session firmer in line with rises in Asian stock markets.

German debt sale underwhelms

Germany sold €4.057bn ($5.30bn) of 10-year government bonds in its first auction of the benchmark maturity since one last November that raised fears Europe’s debt crisis had begun to threaten its biggest economy.

Bids for the Bunds amounted to 1.3 times the amount offered and were improvement over the previous sale - one the country’s least successful debt since the introduction of the euro. The debt sold at an average yield of 1.93%, lower than the 1.98% from November.

“It looks solid - there’s nothing surprising. (The bid/cover ratio) was above one, which the market will see as a decent start for the year,” said Achilleas Georgolopoulos, a strategist at Lloyds Bank in London.

The sale was “much better than November’s auction, but not particularly great either,” said Peter Chatwell, rate strategist at Credit Agricole.

The auction kicked off a huge sovereign refinancing cycle in the eurozone, with traders worried that debt-laden countries such as Italy and Spain may have to pay unsustainably high prices to meet their needs.

The single currency slipped 0.8% to $1.2950 and within striking distance of its 2011 trough of $1.2858, hit in the last week of December.

The falls came after a sharp rally on Tuesday in the wake of a better-than-expected US manufacturing report that saw the single currency reach its highest in a week at $1.3077.

In another sign of stress among eurozone banks, commercial lenders’ overnight deposits at the European Central Bank (ECB) hit a record high of €453bn, data showed on Wednesday.

However, key eurozone bank-to-bank lending rates continued to drop, pulled down by the ECB’s recent record injection of almost half a trillion euros of ultra-long and ultra-cheap three-year liquidity.

Eurozone banks received €489bn late last month in the first of two opportunities to access the long-term loans.

Eurozone slump still looms

The latest set of purchasing managers’ indices (PMIs) for the eurozone and several key individual countries suggested the region remains on track for a moderate recession, despite a slight uptick in the data for December.

“The uplift in the eurozone PMI in December does little to dispel fears of the region sliding back into recession,” said Chris Williamson, chief economist at Markit.

The slight PMI improvement was due mainly to an upturn in Germany, widening the divisions between the region’s stronger economies and the likes of Italy and Spain that appear to be undergoing a severe contraction.

Eurozone inflation eased from last year’s peaks of 3.0% in December, creating room for more ECB interest rate cuts to help the weakening economy.

On the other side of the Atlantic, minutes on Tuesday from the last meeting of the Federal Reserve’s policy setting committee, the FOMC, showed some members had noted that current and prospective economic conditions could warrant additional policy accommodation.

The Fed said it would begin publishing forecasts on the path of interest rates later this month, a move that could suggest rates will be on hold for longer than previously expected , which markets saw as dollar-negative.

Oil prices eased from Tuesday’s peak around $112 a barrel, which followed threats from Iran to choke off crude shipments through the strategic Strait of Hormuz in retaliation against tougher sanctions from the West over its nuclear programme.

Brent February crude fell 0.63 cents to $111.43 barrel after rising more than 4% on Tuesday to settle at the highest since November 15.
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