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New York - Stocks and the euro fell on Wednesday as traders cashed in gains following their best session in three weeks and as doubts set in that a fresh batch of funds in Europe would be used to buy high-yielding eurozone sovereign bonds.
Tuesday's gains were extended briefly on hopes that billions of euros borrowed by euro zone banks from the European Central Bank would help ease the two-year-old sovereign debt crisis, but those expectations quickly gave way to concern that the large take-up highlighted the scale of the pressure lenders are under.
The ECB indicated the loans, from which banks took 489 billion euros ($641.08 billion), were designed in part to free up money markets and tempt banks to buy Italian and Spanish debt.
But an Italian banking group said banks wouldn't increase their exposure to sovereign debt even after the ECB offering because European Bank Authority rules discourage it.
"The ECB efforts should prevent a lot of this liquidity crisis with the banks having to refinance in the early part of 2012," said Peter Jankovskis, co-chief investment officer at OakBrook Investments LLC in Lisle, Illinois.
"The banks themselves are stronger, but it doesn't necessarily go towards solving the sovereign debt crisis. So it's a good step, but it doesn't solve the whole problem."
Italian and Spanish government bond yields rose, snapping an eight-session falling trend, while German Bunds edged up in price. The benchmark 10-year U.S. Treasury note was down 3/32, yielding 1.9372 percent, down from 1.927 percent Tuesday.
U.S. stocks opened lower following a more than 3-percent run Tuesday, weighed by a slump in shares of Oracle Corp (ORCL.O), which fell more than 12 percent after posting results below analysts' expectations.
In early trading in New York, the Dow Jones industrial average dropped 52.52 points, or 0.43%, to 12 051.06. The S&P 500 Index fell 7.25 points, or 0.58%, to 1 234.05. The Nasdaq Composite lost 36.94 points, or 1.42 %, to 2 566.79.
Global stocks as measured by MSCI edged up 0.1% a day after their largest gains since November 30, while the European benchmark FTSEurofirst 300 fell 0.3%.
Global equity markets and the euro have hinged on European headlines for months as an escalating sovereign debt crisis threatens to take down the bloc's economy.
As the Christmas and New Year holidays approach, equity markets are expected to become more volatile as volume peters out.
Markets rally limited
The euro fell against the U.S. dollar after the larger-than-expected bank demand for ECB loans failed to convince investors the move would ease Europe's deep-seated debt problems.
The single currency initially rose nearly 1 percent on the day to a one-week high near $1.32 before giving up gains to trade around $1.3041, down 0.3 percent.
"The initial response was traders thought this was a back door to quantitative easing," said Boris Schlossberg, director of currency research at GFT in Jersey City, New Jersey. "Now (there's) a major rethink that banks will use it more for short-term debt refinancing and not sovereign debt, so very little benefit to sovereign yields."
Italian bond yields were 13 basis points higher at 6.762 percent, with Spanish yields 14 bps higher at 5.288 percent, after both had fallen almost 100 basis points in the last week and a half.
Italian data showed the economy contracted by 0.2 percent in the third quarter compared to the previous three months while British consumer morale hit its lowest in almost three years in December.
