Europe fears spook equities, euro

2012-06-25 14:16

London - Equities hit a one-week low and Spanish borrowing costs rose on Monday as investors worried that policymakers at a European summit this week would make little progress in solving the debt crisis that is hurting world economic growth.

The euro weakened broadly and US stocks were set to fall on investor scepticism the June 28-29 meeting would produce substantive measures to tackle the debt crisis, now in its third year and buffeting Spain, the region's fourth largest economy.

German Chancellor Angela Merkel agreed on Friday with leaders of France, Italy and Spain on a €130bn package to revive growth but resisted pressure for common eurozone bonds or a more flexible use of Europe's rescue funds.

The absence of Greece's new prime minister and finance minister due to illness complicated the outlook for the summit. A German government spokesman said no decisions would be taken on the debt-stricken country, dashing Athens' hopes the EU might ease the terms of its bailout.

European stocks slid as much as 1.2%, retreating for a third successive session after Friday's meeting cooled expectations for a break-through in the debt crisis.

The MSCI world equity index slipped 0.5% while Wall street was poised to open lower with futures for the Dow Jones, the Nasdaq 100 and the S&P 500 index down 0.5% to 0.8% down.

"EU leaders have waited for so long to implement any changes that the situation is almost out of control and affecting nations across the world," Ion-Marc Valahu, fund manager at Clairinvest in Geneva, said.

He said a lot of investors had been cautious in trading in the volatile stock market and the market was mainly driven by short-term players and hedge funds before the summit.

Europe's debt problems are adding to the slowdown in world economic growth, as highlighted by data last Thursday showing weakness in global manufacturing.

"Macroeconomic data has been weakening for the past few months and Spain is still having difficulty financing its deficits at economical levels," said Don Fitzgerald, fund manager at Tocqueville Finance, which manages $2.2bn in assets. "I would not expect a miracle from the EU summit. Any moves will be very evolutionary in nature at best."

Resurgent Spanish yields

Spanish and Italian borrowing costs rose in the secondary market after falling sharply last week on moves by the European Central Bank to ease funding strains in the banking system.

Spanish 10-year yields jumped 19 basis points to 6.54% while the equivalent Italian yields were 10 basis points higher at 5.91%.

Spanish yields had fallen almost a full percentage point last week from a euro-era peak of 7.31% hit on June 19, after the ECB said it would start accepting a wider range of collateral and assets of a lower quality in its lending operations..

But investors fear policymakers will not do enough to prevent Spain and Italy from being sucked further into a debt crisis that has already forced Greece, Portugal and Ireland to seek international bailouts.

The downbeat tone in riskier assets spurred demand for safe havens, helping German bonds to snap three weeks of losses. Bund futures were last up a full point to 141.90 while US bond prices also rose in Europe, pushing yields lower.

The euro fell broadly, extending last week's losses. The single currency slid as much as 1% against the yen to a day's low of 100.05 yen and was last 0.6% lower against the dollar at $1.2480.

Investors traditionally flock to the yen and the dollar in times of financial stress and economic uncertainty though the Japanese currency's safe-haven status has been clouded by the country's economic problems.

The dollar was last 0.4% up at 82.58 against a basket of currencies.

"There's some nervousness ahead of the EU summit. Reports about the meeting (on Friday) have not intensified hopes or expectations that there will be agreement or any big progress," said Niels Christensen, currency strategist at Nordea.

"At best if we see some small positive steps forward for the banking union it could leave the euro at current levels. But it will be difficult for the euro to stage a lasting rally in the current environment's growth outlook."

Brent crude fell briefly below $90 as investors fretted about Europe's debt problems and worries that stuttering global growth could hit demand for oil. Brent crude was last 95 cents to $90.06 per barrel.