European stocks steady after big falls

[August 12, 2010]  LONDON (AP) -- European stock markets steadied Thursday after sharp drops across the world the previous day, when investors were spooked by a raft of downbeat economic news and the Federal Reserve's warning that the U.S. economy is not growing as fast as anticipated.

In Europe, the FTSE 100 index of leading British shares was down 4.31 points, or 0.1 percent, at 5,240.90 while Germany's DAX fell 11.03 points, or 0.2 percent, to 6,143.04. The CAC-40 in France was 13.47 points, or 0.4 percent, lower at 3,614.82.

Wall Street was also poised for a muted trading session later. Dow futures were down 22 points, or 0.2 percent, at 10,315 while the broader Standard & Poor's 500 futures fell 2.1 points, or 0.2 percent, to 1,082.90.

Those falls are tiny in comparison with the declines recorded on Wednesday, when fears about the global economic recovery stalked markets following the Fed's warning and disappointing Chinese consumption data. That selling pressure continued into the Asian trading day, with most of the continent's main markets down around 1 percent at the close.

"Overall the market mood has turned subdued since Tuesday as investors become risk adverse, unable to ignore the plethora of poor data that has started to overhang the world economy," said Phil Gillett, a trader at Spreadex

The impact of the deteriorating economic picture isn't just felt in shares, though.

In this case, the dollar has recovered its poise after a month of selling as it shines in its status as one of the world's leading safe haven assets. Its capacity as the world's number one reserve currency more than offsets worries about the U.S. economy's prospects or that interest rates are likely to stay lower for longer than previously expected.

It's been particularly strong against the euro, which plunged around 3 cents on Wednesday. By mid morning London time, the euro was down another 0.1 percent at $1.2834, its fortunes little helped by an unexpected 0.1 percent decline in the euro area's industrial output in June, a day ahead of wider economic growth figures.

Neil Mellor, a currency strategist at Bank of New York Mellon, said that the dollar's recovery against the euro may, at first glance, appear to be "rather surprising" given that the Fed has effectively rubber-stamped the market's view on U.S. interest rates -- they aren't going to go up anytime soon.

He said "the answer is possibly to be found in the eurozone debt markets themselves," which have been fairly quiet of late after six months of turmoil nearly brought the whole single currency project to its knees. Following a bailout of Greece and a wider support package for other eurozone members, European government bond markets have settled down.

However, Mellor noted that in the course of the last week, some jitters have returned, and the spread between the interest rates on 10-year bonds from the periphery countries -- Greece, Ireland, Spain and Portugal -- and those of Germany have started to widen again.

The dollar has also recovered slightly against the yen, though the Japanese currency is also considered a safe haven.

By mid morning London time, the dollar was up 0.1 percent at 85.32 yen, having fallen to a 15-year low on Wednesday.

The strength of the yen has been hitting Japanese stocks hard over the last few weeks, as investors worry about the potential negative impact on Japan's exporters.

The benchmark Nikkei 225 stock average closed down 80.26 points, or 0.9 percent, to 9,212.59.

South Korea's Kospi dived 2.1 percent to 1,721.75, Australia's S&P/ASX 200 fell 1.2 percent to 4,400.90 and Hong Kong's Hang Seng retreated 0.9 percent to 21,105.71.

The Shanghai Composite Index dropped 0.7 percent to a two-week low of 2,575.48.

Worries about the global economy have also hit oil markets hard over the last few days, with a barrel of oil down around $5 this week. Benchmark crude for September deliver was down 94 cents at $77.08 in electronic trading on the New York Mercantile Exchange. The contract slid $2.23 to settle at $78.02 on Wednesday.

[Associated Press; By PAN PYLAS]

Copyright 2010 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.