Markets weighed down by Europe's debt crisis

[May 10, 2011]  LONDON (AP) -- Worries that Portugal or even Spain will have to seek outside help to deal with their debts continued to weigh on markets Tuesday, sending the euro briefly below $1.30 for the first time since mid-September.

European stocks were somewhat more settled following big declines Monday and Wall Street's late rally. The FTSE 100 index of leading British shares was up 12.40 points, or 0.2 percent, at 5,563.35 while Germany's DAX rose 54.47 points, or 0.8 percent, at 6,752.44. The CAC-40 in France was 4.57 points, or 0.1 percent, higher at 3,641.53.

Wall Street was poised for a fairly flat open -- Dow futures were down 6 points at 11,033 while the broader Standard & Poor's 500 futures rose less than a point to 1,187.

The main focus in the markets once again was on Europe's debt crisis and in particular how the bond markets are viewing the likelihood of further bailouts, following the weekend's euro67.5 billion ($89 billion) rescue package for Ireland.

Although Portugal is widely considered to be the most at risk for outside help given the size of its debts relative to its economy, the major worry in the market is a possible bailout for Spain.

Most analysts think European authorities can handle bailing out the relative minnows of Greece, Ireland and Portugal but that Spain -- at around 12 percent of the eurozone economy -- would be different matter altogether.

Bond market investors were nervous about that prospect. The Spanish yield on ten-year bonds rose another 0.13 percentage point Tuesday to 5.56 percent, while Portugal's was up 0.05 percentage point.

Even Italy and Belgium appeared to be affected by the tensions. Italy's yield was up 0.13 percentage point to 4.77 percent and Belgium's rose 0.11 percentage 0.11 to 3.97 percent.

"Ireland's bailout package has clearly failed to stop the rot in eurozone markets and if anything it has focused attention on other countries in the periphery especially Portugal but also to Spain, Belgian and Italian government debt," said Mitul Kotecha, an analyst at Credit Agricole.

Unsurprisingly, in light of these bond market jitters, the euro has continued to be sold off heavily.

By mid morning London time, the euro was trading a further 0.7 percent lower on the day at $1.3030, having fallen earlier as low as $1.2982. That was the first time it had fallen below $1.30 since Sept. 16.

Trading across financial markets will likely be complicated by the month's end, when investors square off positions, but most analysts think that December will continue to be dominated by Europe's debt crisis.

"Traders certainly won't be taking their eyes off the somewhat perilous state of the eurozone, and this is certainly going to cast a shadow over December," said Anthony Grech, head of research at IG Index.

The other theme in the markets at the moment is the seeming pickup in the pace of the economic recovery in the U.S. following encouraging Black Friday retail sales figures. Black Friday is the day after Thanksgiving when the Christmas shopping season effectively begins and most retailers start posting profit for the first time in the year.

The National Retail Federation, a trade group, estimated that 212 million shoppers visited stores and websites during the first weekend of the holiday season, up from 195 million last year.

Given the fairly buoyant anecdotal evidence, traders are keen to see if the monthly consumer confidence survey from the Conference Board surprises to the upside. The consensus in the markets is that the main index rose to 53 in November from October's 50.2.

Earlier in Asia, Chinese shares trimmed some losses after volatile trading that took the Shanghai benchmark down 3.4 percent at one stage on worries over fresh inflation-fighting measures. However, the Shanghai Composite Index closed down 1.6 percent to 2,820.18 while the Shenzhen Composite Index for China's smaller, second exchange fell 2.4 percent to 1,307.83.

Soaring prices in China, the world's No. 2 economy, are so far limited mostly to food, but analysts say price pressure could spread to other areas unless Beijing hikes interest rates and further tightens credit. Investors worry that might slow economic growth or reduce the amount of money flowing through the economy that is helping to finance stock trading.

Japan's Nikkei 225 stock average dropped 1.9 percent to close at 9,937.04 and Hong Kong's Hang Seng fell 0.7 percent to 23,007.99. Australia's S&P/ASX200 index shed 0.7 percent to 4,584.4.

The Nikkei's slump came after government figures that showed Japan's factories cut production for the fifth straight month in October, although the decrease wasn't as bad as expected. Unemployment worsened slightly and consumer spending fell in October, adding to Japan's struggle to keep its nascent economic recovery alive.

Benchmark oil for January delivery was down 40 cents to $85.33 a barrel at late afternoon Singapore time in electronic trading on the New York Mercantile Exchange.

[Associated Press; By PAN PYLAS]

Associated Press writer Pamela Sampson in Bangkok contributed to this report.

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