Stocks hit by China's tightening, Portugal jitters

[February 18, 2011]  LONDON (AP) -- China's move to clamp down on lending and dampen inflation risks hurt stocks Friday, while European investors worried that debt market tensions will force Portugal to require a financial rescue in coming months.

China's increase in the required reserve ratio by 0.5 percentage points is the latest in a string of policy efforts to cool the economy and avoid dangerous spikes in consumer prices. China's policies are crucial to markets because rising demand in the country has been the motor of world economic growth during the global financial crisis.

"The latest move is equivalent to withdrawal of $55 billion of base money in terms of its impact on banks' ability to lend," said Mark Williams, senior economist at Capital Economics.

He said China's policies are "eating into banks' excess reserves and should be steadily eating into their capacity to expand lending."

In Europe, market jitters also increased due to a renewed rise in Portugal's bond yields to near euro-era records.

Eurozone ministers are expected to agree to an increased bailout fund starting in 2013, but analysts say that the crisis response -- EU leaders are expected to present a "comprehensive solution" on March 11 -- may underwhelm.

Crucially, that means Portugal might require a bailout like Greece and Ireland before.

"If there were another domino to fall, Portugal might be it," said Athanasios Vamvakidis, a forex strategist at Bank of America Merrill Lynch.

He noted that Portugal's borrowing costs are now at a level that will likely prove too high.

"Beyond debt sustainability concerns, the lower IMF-EU borrowing cost should look increasingly attractive to Portugal," Vamvakidis said.

Meanwhile, the Group of 20 summit kicked off in Paris, though expectations for the outcome were low. French Finance Minister Christine Lagarde said the main goal is to find the right tools to measure global economic imbalances, which many economists say contributed to the world's financial meltdown.

Analysts say concrete results are unlikely due to defiance by countries like China and Germany, who export and save, to adjust their economic policies. Germany has repeatedly said that trade surpluses should not be targeted and that it is the burden of countries with deficits -- who borrow and spend -- to make their economies more competitive.

By late morning, Britain's FTSE 100 was down 0.5 percent to 6,058.73, while Germany's DAX was 0.2 percent lower at 7,389.00. France's CAC-40 fell 0.2 percent to 4,141.68.

Wall Street was expected to likewise dip on the open -- Dow Jones industrial futures were down 0.1 percent at 12,274 and S&P 500 futures fell 0.2 percent to 1,335.30.

Indexes in Asia, which closed before China's announced policy tightening, performed much better thanks to momentum from the U.S. the previous day. A strong U.S. manufacturing report overshadowed a bigger-than-expected rise in the number of people applying for unemployment benefits.

Japan's Nikkei 225 stock average rose 6.16 points to close at 10,842.80 -- ending at a 10-month high for the fifth session in a row, thanks in part to a growing appetite among foreign investors for Japanese shares.

South Korea's Kospi jumped 1.8 percent to 2,013.32. Benchmarks in Taiwan, Singapore and New Zealand also advanced.

"I think the lead overnight from the U.S. was pretty positive," said Tey Tze Ming, a trader at Saxo Capital Markets in Singapore. "There's more of a feel-good factor than anything else today" moving the markets.

While anti-government strife across the Middle East was having an impact on oil prices and currencies, Ming said equities were "a little slower to respond" to immediate news; the most recent developments -- including a violent crackdown on demonstrators in Bahrain on Thursday -- were not enough to fluster stock investors.

Meanwhile, China shares struggled amid the release of newly calculated data that showed property prices rose in most cities in January despite renewed efforts to cool the overheated market. The benchmark Shanghai Composite Index dropped 0.9 percent to 2,899.79 while the Shenzhen Composite Index for China's smaller, second market was down 1 percent at 1,273.42.

India's benchmark Sensex index was also down while Australia's S&P/ASX 200 was flat at 4,936.70.

Benchmark crude for March delivery was down 28 cents at $86.08 a barrel in electronic trading on the New York Mercantile Exchange. The contract rose $1.37 to settle at $86.36 on Thursday.

In currencies, the dollar fetched 83.37 yen, up from 83.33 yen late Thursday. The euro fell to $1.3565 from $1.3604.

[Associated Press; By CARLO PIOVANO]

Pamela Sampson in Bangkok contributed to this report.

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