World shares advance ahead of Portuguese auction

[January 12, 2011]  LONDON (AP) -- European stocks and the euro rose sharply Wednesday as confidence over an upcoming Portuguese bond auction helped soothe investor worries that the country is heading for a financial bailout.

In Europe, the FTSE 100 index of leading British shares was up 32.95 points, or 0.6 percent, at 6,046.98 while Germany's DAX rose 95.77 points, or 1.4 percent, to 7,037.34. The CAC-40 in France was 58.49 points, or 1.5 percent, higher at 3,920.41.

The euro meanwhile was up 0.4 percent at $1.3022, the first time it's been above $1.30 this week.

The main question in the markets is whether Portugal will be able to sell euro1.25 billion ($1.62 billion) worth of bonds at a reasonable price.

Most analysts think the country won't find it difficult selling the bonds and that the interest rate, though high, won't be exorbitant thanks to European Central Bank buying of Portuguese bonds ahead of the auction.

Buying bonds supports their prices, taking pressure off the banks that hold them. It also lowers bond yields, which indicate the borrowing costs countries would face were they to go into the market for more credit.

"Portugal is the epicentre for now, and today's bond auction could be seismic for markets were it to fail," said Daragh Maher, an analyst at Calyon Credit Agricole. "We suspect it will not, and yesterday's narrowing of spreads, reportedly on the back of ECB buying, points to a determination to underpin sentiment."

Results of the auction are due before midday London time.

Portugal's not the only eurozone country tapping the markets this week. It's followed on Thursday by Spain and Italy.

Analysts reckon that the pledges of support from Japan and China have provided temporary relief in Portugal's battle to prevent a bailout, but that underlying problems remain to be resolved both at the country level and at the EU level.

The yield on Portugal's benchmark 10-year bond has dropped further for a third day to 6.77 percent.

Though an improvement from a record 7.18 percent earlier this week, that rate is still high. Anything around 7 percent is considered to be too onerous in the long-term, especially as the country is widely expected to sink back into recession next year.

"Even if demand (in the auction) is solid, average yields at the auction promise to be at elevated levels which will underpin current speculation that high funding costs will eventually force the government cap in hand to the EU/IMF for funding," said Jane Foley, an analyst at Rabobank International.

Many think that the real motivation behind recent voices of support from Japan and China is not to prevent a bailout of Portugal -- the prevailing view in the markets remains that the country will end up having to get a lifeline, like Greece and Ireland beforehand -- but to stop the crisis spreading to Spain.

Emergency support for Spain would test the limits of the existing bailout fund, potentially putting the euro project in jeopardy if governments don't put up more cash. Spain makes up over 10 percent of the eurozone economy, whereas Greece, Ireland and Portugal only account for around 2 percent each.

Wall Street was poised to open stronger later -- Dow futures were up 68 points, or 0.6 percent, at 11,684 while the broader Standard & Poor's 500 futures rose 8.4 points, or 0.7 percent, to 1,278.80.

Earlier in Asia, Japan's Nikkei 225 stock average closed 2.12 points higher at 10,512.80, while Hong Kong's Hang Seng index rose 1.5 percent to 24,125.61. Australia's S&P/ASX 200 advanced 0.3 percent to 4,724.20.

South Korea's benchmark Kospi closed at a record high for the second straight day, gaining 0.3 percent to 2,094.95.

Chinese shares advanced, though demand was crimped by tight liquidity and jitters over possible further moves by regulators to tighten credit to combat inflation. The benchmark Shanghai Composite Index gained 0.6 percent to 2,821.31, while the Shenzhen Composite Index of China's smaller, second exchange rose 0.4 percent to 1,257.17.

Benchmark oil for February delivery rose 51 cents to $91.62 a barrel in electronic trading on the New York Mercantile Exchange.

[Associated Press; By PAN PYLAS]

AP writers Pamela Sampson in Bangkok and Kelly Olsen in Seoul contributed to this report.

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