Stocks drop on Libya, surprise Chinese deficit

[March 10, 2011]  LONDON (AP) -- The battle for control of Libya and weaker than expected Chinese economic data weighed on markets Thursday while a debt rating downgrade of Spain hit the euro, a day ahead of a crucial meeting of EU leaders.

Sentiment over the past few weeks has been driven by developments in North Africa, most recently in Libya, which in normal times produces a little under 2 percent of the world's global oil needs.

Though the regime of longtime leader Moammar Gadhafi appears to be recapturing ground lost to rebels, investors remain cautious of staking out fresh positions given worries over oil supplies and how the crisis in the Arab world will spread.

The main impact has been in oil markets, sending prices up to their highest levels for around two and a half years. By mid-morning London time, the benchmark oil contract on the New York Mercantile Exchange was down 3 cents at $104.35 a barrel, while Brent crude in London fell 71 cents to $115.23.

Both rates are slightly lower than where they were on Monday but remain elevated and a threat to global growth prospects. That fear has hung over stock markets recently -- equities are a leading indicator of perceptions for economic expansion.

It's clear that rising oil prices are having an impact in China, which has been one of the main pillars behind the global economy over the past few years. Many analysts argue that buoyant Chinese economic growth effectively prevented the economic recession from becoming a depression.

The world's second biggest economy, however, reported a surprise trade deficit in February as surging prices for oil and other commodities pushed up its import bill.

"Confidence in equity markets is being shaken once again as China's surprise posting of a trade deficit combined with the ongoing geopolitical uncertainty -- something that's still focused very much on Libya -- is pushing traders very much into a bearish mindset," said Harley Salt, head of sales trading at IG Markets.

In Europe, the FTSE 100 index of leading British shares was down 0.7 percent at 5,894 while Germany's DAX fell 0.7 percent to 7,081. The CAC-40 in Paris was 0.8 percent lower at 3,962.

Wall Street was poised for a retreat at the open -- Dow futures were down 43 points at 12,131 while the broader Standard & Poor's 500 futures fell 6.6 points to 1,309.

Hardly helping matters was the news that Moody's has downgraded its credit rating on Spain by one notch to Aa2, citing worries over the cost of the banking sector's restructuring, the government's ability to achieve its borrowing reduction targets and grim economic growth prospects.

The euro retreated in the wake of the downgrade, trading 0.5 percent lower on the day at $1.3835.

The downgrade came amid signs that Europe's debt crisis is flaring up again ahead of the March 24-25 summit of EU leaders in Brussels. Portugal's cost to borrow 10-year bonds stands near a euro-era record.

Though a "comprehensive solution" to the debt crisis has been trumpeted, there are growing fears that the 17 countries that use the euro will not agree a revamped bailout mechanism, set new rules on budget deficits and a system of support funds to flow from richer countries in the single currency bloc to the poorest.

"Eurozone issues have returned to the fore as we approach a period of critical decisions on the funding facilities and bank stress tests," said Richard Cochinos, a foreign exchange strategist at Bank of America Merrill Lynch.

Attention is also turning towards the Bank of England's monthly interest rate decision. Though most analysts think the benchmark rate will remain unchanged at the record low of 0.5 percent, a rate hike would not be inconceivable -- three of the nine rate-setters have already voted to raise borrowing costs given that inflation is running at double the Bank's target.

Ahead of the decision at midday, the pound was trading 0.1 percent lower on the day at $1.6177.

Earlier in Asia, Japan's Nikkei 225 stock average ended 1.4 percent lower at 10,434.38 after the government said the economy shrank 1.3 percent in the fourth quarter.

Chinese shares fell too, with the Shanghai Composite Index closing down 1.5 percent to close at 2,957.14 while the Shenzhen Composite Index of China's smaller, second exchange fell 0.7 percent to 1,302.65.

Hong Kong's Hang Seng index retreated 0.8 percent to 23,614.89.

[Associated Press; By PAN PYLAS]

Kelvin Chan in Hong Kong contributed to this report.

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