Japan, Libya weigh on stocks as dollar rallies

[March 28, 2011]  LONDON (AP) -- Popular uprisings in the Arab world and concerns over a leaking nuclear reactor in Japan weighed on stock markets Monday while the dollar remained well-supported by signs the Federal Reserve may raise interest rates sooner than anticipated.

Investors are keeping a close watch on developments in the Middle East and North Africa. In addition to Libya, where the rebels appear to be gaining ground on the regime of longtime leader Moammar Gadhafi following further international airstrikes, there is increasing unrest in Syria, Bahrain and Yemen.

Investors are also monitoring developments at the Fukushima nuclear complex after it was hit hard by the March 11 earthquake and tsunami. Suggestions that highly radioactive iodine may be making its way into seawater farther north of the plant than previously thought has added to concerns.

Inevitably, the combination of news is keeping investors on edge at the start of the week that culminates with the March U.S. nonfarm payrolls report. The jobs data often set the market tone for a week or two after their release and will be watched particularly closely this month amid signs that Fed policymakers are gauging when to ease their super-loose monetary policy.

"Equity markets are starting the week in something of a mixed mood as the two key ongoing geopolitical stories remain front of mind for many," said Ben Potter, research analyst at IG Markets.

In Europe, Germany's DAX was down 0.3 percent at 6,929 while the CAC-40 in France fell 0.1 percent to 3,969. The FTSE 100 index of leading British shares was bucking the trend somewhat, trading 0.1 percent higher at 5,904.

Wall Street was poised for a subdued opening, too -- Dow futures were up 8 points at 12,178 while the broader Standard & Poor's 500 futures rose a point to 1,311.

So far, the financial markets appear to have taken the view that the many unsettling events, from Japan to Libya, will not derail the global economic recovery. Stocks have managed to post solid gains over the past couple of weeks.

However, analysts said it wouldn't take much to prompt a rethink, especially if oil prices climb much higher from current elevated levels around $105 a barrel, and central banks start tightening monetary policy to deal with inflation risks.

In the currency markets, interest rate expectations were the main driver of activity.

Last Friday, the dollar enjoyed one of its best days in weeks after hawkish comments from leading Fed officials. One of the reasons the dollar has been in the doldrums of late was the prevailing view in the markets that the Fed would raise interest rates at a slower pace than its counterparts.

The comments from the Fed's Charles Plosser and James Bullard have reinforced market expectations that the U.S. will "normalize" monetary policy sooner than previously anticipated. At the very least, it makes a further monetary expansion following the expiry of the current $600 billion stimulus program in June extremely unlikely.

By late morning London time, the euro was trading 0.1 percent higher at $1.4046, just above an earlier ten-day low of $1.4020. Meanwhile, the dollar was 0.4 percent higher at 81.77 yen while the British pound fell 0.3 percent to $1.5952.

The euro hasn't suffered much from a muted response to last week's EU summit on the eurozone's debt crisis. Though leaders rubber-stamped earlier decisions on the future of the bailout fund, they postponed other decisions until June.

Jeremy Batstone-Carr, head of private client research at Charles Stanley, said there's nothing in the EU's roadmap to resolve the government debt crisis that has already seen Greece and Ireland get bailed out and threatens to take Portugal down as well. As Portugal was mired in a political standoff, its 10-year bond yield was hit a new record high of 7.84 percent on Monday.

"There is no indication that anything debated at the summit could plausibly avert a default on a possibly significant proportion of Europe's sovereign debt," Batstone-Carr said. "Simply lending money to already hugely over-borrowed nations does not help solve a debt crisis."

An additional point of interest for markets will be how the government of German Chancellor Angela Merkel responds to a heavy defeat in a regional election Sunday. Though the Greens won control of Baden-Wuerttemberg largely on account of their stance on nuclear power, there are indications that many voters are not fully behind Germany paying the lion's share of European bailouts.

"Having lost two elections in a row in areas where there is normally strong support there must be doubts about whether Merkel's policy on Europe has the support of the German people and this could call into question Germany's role as Europe's cash machine with respect to the bailout fund and any future agreements," said Michael Hewson, market analyst at CMC Markets.

Earlier in Asia, Tokyo's benchmark Nikkei 225 dropped 0.6 percent to 9,478.53, while Hong Kong's Hang Seng index shed 0.4 percent to 23,068.19. Shanghai's Composite index eked out a 0.2 percent gain to 2,984.

[Associated Press; By PAN PYLAS]

Pamela Sampson in Bangkok contributed to this report.

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