Euro hit as investors fret over Europe's banks

[January 05, 2012]  LONDON (AP) -- The euro fell to a fresh 15-month low against the dollar Thursday while stock markets continued to give up some of their early-year gains as European debt concerns offset mounting optimism over the state of the U.S. economy.

For a second day running, the concern in the markets has centered on the state of Europe's banks following UniCredit's announcement Wednesday that it was selling new shares at a large 69 percent discount to Tuesday's closing price.

UniCredit is trying to raise euro7.5 billion ($9.7 billion) to meet new European requirements for banks to thicken their financial cushions against possible losses. UniCredit's share price was down another 10 percent Thursday, following a near 15 percent decline the day before.

Italy, the recent focus of the debt crisis, must borrow to cover euro53 billion ($69 billion) in expiring debt in the first quarter alone in debt auctions beginning Jan. 13. That will test whether the government of new Prime Minister Mario Monti is making progress in regaining market confidence through budget cuts and efforts to improve weak economic growth.

Banks are an integral part of the debt crisis because they hold government bonds. A default or steep fall in the value of government bonds could inflict heavy losses on banks and choke off credit to the European economy. That's why regulatory authorities want Europe's banks to raise their buffers by euro115 billion (149 billion) over the next few months. The worry in the markets is that banks will have to offer sharp discounts.

The economic slowdown will also keep pressure on lenders in Europe. Spain's economy minister told the Financial Times he expects the country's banks to have to set aside anoter euro50 billion in provisions to cover the costs of bad property loans. The comments caused Spanish banks stocks to slide and contributed to losses in other countries. France's Societe Generale SA was down 4 percent, for example.

"European bank stocks are under pressure and UniCredit shares were suspended after a 14 percent fall yesterday was compounded by an 8 percent fall today," said Adam Cole, an analyst at RBC Capital Markets. "The latter was the immediate catalyst for euro weakness and well-received European debt supply did little to offset the damage."

France became the latest euro country to sell off a large chunk of bonds in a relatively troublefree manner, though its borrowing rates edged up and demand slipped from earlier auctions. France's bond markets are a particular focus for investors because credit ratings agencies have threatened to cut the country's cherished triple-A rating.

In total, France sold euro7.96 billion ($10.31 billion)of its bonds at affordable rates. Of the issues on offer, most interest centered on the euro4 billion in ten-year notes, for which the results were mixed. It had to pay a rate of 3.29 percent, up from December's equivalent rate of 3.18 percent, and demand was lackluster -- the bid to cover ratio, a gauge of investor demand, was only 1.643 as against 3.046 last time.

Germany had also seen a drop in demand for its bond issues this week, with demand for euro4.06 billion of its ten-year bonds issued on Wednesday only barely covering what was on offer.

As investors' risk appetite waned, following a surprisingly buoyant start to the year, the euro took a battering. Weaker than expected eurozone industrial orders in October -- up just 1.8 percent after September's dramatic 7.8 percent decline -- helped send the euro down to $1.2832, its lowest level since September 2010.

European stocks likewise fell, though most indexes remained higher for the year so far. Germany's DAX was down 0.8 percent at 6,062 while the CAC-40 fell 1.1 percent to 3,157. The FTSE 100 index of leading British shares was 0.7 percent lower at 5,629.

Italy's FTSE MIB underperformed, trading 1.9 percent, as it continued to suffer the fallout from UniCredit's pricing of its rights issue.

Wall Street was poised for a fairly weak opening, too -- Dow futures were down 0.6 percent at 12,280 while the broader Standard & Poor's 500 futures fell 0.8 percent to 1,263.

A raft of U.S. economic data later have the potential to shift sentiment, especially if the recent strong run continues. Key releases later include the Institute for Supply Management's monthly survey of the services sector as well as indicators on the pace of hiring in the private sector.

The latter may affect market expectations for Friday's closely-watched nonfarm payrolls data for December. The figures often set the market tone for a week or two after their release. The expectation is that the U.S. economy generated around 150,000 jobs during December.

That would represent a further steady, if unspectacular, improvement in the U.S. jobs market.

Earlier in Asia, Japan's Nikkei 225 index fell 0.8 percent to close at 8,488.71. South Korea's Kospi index lost 0.1 percent at 1,863.74, while Hong Kong's Hang Seng Index rose 0.5 percent to 18,813.41. Benchmarks in Singapore and Taiwan were also higher.

Mainland China's benchmark Shanghai Composite Index lost 1 percent to 2,148.45, its lowest level in almost three years. The Shenzhen Composite Index lost 3.5 percent to 813.99. More than 100 companies plunged to the daily limit of 10 percent.

Oil prices tracked equities lower even though the EU countries are beginning the process of trying to thrash out an agreement on banning the purchase of Iranian oil in the hope of choking off funding for the country's nuclear program -- benchmark oil for February delivery fell 76 cents to $102.46 per barrel in electronic trading on the New York Mercantile Exchange. The contract rose 26 cents to end at $103.22 per barrel on the Nymex on Wednesday.

[Associated Press; By PAN PYLAS]

Pamela Sampson in Bangkok contributed to this report.

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