European stocks follow US down on debt concerns

[May 28, 2009]  LONDON (AP) -- European stock markets fell Thursday following big losses on Wall Street as investors worried that a rise in U.S. bond yields could derail any nascent global economic recovery.

The FTSE 100 index of leading British shares was down 48.79 points, or 1.1 percent, at 4,367.44 while Germany's DAX was 50.51 points, or 1 percent, lower at 4,950.26. The CAC-40 in France fell 35.87 points, or 1.1 percent, at 3,258.99.

The losses in Europe came in the wake of the retreat on Wall Street, when investors were spooked by the ongoing rise in bond yields, particularly 10-year Treasury notes, whose yields have risen to a six-month high of 3.7 percent. Yields rise as bond prices fall.

Higher bond yields have the potential to raise the cost of borrowing for homeowners and businesses, stoking fears that any recovery could face immediate hurdles. The Dow Jones industrial average ended 173 points lower Wednesday while the broader Standard & Poor's 500 index fell 16 points.

"The rise in U.S. bond yields has finally put equity markets under pressure," said Hans Redeker, an analyst at BNP Paribas.

The increase in bond yields and the consequent fall in bond prices has occurred even though the U.S. Federal Reserve's purchases of Treasuries should typically bring rates lower and increase prices. Investors seem to be worried by the concern that the Fed will create new money to pay the government's debts and unleash an inflationary tide that will require sharply higher interest rates to control.

Also undermining investor confidence somewhat was the growing expectation that General Motors Corp. will be forced into bankruptcy court as soon as Monday after bondholders rejected a debt for equity swap.

Despite the recent lull -- the Dow has lost ground for five out of the last six days -- stocks around the world have rallied strongly over the last few weeks, with some major indexes moving into positive territory for the year.

The trigger for the gains has been better than expected economic news, particularly in the U.S., which has fueled an increase in appetite for risk on hopes that the global recession is receding. Stock markets usually start recovering between 6-9 months before an actual economic recovery emerges.

There are some concerns that the markets, having rallied since March, are now being largely driven by speculative capital flows searching for short-term returns, and that the liquidity boost from the world's central banks over the last few months has pushed stock prices above what many companies can actually earn without a dramatic pick up in economic activity in the coming months.

"The jury is still out as to whether a recent pullback in equities is a buying opportunity and economic data during the summer will provide a test of the thesis that economic recovery is around the corner," said Neil Mackinnon, chief economist at ECU Group.

Wall Street was poised to recoup some of Wednesday's losses when it opens for business later. Dow futures rose 36 points, or 0.4 percent, to 8,333, while S&P 500 futures were up 3.9 points, or 0.4 percent, to 896.40.

Earlier, Asian markets were mixed as the looming bankruptcy of auto giant General Motors and sliding retail sales in Japan undercut optimism about a global recovery.

Japan's benchmark index edged up to a three-week high as the weaker yen prompted investors to buy exporters like Toyota and Sanyo. The Nikkei 225 stock average rose 12.62 points, or 0.1 percent, to 9,451.39.

South Korea's Kospi, hit the past few days by rising tensions with North Korea, rose 2.2 percent to 1,392.17.

On the downside, Singapore's Straits Times index fell 1 percent, Australia's key benchmark declined 1.2 percent and Malaysia's lost 0.9 percent.

Markets in Hong Kong, mainland China and Taiwan were closed for holidays.

In oil, crude prices eased from six-month highs as investors looked to a weekly U.S. inventory report for signs that crude demand may be recovering. Benchmark crude for July delivery was down 9 cents at $63.36 a barrel.

Meanwhile, the dollar rose to 96.84 yen from 95.35 yen. The euro was up to $1.3873 from $1.3963.

[Associated Press; By PAN PYLAS]

AP Business Writer Stephen Wright in Bangkok contributed to this report.

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