European stocks steady amid ongoing debt concerns

[December 08, 2010]  LONDON (AP) -- European stocks steadied Wednesday following a strong run as investors continued to fret about the continent's debt crisis despite a seeming easing of tensions in government bond markets.

In Asia, Chinese shares fell sharply amid concerns the country's monetary authorities are preparing to announce an interest rate increase shortly to rein in mounting inflationary pressures.

In European trading, the FTSE 100 index of leading British shares was up less than a point at 5,809, while Germany's DAX fell less than 2 points at 6,999.97. The CAC-40 in France was 6.1 points, or 0.2 percent, higher at 3,81660.

U.S. shares are poised to fall further at the open following Tuesday's late sell-off -- Dow futures were down 46 points, or 0.4 percent, at 11,309 while the broader Standard & Poor's 500 futures fell 3.3 points, or 0.3 percent, at 1,219.90.

Though European bond markets have settled down over the last week following indications that the European Central Bank is taking a more active role in the crisis, through bigger purchases of government bonds, there is still a nagging feeling that policymakers have not yet done enough.

The International Monetary Fund's managing director Dominique Strauss-Kahn indicated as much in a visit to bailed-out Greece, urging European leaders to forge a more comprehensive solution to the debt crisis as opposed to the current piecemeal response.

There was mild disappointment in the markets that two days of discussions between Europe's finance ministers in Brussels did not yield much more than a commitment to make bank stress tests more rigorous and comprehensive.

Calls for the creation of pan-European bonds and an expansion in Europe's bailout funds fell on deaf ears, particularly in Germany.

"There is a feeling that this continued predisposition to tinker around the edges will in likelihood go the same way as all the other measures before it," said Michael Hewson, market analyst at CMC Markets.

That disappointment was most evident in the performance of the euro, which was trading 0.5 percent lower at $1.3215. Last week, the euro had sunk below $1.30 amid concerns that Europe's debt crisis was showing increasing signs of spreading to Portugal, and even more dangerously to much bigger Spain.

Investors also continue to track developoments in the bond markets to see if there is a new groundswell of unease emerging.

So far, the ECB's bond buying appears to be doing the trick -- 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 one country that will be breathing a huge sigh of relief as the yield on its ten-year bonds has slid below 6 percent from just above 7 percent a week ago, while Ireland's government will be comforted that the passage of its budget Tuesday, which includes euro6 billion of austerity measures, has pushed Irish bond yields down by 0.13 percentage point to 7.83 percent.

The rates remain prohibitively high for both countries, especially when they are compared to the equivalent yield for benchmark German bonds, which though edging up slightly over recent days on fears the country will have to splash out more money to help its more indebted partners, remains relatively low at 3.02 percent.

"There remain pressing problems of liquidity and solvency, which extends the underlying problem into 2011," said Neil MacKinnon, global macro strategist at VTB Capital.

Spain's borrowing costs have not changed much, and remains relatively high at 5.23 percent. Analysts though said that may just be a function of the fact that the European Central Bank has concentrated its firepower on Portugal and Ireland.

Figures earlier this week showed that the bank bought euro1.965 billion of government bonds in the week to Nov 30. -- a 22-week high -- as it tried to boost confidence in the single currency bloc following the Irish bailout and renewed contagion fears.

Next week's figures will be key as they will contain purchases by the bank last Friday, Dec. 2, when it held its monthly policy meeting. Investors think that the big falls in certain countries' borrowing costs, such as Portugal, was due to a marked pickup in the ECB's bond buying.

Investors are also keeping a close watch on developments in China, amid mounting market talk that the country's monetary authorities are planning to raise interest rates soon -- possibly this weekend -- in an attempt to rein in inflationary pressures and cool a property-related credit boom.

The fears of a monetary tightening have been stoked by market speculation that the country's inflation rate topped 5 percent in November.

Given that backdrop, it's unsurprising that Chinese shares dropped. The benchmark Shanghai Composite Index lost 1 percent to 2,848.55 while the Shenzhen Composite Index for China's smaller, second market dropped 0.3 percent to 1,305.25.

Elsewhere, South Korea's Kospi slipped 0.4 percent to 1,955.72 and Hong Kong's Hang Seng lost 1.4 percent to 23,092.52.

Japan's Nikkei 225 stock average bucked the trend, adding 91.23, or 0.9 percent, to 10,232.33 as the yen continued to weaken against the dollar to the relief of the country's exporters -- by mid morning London time, the dollar was up 0.4 percent at 83.94 yen.

Oil prices suffered a bout of profit-taking after hitting a two-year on Tuesday.

Benchmark crude for January delivery was down 72 cents at $87.96 a barrel in electronic trading on the New York Mercantile Exchange. The contract hit $90.76 on Tuesday, the highest price since Oct. 8, 2008.

[Associated Press; By PAN PYLAS]

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