Markets edgy over EU debt crisis resolution

[October 18, 2011]  LONDON (AP) -- Skepticism over Europe's ability to deliver a comprehensive solution to its debt troubles weighed on market sentiment Tuesday, as did a warning from Moody's that it could soon review France's cherished triple-A credit rating for possible downgrade.

Over the past two weeks, stocks have recovered a large chunk of their losses for the year, while the euro and oil prices have surged as investors priced in the likelihood of a big European response to the debt crisis that has seen three countries bailed out and pushed Greece to the bring of default.

The expectation was that the 17 countries that use the euro, led by Germany and France, were preparing a three-pronged solution to the debt crisis. That would include measures to boost the firepower of the bailout fund, a recapitalization of a large part of the banking sector and a plan to get the banks to take a bigger hit on their Greek debt holdings.

However, hopes for such a plan were lowered on Monday when German officials, including the finance minister, cautioned investors against believing that Sunday's summit of eurozone leaders in Brussels would mark a definitive turning point in the crisis.

Coupled with a warning from Moody's that France may be put on notice for a possible credit rating downgrade after a three-month assessment, sentiment continued to sour on Tuesday.

"The positive momentum behind risk at the end of last week has faded as the realities in front of the EU counterbalanced the prior hope for a resolution to the region's difficulties," said David Watt, an analyst at RBC Capital Markets.

In Europe, France's CAC-40 index was 1.4 percent lower at 3,121, underperforming its main counterparts. Germany's DAX was only 0.2 percent lower at 5,845 while the Britain's FTSE 100 index was 0.9 percent lower at 5,387.

Wall Street was poised for modest losses at the open, too -- Dow futures were down 0.2 percent 11,284 while the broader Standard & Poor's 500 futures fell 0.1 percent to 1,192.

Investors will also monitor the next batch of U.S. corporate earnings. So far, they've been mixed. Among companies reporting quarterly financial results are Apple Inc., Bank of America Corp., Coca-Cola Co., Johnson & Johnson and Yahoo Inc.

Alongside the softer tone in stock markets, the euro fell as well, trading 0.4 percent lower at $1.3677. When investors are willing to take on more risk the euro usually rises, as it has in the previous two weeks.

Oil prices likewise dropped, with the benchmark rate for November delivery down 39 cents at $85.99 a barrel in electronic trading on the New York Mercantile Exchange.

News that China is growing at its slowest rate in two years added to the unease in markets in the run-up to Sunday's meeting.

Though Chinese growth was running at a still strong rate of 9.1 percent in the three months through September, the slowdown comes at a time when other key pillars of the global economy, such as Europe and the U.S. have seen their growth rates slow down sharply as well.

"Given the European Union as a whole is China's largest trading partner, investors are justifiably questioning the ability of Europe to register enough growth to help alleviate its current debt crisis," said Geoffrey Yu, an analyst at UBS. "The soft data added to market woes initiated yesterday."

In mainland China, the Shanghai Composite Index dropped 2.3 percent to 2,383.49 while the smaller Shenzhen Composite Index lost 2.9 percent at 1,010.46.

Elsewhere in Asia, Japan's Nikkei 225 lost 1.6 percent to close at 8,741.91. Hong Kong's Hang Seng plunged 4.2 percent to 18,076.46. South Korea's Kospi fell 1.4 percent to 1,838.90. Benchmarks in Singapore, Taiwan, Australia, Indonesia and the Philippines were also lower.

[Associated Press; By PAN PYLAS]

Pamela Sampson in Bangkok contributed to this report.

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