World stock markets diverge

File picture: Alex Grimm

File picture: Alex Grimm

Published Jun 13, 2012

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World stock markets diverged in choppy trading on Wednesday as investors' fixed their attention on worries over eurozone debt contagion.

European stock markets were falling in late morning deals after Asian indices mostly closed higher following Tuesday's rebound on Wall Street.

The euro climbed against the dollar, while in bonds news Italy borrowed 6.5 billion euros at sharply higher rates.

Simon Denham, head of Capital Spreads trading group, said that bond investors were “unconvinced that last weekend's bailout (deal for Spanish banks) will be enough to prevent the contagion from spreading.”

He added: “Certainly, the extent of the (equities) sell off we've seen since April has been enough to get any investor interested in dipping their toes back into the market and those buying at these levels are betting that if contagion is averted then we could quickly see a rally back towards the highs of the year.”

London's FTSE 100 index of leading companies fell 0.22 percent to 5,473.80 points in morning deals, while Frankfurt's DAX 30

dropped 0.45 percent to 6,135.32 points and in Paris the CAC 40

lost 0.36 percent to 3,035.89.

Madrid's IBEX 35 though jumped 0.98 percent.

In foreign exchange deals, the euro gained to $1.2539 from $1.2502 late on Tuesday in New York.

Spain's Prime Minister Mariano Rajoy on Wednesday said the nation had no choice but to seek a vast eurozone rescue loan of up to 100 billion euros ($125 billion) for stricken banks because it could not raise the cash alone.

He also urged the European Central Bank to take urgent action.

The conservative leader, who faced ridicule in parliament for refusing to describe the aid as a rescue, said he inherited a banking system in crisis when his conservative government took power in December last year.

Finance ministers of the 17 eurozone nations struck a deal in a video conference Saturday to extend Spain a banking sector rescue loan.

“I am very satisfied because Spain at this time does not have the 100 billion euros nor, as you know, can it issue public debt,” Rajoy told parliament.

But Spanish 10-year government bonds yields - the rate of return earned by investors - spiked to a record 6.834 percent on Tuesday, the highest level since the eurozone was founded, as tension reigned on sovereign debt markets.

Any yield above 6.0 percent is judged unsustainable for the long term and in this instance indicates the market is increasingly sceptical that the EU bank bailout accord can resolve Spain's problems.

Spain, with its ratings already slashed three notches to near junk status, was hit again on Tuesday when Fitch downgraded 18

Spanish banks, a day after it cut the country's two biggest lenders, Santander and BBVA.

Fellow eurozone member Italy has also seen its bond yields soar but Prime Minister Mario Monti said he was relaxed about Rome's standing on international markets at a “crucial” time for the eurozone, despite rising crisis contagion.

“We are relaxed over Italy's standing on the international stage and on the markets,” he said on Wednesday in a speech to the cabinet, adding that it was “a particularly intense and crucial phase for Europe and the country.”

Monti said that Italy had a lower public deficit and unemployment rate than many other EU countries, and “stable” banks which were not exposed to the real estate crisis threatening Spain.

Italy borrowed 6.5 billion euros with a 12-month bond issue on Wednesday but had to pay increased rates, the Bank of Italy said.

Interest rates for the one-year bonds rose to 3.972 percent compared to the 2.34 percent paid in an auction on May 11, as Italy battled to deny rumours that it might be forced to follow Spain in asking for a bailout.

Asian stock markets mostly closed higher on Wednesday but gains were capped by concerns about Spain's banking system and as Greece prepared for another election, traders said.

Tokyo rose 0.60 percent, Hong Kong climbed 0.82 percent and Shanghai gained 1.27 percent. Sydney slipped 0.22 percent.

Investors fear that Sunday's general election in Greece, the second in six weeks, could end in a victory for anti-austerity groups who would tear up a bailout agreement in a move that would lead to Athens exiting the eurozone.

Meanwhile on Wall Street, the Dow closed up 1.31 percent on Tuesday, the S&P 500 gained 1.17 percent and the Nasdaq Composite advanced 1.19 percent.

Chicago Federal Reserve Bank President Charles Evans meanwhile reiterated his support for more monetary stimulus ahead of next week's meeting of the US central bank. - Sapa-AFP

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