US, European stocks remain volatile

AP News
Posted: Aug 22, 2011 12:16 PM
US, European stocks remain volatile

Stocks in Europe and the U.S. remained volatile Monday as investors gyrated between fears of a double-dip recession and hopes that the Federal Reserve will soon take action to revitalize the U.S. economy.

Gold prices crossed $1,890 an ounce for the first time, as a flight to save-haven assets continued.

Brent crude, meanwhile, fell to near $107 a barrel as Libyan rebels' capture of most of Tripoli boosted hopes the OPEC nation's oil exports could resume soon.

After rallying earlier in the day, European stocks erased much of their gains in late trading. Britain's FTSE 100 closed 1 percent higher at 5,092.8, after having risen above 2 percent. France's CAC 40 gained 1.1 percent to 3,051.3, but Germany's DAX declined 0.1 percent to 5,473.7.

Wall Street, which opened firmly higher, also weakened in noon trading, with the Dow Jones Industrial Average up just 0.2 percent at 10,835 and the broader S&P 500 down 0.2 percent at 1121.8.

The indecisive mood in Europe and the U.S. followed a jittery day of trading in Asia, where most markets closed in the red.

Throughout the week, investors will be looking with anticipation to a speech Friday by U.S. Federal Reserve Chairman Ben Bernanke at a retreat in Wyoming.

The Fed pledged earlier this month to keep interest rates super-low through mid-2013, but the announcement failed to calm fears that the world's largest economy may once again fall into recession.

Investors hope Bernanke will announce, or at least preview, further steps to help the economy, including a third round of bond purchases known as quantitative easing, but analysts warned against overly high expectations.

"Given the absence of deflation risk, we do not expect him to announce QE3," analysts at UniCredit in Milan wrote in a note, referring to a new round of bond buying. "But (Bernanke) is likely to reiterate that the Fed is prepared to ease monetary policy further if needed."

The European Central Bank on Monday confirmed that it was taking on a more active role in fighting the eurozone debt crisis, disclosing that it spent euro14.29 billion on buying the bonds of struggling countries such as Italy and Spain last week.

That's below the euro22 billion it doled out the previous week, but has kept the yields, or interest rates, on Italian and Spanish 10-year bonds below 5 percent _ more than a percentage point below record levels seen in the week before the ECB resumed its bond buying program.

However, most economists see the ECB's purchases as only a temporary bandage in the eurozone's fight against the debt crisis. Over the weekend, German Chancellor Angela Merkel and EU President Herman Van Rompuy both ruled out the introduction of eurobonds _ debt backed by all 17 euro countries _ anytime soon, squashing investor hopes that a more lasting solution to the currency union's debt troubles may be in the works.

With resistance to eurobonds in the currency union's rich states remaining firm, analysts warn that any stabilization in stock prices is likely temporary, especially amid growing worries about banks' funding levels.

"With the north/south divide within the eurozone becoming ever more clearly defined, the chances of finding a solution that will both placate investors and increasingly wary voters in northern Europe seem low," wrote analysts at the Bank of New York Mellon. "The only question we therefore need to ask is quite where the next signs of stress will emerge."

That fear manifested itself in gold prices Monday, which briefly rose 2.2 percent to $1892.2 an ounce, setting a new record for the precious metal. Unsure about the outlook for the global economy and more volatile investments like stocks or bonds from weaker economies, investors have been parking their funds in save-haven assets such as gold, the Swiss franc, and the Japanese yen.

The recent rise in the yen contributed to losses in Asia, where most markets ended the day in negative territory.

Japan's Nikkei 225 index lost 1 percent to close at 8,628.13 _ a five-month low _ as the strong yen hurts the country's exports by making them more expensive.

Japan intervened in currency markets earlier this month to try to reverse the yen's climb. The decision to sell the yen and buy the dollar worked initially, sending the greenback toward 80 yen. But the dollar has been weighed down by the dimming outlook for the U.S. economy and is back down to mid 76-yen levels.

South Korea's Kospi also took a hit, dropping 2 percent to 1,710.70. The Shanghai Composite Index lost 0.7 percent to 2,515.86 while the Shenzhen Composite Index lost 0.9 percent to 1,124.17. Hong Kong's Hang Seng, meanwhile, swung into positive territory to eke out a 0.5 percent gain at 19,486.87.

Asian markets were the first to open after the developments in Libya, where Moammar Gadhafi's regime is crumbling after rebels entered the capital of Tripoli on Sunday. Oil prices are expected to fall if the situation can quickly stabilize.

In London, Brent crude for October delivery fell $1.51 per barrel to $107.11 on the ICE Futures exchange. Benchmark oil for September delivery on the New York Mercantile Exchange, however, inched up 74 cents to $83.15 a barrel in electronic trading, in line with the somewhat improved sentiment over the U.S. economy.

Even though movements in oil prices have been less pronounced than expected, "we still think that regime change in Libya could ultimately knock as much as $10 from the price of a barrel of Brent," analysts at Capital Economics said Monday. Libya used to export about 1.5 million barrels of oil a day, but production all but ground to a halt in recent months as rebels battled to overthrow Gadhafi.

In currency markets, the dollar dipped to 76.76 yen, while the euro rose 0.1 percent to $1.437.


Pamela in Bangkok and Fu Ting in Shanghai contributed to this story.