Markets cautious amid Spain concerns

AP News
Posted: Jun 12, 2012 1:04 PM
Markets cautious amid Spain concerns

World markets rose cautiously Tuesday amid uncertainty over whether Europe's plan to rescue Spain's ailing banks would be enough to prevent the continent's debt crisis from infecting other economies, like Italy.

Stocks had surged early Monday as investors seemed to bestow their approval on a weekend deal to make (EURO)100 billion ($125 billion) available to Spain to revive banks crushed by bad real estate loans. But those gains were erased in just a few hours, as observers worried the money might just add to the Spanish government's debts, and maybe eventually force it to seek its own bailout.

As a sign of investor wariness of Spain, the yield, or interest rate, on its 10-year benchmark bond shot up. It was still climbing Tuesday, reaching 6.81 percent, a euro-era record. That's also dangerously close to the 7 percent yield that has forced other countries to seek rescue loans. Italy's yields were also rising.

Keeping pressure on Spain's markets was Fitch's decision to downgrade 18 domestic banks due to their exposure to Spanish government debt, which the agency had downgraded earlier this month.

France's CAC-40 closed 0.1 percent higher at 3,046.91, while the DAX in Germany gained 0.3 percent to 6,161.24. The FTSE index of British shares climbed 0.8 percent to 5,473.74. The euro was flat at $1.2485.

Wall Street rose more strongly, which analysts attributed to comments from Federal Reserve official Charles Evans, who told Bloomberg he would support more monetary stimulus. The Dow industrial average was up 0.7 percent to 12,494.67 and the S&P 500 rose 0.4 percent to 1,314.74.

Europe's financial troubles are likely to dominate trading for the rest of the week as investors gauge the stability of Spain and other eurozone countries.

"`Fragile' is perhaps the most appropriate word to describe sentiment at present," said Ben Critchley, a sales trader with IG Index. "Yesterday's trading showed that even (EURO)100 billion is not sufficient to rebuild battered investor confidence, and Spanish and Italian yields are creeping higher once again."

As always with the eurozone crisis, concern about one country is never limited to that country. If Spain needs help, investors might worry that Italy will too. Both are enormous economies _ the fourth- and third-largest in the currency bloc, respectively _ and many think the eurozone cannot afford to rescue them.

Italy's government on Monday confirmed that the country's recession is deepening. The economy contracted at a quarterly rate of 0.8 percent in the first three months of the year, the worst contraction in three years and double Spain's rate.

Investors are also nervously eyeing a Greek election this Sunday to see if a party that has said it will throw out the country's bailout agreement will be the big winner. The party has been rising in the polls, convincing Greeks that it can either get a better deal _ after months of brutal cuts _ or that Greece would be better on its own.

"Italy of course is never far away when we consider Spain's situation; add Greece into that mix and you have a dangerous combination," Critchley said.

Earlier in the day, Asian markets responded to the gloom that had settled over Europe and the U.S. late Monday.

Japan's Nikkei 225 index lost 1 percent to close at 8,536.72. South Korea's Kospi dropped 0.7 percent to 1,854.74 and Hong Kong's Hang Seng was 0.4 percent lower at 18,872.56.

Mainland Chinese shares lost ground, with the benchmark Shanghai Composite Index shedding 0.5 percent to 2,289.79. The Shenzhen Composite Index lost 0.4 percent to 942.18.

Energy prices were stable, with benchmark oil for July delivery up 46 cents to $83.16 per barrel in electronic trading on the New York Mercantile Exchange.


Pamela Sampson contributed to this report from Bangkok.