Market relief at German ruling fades ahead of Fed

AP News
Posted: Sep 12, 2012 5:29 AM
Market relief at German ruling fades ahead of Fed

LONDON (AP) — Investors breathed a sigh of relief Wednesday, sending the euro briefly above $1.29 for the first time in four months after Germany?s highest court rejected calls to block Europe?s permanent rescue fund.

The decision removed some uncertainty about Europe?s efforts to solve its debt crisis. Even though the decision by Germany?s Federal Constitutional Court comes with certain conditions, it means the country?s president can sign off on the European Stability Mechanism and that fund can take effect by early next year.

The fund is important because it can loan money to cash-strapped governments. It?s also due to play a key role in the recent bond-buying plan unveiled by European Central Bank President Mario Draghi, the main reason behind the turnaround in market sentiment over Europe in the past few weeks.

The euro benefited from the ruling, climbing to a high of $1.2937 — its first foray above the $1.29 threshold since May 14.

By late afternoon London time, it had shed some of those gains as investors positioned themselves for a key U.S. Federal Reserve decision on Thursday about whether it will pump more money into the U.S. economy. The euro was trading 0.2 percent higher on the day at $1.2881. European stocks also got a boost but the rally there also faded after a lackluster opening in the U.S.

Germany?s DAX was up 0.3 percent at 7,329 but the CAC-40 in France shed earlier gains to trade 0.1 percent lower at 3,534. The FTSE 100 index of leading British shares was 0.5 percent lower at 5760.

On Wall Street, the Dow Jones industrial average was steady at 13,322 while the broader S&P 500 index was more or less unchanged too at 1,434.

The borrowing rates of countries at the frontline of Europe?s debt crisis eased further Wednesday, with the yield on Spain?s 10-year bonds down 0.14 percentage points to 5.53 percent and Italy?s falling 0.08 percentage points to 4.93 percent. Not long ago, both countries were seeing this key interest rate above 7 percent, a level widely-considered unsustainable in the long run.

Despite the positive reaction in the markets, investors think Europe?s debt crisis is a long way from being fixed. Greece still has to convince creditors that it deserves more bailout money, while Spain appears undecided about whether to tap the ECB?s bond-buying facility.

Also, there are real doubts about whether the ESM can do the job. The €500 billion available would not be enough in the event that Italy or Spain needed to be bailed out like Greece, Ireland and Portugal have already been.

"In the event of a Spanish and Italian bailout, even with ESM ratification, the resources available fall short of what is required for such bailouts," said Neil MacKinnon, global macro strategist at VTB Capital.

Attention is shifting to Thursday?s decision by the U.S. Federal Reserve on whether to back another monetary stimulus. Expectations that it will do so have risen lately following a run of soft economic data.

Many analysts remain skeptical that the Fed will do anything more than reassert that it?s willing to do more, especially as a number of its policymakers may be reluctant to do anything dramatic in the middle of the U.S. presidential campaign.

Earlier in Asia, Japan's Nikkei 225 index rose 1.7 percent to close at 8,959.96. Hong Kong's Hang Seng added 1.1 percent to 20,075.39 and South Korea's Kospi gained 1.6 percent to 1,950.03.

In mainland China, the Shanghai Composite Index gained 0.3 percent to 2,126.55. The Shenzhen Composite Index gained 0.5 percent to 901.29.

Oil prices edged higher with benchmark crude for October delivery up 26 cents to $97.43 a barrel in electronic trading on the New York Mercantile Exchange.