European debt woes stalk markets

AP News
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Posted: Jun 20, 2011 10:59 AM
European debt woes stalk markets

Worries over Europe's debt crisis kept markets on edge Monday, following a warning over Italy's credit rating and a failure by eurozone finance ministers to agree an immediate release of bailout funds to Greece.

However, a brighter than anticipated opening on Wall Street helped stocks in Europe to recover from earlier lows and shored up the euro currency _ an improvement in investors' risk appetite often gives the euro a lift.

In Europe, the FTSE 100 index of leading British shares was down 0.3 percent at 5,699 while Germany's DAX fell 0.3 percent to 7,145. The CAC-40 in France was 0.9 percent lower at 3,137.

All three had been trading even lower as had Europe's worst performing stock market, Italy's FTSE MIB index. The FTSE MIB was hit by a warning Friday from Moody's that it may downgrade its Aa2 rating on the country on account of "long-term structural impediments to growth." The index was trading 2 percent lower at 7,140.

In the U.S., the Dow Jones industrial average was up 0.1 percent at 12,017 soon after the open while the broader Standard & Poor's 500 index was unchanged at 1,272 _ hardly spectacular trading, but a noticeable improvement on the expected open.

The stronger than anticipated opening helped the euro recover its earlier losses to trade 0.1 percent higher at $1.4298, helping it to build on Friday's rally when German Chancellor Angela Merkel indicated that private creditors, such as banks, would not be compelled to share any pain in a second bailout of Greece. Instead, she backed the line touted by the French government and the European Central Bank that any private sector involvement has to be on a "voluntary" basis.

Greece will likely remain the main driver in the markets this week, especially after the eurozone's finance ministers said they would only hand over Greece's next bailout installment _ worth euro12 billion ($17 billion) _ on condition the Greek Parliament backed further austerity measures.

With the Greek government facing a confidence vote in Parliament on Tuesday, there's still an element of political risk and that's clearly weighing on markets at the start of a week that's likely to be dominated again by the country's woes. Though Prime Minister George Papandreou's newly reshuffled government is expected to prevail in the confidence vote, there's still uncertainty over the passage of another euro28 billion in austerity measures.

"That has put the ball fairly and squarely back in Greece's court," said Nick Bennenbroek, an analyst at Wells Fargo Bank. "While those votes will probably pass, we may have a nervous few days until those decisions are out of the way."

Though all developments Greek will likely dominate sentiment in the markets, investors will be interested to see what the U.S. Federal Reserve does in its rate-setting meeting on Wednesday.

The headlines will likely be that the benchmark rate will be left unchanged at near zero percent and that the current $600 billion monetary stimulus will come to an end as expected at the end of the month. Most interest, though will likely center on Fed chairman Ben Bernanke's second post-meeting press briefing and specifically on what he says about elevated inflation levels in the U.S.

Earlier in Asia, Japan's Nikkei 225 was one of the few benchmarks posting gains for the day. The benchmark gained less than 0.1 percent close at 9,354.32 despite data showing the country's exports dropped for the third straight month in May due to massive production losses following the March 11 earthquake.

South Korea's Kospi sank 0.6 percent to 2,019.65, while Hong Kong's Hang Seng shed 0.4 percent to 21,599.51

Mainland Chinese shares extended losses for a fourth straight trading session amid a lack of funds as banks complied with the central government's latest order to raise the level of deposits they must hold as reserves.

The Shanghai Composite Index lost 0.8 percent to 2,621.25, its lowest close this year, while the Shenzhen Composite Index lost 1.1 percent to 1,073.19.

In the oil markets, worries over the global economy pushed prices lower again. Benchmark oil for July delivery was down 16 cents to $92.85 a barrel in electronic trading on the New York Mercantile Exchange.

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Pamela Sampson in Bangkok contributed to this report.