Wednesday, 7 December 2011

Markets in retreat as euro plan optimism fades

Associated Press

Stocks gave up earlier gains Wednesday as hopes dissipated that a deal to save the euro would be agreed at a summit of European leaders at the end of the week, in the wake of an insistence from Germany that it wouldn't accept anything other than a treaty change.

Investors have been betting that EU leaders will agree on Friday a strategy that will allow the 17 countries that use the euro to link up their economies more closely. The tighter budget rules, proposed by the leaders of Germany and France, could then allow the European Central Bank to play a bigger role in solving the crisis by buying up the bonds of the most imperiled countries.

Germany has insisted that a change to the treaty governing the 27-nation EU, or a new one for just the 17 countries that use the euro, is needed to enforce discipline. In contrast, European Council President Herman Van Rompuy voiced his support for a fast-track approach that doesn't involve a new treaty.

"As is usual ahead of a major event, a few spanners continue to be thrown in," said Sebastien Galy, an analyst at Societe Generale.

In Europe, shares have fallen sharply in light of the comments from a top German official, who was speaking on condition of anonymity, that it's not going to change its stance on the need for a new treaty.

Germany's DAX was 1.5 percent lower at 5,947 while the CAC-40 in France fell 1 percent to 3,147. The FTSE 100 index of leading British shares was 1.1 percent down at 5,509.

U.S. stocks were down too _ the Dow Jones industrial average was 0.7 percent lower at 12,068 while the broader Standard & Poor's 500 index fell 1 percent to 1,245.

The euro also fell 0.3 percent to $1.3368 while the bond yields on Italy and Spain rose again following big falls this week _ a clear sign that investors are getting more fidgety in the run-up to Friday's summit of EU leaders. Italy's yield was back above 6 percent.

"Comments from a German official who played down expectations for the EU leaders' summit are weighing on the euro and the risk sentiment more broadly," said Vassili Serebriakov, a currency strategist at Wells Fargo Bank.

Before Friday's summit, the European Central Bank is expected to cut interest rates Thursday, possibly by as much as half a percentage point. If it did sanction such a big move, then the rate would fall to 0.75 percent and below the 1 percent that had previously been considered the floor.

Lower interest rates would help the eurozone economy, which has been sliding back toward recession under the weight of the debt crisis that threatens to spread from the relatively small economies, such as Greece, to much-bigger Italy and Spain.

Earlier in Asia, Japan's Nikkei 225 jumped 1.7 percent to end at 8,722.17 _ its highest close in a month. South Korea's Kospi added 0.9 percent to 1,919.42 and Hong Kong's Hang Seng gained 1.6 percent to 19,240.58.

Mainland Chinese shares edged higher, with the benchmark Shanghai Composite Index climbing 0.3 percent to 2,332.73, ending a five-session losing streak.

Oil prices, meanwhile, tracked stocks lower _ benchmark crude for January delivery was down 33 cents to $100.95 a barrel in electronic trading on the New York Mercantile Exchange.
Pamela Sampson in Bangkok contributed to this report.