Euro, shares dip as growth worries revive

Wednesday, 21 March 2012 00:02 - - {{hitsCtrl.values.hits}}

LONDON (Reuters): The euro dipped to just below its highest level in more than a week and European stocks fell on Tuesday as investors eyed crucial talks between Italy’s government and unions on labor reforms and worried about the scale of China’s growth slowdown.

Prime Minister Mario Monti’s meeting with union bosses could make or break his brief tenure as head of a government struggling to pay down massive debts and find ways to revive an economy in which factory output has fallen sharply.

Ahead of the meeting, equity investors were trimming positions after shares rose to eight-month peaks on signs of a recovery in the giant U.S. economy and after big improvements in corporate balance sheets.

“Strategically, I am bullish on equities,” Neil Dwane, chief investment officer for Europe at Allianz Global Investors/RCM, said.

“The thing is that they have rallied quite a long way, so it’s harder to be as confident when you think: have we solved any of the economic issues?”

The FTSE Eurofirst 300 was down 0.5 percent at 1,099.71 points after snapping a four-session winning streak on Monday that saw it touch levels last seen in July. Traders’ growing nervousness about the outlook could be seen in the Euro STOXX 50 volatility index, a key gauge of sentiment, which jumped 4.3 percent after three-days of falls. The higher the volatility index, the lower the investor appetite to take on more risk.

Meanwhile U.S. Treasury yields, which have risen sharply in the past week on the improved U.S. economic outlook and scaled back expectations of further monetary easing in the near term, also dipped on Tuesday but the falls were expected to be short lived.

“I think that movement (in U.S. Treasury yields)...is definitely a confirmation that the market is switching much more in terms of its mentality towards a recovery mentality,” Graham Neilson, chief investment strategist at Cairn Capital said. “I think yields are going to go higher from here as well.”

The 10-year U.S. Treasury yield, which moves inversely to price, stood at 2.35 percent after rising as high as 2.392 percent on Monday, its highest level since late October.Higher Treasury yields and concerns over the impact of China’s economic slowdown on the world economy have helped lift the dollar against basket of currencies. The dollar index was up 0.3 percent to 79.73.

The euro dipped 0.35 percent to just under $1.32, over half a cent below one-week highs. German government bond yields followed Treasuries and dipped slightly on Tuesday as investors were lured back into the market after 10-year yields broke last week above 2 percent, the upper end of the year’s trading range to that point.