Euro struggles on debt contagion fears, stocks fall

Wednesday, 1 December 2010 00:20 -     - {{hitsCtrl.values.hits}}

SINGAPORE  (Reuters) - The euro struggled on Tuesday and Asian stocks fell as fears that Ireland’s fiscal problems could spread to other weak euro zone countries weighed on investor sentiment.

European shares rose in early trade, however, bouncing back from eight-week closing lows in the previous session after U.S. stocks finished softer but well off their lows overnight.

The FTSEurofirst index of leading regional stocks advanced 0.4 percent.

But financial markets in Asia were weighed down by concerns over Europe’s festering debt problems as well as data showing Japanese and South Korean factories cut output last month, highlighting the fragile nature of the global economic recovery heading into 2011. [ID:nL3E6MU05H]

Strong Asian growth, particularly in China, has been one of the few bright spots for the world economy this year, giving ailing developed economies a much-needed boost in exports to the Far East and buoying commodity prices.

The euro wobbled but managed to hold above a 10-week low of $1.3064 hit on Monday on trading platform EBS, helped by short-term oversold technical signs. But it slid to its lowest in 10 weeks against the yen and the Swiss franc as investors moved into so-called safe-haven currencies.

Dealers said the single currency may pull back further on fears that Portugal and Spain may soon be the next fiscally weak European countries to be engulfed by debt problems, after a rescue package was agreed for Ireland at the weekend.

Italian and Spanish 10-year bond yields jumped by more than 20 basis points on Monday -- their biggest daily rise in more than a decade -- highlighting the lack of confidence in the European Union’s ability to deal with the crisis.

“You probably have more selling to come through. Movements in European bond yields were savage last night ... and that’s a reflection of the concern that is evident in the market. I don’t think this is over just yet,” said Richard Grace, a currency strategist at Commonwealth Bank.

The euro has fallen about 6 percent against the dollar this month alone and is on track for its biggest monthly fall since May, when it fell 7.5 percent.

Profit taking ahead of the year-end also continued to erode equities, with Japan’s Nikkei sliding 1.9 percent and the MSCI ex-Japan index falling 0.4 percent.

The Nikkei, though, still gained 8 percent in November, its best monthly performance since March, helped by a global rally in stocks which took off in late summer.

China’s key stock index fell 1.6 percent to close at a seven-week low, weighing on Hong Kong , as tight liquidity in the domestic money market and fears of more central bank policy tightening prompted retail investors to sell heavily weighted financial and resource stocks.

The Shanghai index has fallen 5.3 percent this month after rising 12 percent in October.

Purchasing managers surveys on Wednesday are expected to show China’s manufacturing sector continued to expand at a solid rate in November, but stronger-than-expected readings could prompt authorities to take more aggressive tightening steps to curb inflationary pressures. [ID:nTOE6AP055]

“Investors are dumping shares because they are afraid of rate increases down the road,” said Alfred Chan, chief dealer at Pearl Investment. “Banks are not going to be lending money as liberally as they wish because the government has capped lending for next year. Corporate earnings will be restricted.”

U.S. Treasuries rose in Asia, adding to the previous day’s rally, as investors turned to government debt as a safe haven from the recent flare-up in volatility.

Ireland deal to take time to calm markets - IMF

DUBAI (Reuters) - The deal to bail out Ireland from its debt crisis will take time to reverse market momentum, but growth is likely to return in the short term, the IMF’s first deputy managing director said on Tuesday.

The extension of Ireland’s deadline for plugging its budget black hole is also a positive step but the challenge to stabilize the country’s financial system remain.

“It isn’t just a matter of showing that banks are adequately capitalised. You have to show that they have adequate access to funding,” John Lipsky told Reuters Insider.

“The European authorities have announced that a new round of (bank) stress tests will, in addition to examining issues of regulatory capital, will also look at the challenge of funding. And that may produce a different answer about the backup facilities that may be required to ensure confidence in the stability of banking systems,” he said.

Some analysts have described this year’s health checks on European Union banks, which none of Ireland’s lenders failed, as an irrelevance in light of the Irish bailout.

The EU approved an 85 billion euro ($115 billion) rescue for Ireland on Sunday and outlined a permanent system to resolve Europe’s debt crisis, in which private investors would gradually share the cost of any future default.

“It is not going to be easy, but we expect growth is going to resume in relatively short order if the appropriate measures are taken successfully,” Lipsky said, speaking on the sidelines of a World Economic Forum (WEF) conference in Dubai.

The European Commission forecast on Monday that Irish gross domestic product (GDP) would grow by just 0.9 percent next year, roughly half the level pencilled in by the government just a few weeks ago, and a fraction of the 3.25 percent Dublin was originally forecasting.

Finance ministers from the 16-nation euro zone, anxious to prevent market contagion spreading to Portugal and possibly Spain, unanimously endorsed the emergency loan package to help Dublin cover bad bank debts and bridge a huge budget deficit.

“It would have been unrealistic to expect that a set of announcements over the weekend were going to completely reverse market momentum. To reverse this momentum will take some time, even in the best of circumstances,” Lipsky said.

Some 35 billion euros was earmarked to help restructure the shattered banks, of which 10 billion will be an immediate capital injection and the rest a contingency fund.

Ireland will contribute 17.5 billion euros of its own cash and pension reserves towards the bank rescue, with the IMF contributing 22.5 billion euros.

“Market participants will be sceptical initially, they will want to see actual performance on the economic measures and disbursement of the cash,” Lipsky said.

“The challenge for Ireland is to stabilize the financial system, to stabilize the fiscal situation, to give confidence in the sustainability of the economic environment for some time to come,” Lipsky said.

EU finance ministers also approved outlines of a permanent crisis-resolution mechanism based on a joint proposal by Germany and France.

Lipsky said European debt worries over the past year and Ireland’s bailout were not impacting growth in the Gulf oil-producing countries.