Global stocks rise despite Europe worries

A man looks at a stock exchange board display in downtown Milan November 18, 2011.

NEW YORK (Reuters) - The euro and global stocks edged higher on Monday but worries over Europe's economy and its troubled banking sector, coupled with caution ahead of Italian and Spanish debt sales this week left riskier assets vulnerable to a slide.

As Wall Street gained slightly ahead of the start of the corporate earnings season, stocks slipped in Europe. A warning from German Chancellor Angela Merkel and French President Nicolas Sarkozy that Greece will get no more aid until it agrees to a debt swap with bank creditors provided a new fear factor in the European debt crisis.

The two leaders insisted after talks in Berlin that private-sector bondholders must share in reducing Greece's debt burden, while new European and International Monetary Fund lending was also needed.

Investors were skeptical that European politicians could deliver an effective plan to resolve the region's debt crisis and remained cautious ahead of this week's debt sales by Italy and Spain, their first bond auctions of the year.

"Availability of credit is drying up and deleveraging is hitting the economy at the same time," said Constantine Ponticos, managing director of research at Pareto Investment Management, a unit of Bank of New York Mellon, in London.

In a sign of investor unease, Germany sold 3.9 billion euros of six-month treasury bills with a negative yield - the first time this has happened at an auction. The sale meant buyers of the bills preferred to pay the German government to keep their money rather than receive interest.

The Dow Jones industrial average .DJI ended up 32.77 points, or 0.27 percent, at 12,392.69. The Standard & Poor's 500 Index .SPX closed up 2.89 points, or 0.23 percent, at 1,280.70. The Nasdaq Composite Index .IXIC finished 2.34 points, or 0.09 percent, higher at 2,676.56.

Shares of Alcoa (AA.N), the largest U.S. aluminum producer, closed up almost 3 percent at $9.43 ahead of the release of its earnings after the bell. It rose another 10 cents before settling near its price at the close after the company reported a loss but on better-than-expected revenues.

Alcoa is perceived as a bellwether of broader economic growth because of aluminum's role in the production of many goods.

Investors fear economic growth might be slowing.

"We are at a point where we need more fundamental data to push the market higher. Alcoa is kicking off the results season today and we want to know if there will be some earnings relief," said Veronika Pechlaner, a fund manager on the Ashburton European equity fund.

S&P 500 fourth-quarter earnings were expected to rise 7.8 percent from a year earlier, according to a Thomson Reuters forecast, down from a July 1 outlook for growth of 17.6 percent.

Banking stocks led shares lower in Europe. UniCredit (CRDI.MI), Italy's largest bank by assets, plunged 12.8 percent as it began a rights issue to bolster its capital. The move highlighted the difficulty some European lenders face recapitalizing.

The FTSEurofirst 300 .FTEU3 index of top European shares eased 0.5 percent to close down at 1,008.69.

Data from Germany showed exports jumped in November, suggesting fourth-quarter gross domestic product for Europe's bulwark economy may be stronger than expected, though industrial output that month was subdued and investors remained jittery.

The MSCI world equity index .MIWD00000PUS rose 0.3 percent, recovering from weaker sessions in Europe and Asia.

The euro rebounded from a 16-month low against the dollar as participants pared short positions, but they remained overwhelmingly bearish ahead of this week's events.

The euro was up 0.4 percent at $1.2765.

However, simultaneous deleveraging and austerity will lead to further downside for the euro, said Ponticos at Pareto Investment.

Recent data showed euro net short positions at their largest ever, making the currency vulnerable to short covering. Further declines are widely anticipated as fears over sovereign funding persist and as the euro zone grapples with a recession that should keep European Central Bank policy accommodative.

The Swiss franc tipped higher on news that Swiss National Bank Chairman Philipp Hildebrand resigned after a scandal over a controversial currency trade by his wife.

The franc rose on concern that with Hildebrand's resignation the Swiss National Bank would be hard pressed to keep its peg against the euro, which could drive up the Swiss franc again.

Italian and Spanish 10-year government bond yield spreads over German safe-haven benchmarks narrowed, with the market taking a breather after a surge in the two countries' borrowing costs last week.

Italian 10-year paper yielded around 7.19 percent, firmly above the 7.0 percent level widely seen as unsustainable, while Spanish equivalent bonds were at 5.62 percent.

U.S. Treasury debt prices were little changed as the listless stock market offered little impetus for investors to shift positions ahead of this week's $66 billion in coupon supply.

The lack of concrete progress on the euro zone debt crisis after the meeting between the French and German leaders kept a safe-haven bid for bonds and limited early losses.

"Stocks opened a little weaker than expected and that added some bids into our market," said Anthony Cronin, a Treasuries trader at Societe Generale in New York.

The benchmark 10-year U.S. Treasury note was little changed in price, rising 2/32 to yield 1.95 percent.

Brent crude futures fell in volatile trade as traders weighed concerns about the euro zone's weakening economy against Iran's threats to shut the Strait of Hormuz, a key oil shipping route, in response to U.S. and European sanctions aimed at discouraging Iran's nuclear program.

February Brent crude futures settled down 61 cents at $112.18 a barrel, after gaining more than 5 percent last week. On the New York Mercantile Exchange, February U.S. light crude futures settled down 25 cents at $101.31 a barrel.

U.S. February gold futures for February delivery settled down $5.89 an ounce at $1,610.50. Trading volume was largely in line with its 30-day average.

(Additional reporting by William James and Neal Armstrong in London; Editing by Leslie Adler and James Dalgleish)