GLOBAL MARKETS-Confidence ebbs as European debt concerns grow

Mon Jan 30, 2012 8:27am EST

* Euro edges down ahead of EU Summit

* Banks stocks lead European shares lower

* Portugal slides towards bond pariah Greece

* Demand solid at Italian debt auction

By Richard Hubbard

LONDON, Jan 30 (Reuters) - Concerns about Europe's finances in the absence of a Greek debt deal pushed the euro off six-week highs and sent world stocks lower on Monday, with investors nervously awaiting the outcome of a European Union leaders summit.

U.S. stock index futures signalled a weaker start for Wall Street as tension over a German-led pact for stricter budgetary discipline, to be discussed by EU leaders, hit confidence that the region was getting on top of its debt problems.

"Confidence globally gets eroded and that has a negative impact on equity markets and also on corporate investment," James Knightley, senior economist at ING, said.

The pan-European FTSEurofirst 300 index of top shares was down 0.8 percent at 1,031.96 points after posting its first weekly loss since mid-December on Friday, following lower-than-expected U.S. GDP figures.

Financial stocks, seen as most exposed to Europe's debt problems, led the falls with the Europe STOXX 600 bank index down 2.6 percent.

The euro also saw some profit taking, after its strongest weekly rally in more than three months last week, on the lack of concrete progress in the Greek debt talks, which officials have said is expected later in the week.

Portugal's slide towards becoming the next Greece and needing a second bailout gathered pace meanwhile as banks raised the cost of insuring government bonds against default and insisted the money be paid up front instead of over years.

On Monday it cost a record 3.9 million euros ($5.12 million) to insure 10 million euros of Portuguese debt.

Data showing business confidence in the euro zone strengthened in January for the first time since early 2011 had little impact as it masked a growing divergence in performance between Germany and the rest of Europe.

"We expect the recession in the euro zone will end in the spring," said Christoph Weil, an economist at Commerzbank. "But we can also see that the divergence in the euro zone is increasing and that is of great concern."

Highlighting those concerns, Spain's economy contracted in the final quarter of 2011 for the first time in two years and looks set to slip into a long recession.

Spain's Prime Minister Mariano Rajoy said Spain was not going to meet its existing growth target for 2012, adding to pressure on Spanish bond yields and the rising cost of insuring its debt against default.

The single currency fell 0.9 percent to $1.3110 having hit a six-week high of $1.3233 in early trade. Data showing currency speculators raised their bets on the single currency to a fifth straight record high in the week ended Jan. 24 also weighed on sentiment.

"I think the pullback in the euro today is because maybe the market was expecting something on Greece today and a little bit of optimism has faded," Gavin Friend, currency strategist at National Australia Bank, said.

A Greek debt restructuring deal with private creditors is needed before agreement can be reached on a second bailout package which Athens needs to meet a 14.5 billion euro ($19 billion) repayment on its debt due in mid-March. Otherwise Greece faces a messy default that could reverberate through European and world markets.

The MSCI world equity index was down 0.5 percent to 316.20, having weakened in Asian trade where investors were returning from the long Lunar new year holidays. The benchmark index hit its highest level since August last week after the Federal Reserve pledged to keep interest rates near zero for the next three years.

ITALY PASSES DEBT TEST

In a further reminder of the euro zone's problems, Fitch downgraded the sovereign credit ratings of Italy, Belgium, Cyprus, Slovenia and Spain on Friday, indicating there was a 1-in-2 chance of further cuts in the next two years.

However, Italy's longer-term borrowing costs fell to their lowest since October at an auction of five- and 10-year bonds, seen as a test of the country's ability to raise the funds it needs to meet this year's heavy refinancing schedule.

Italy needs foreign investors to help it refinance some 90 billion euros of bonds falling due between February and April.

Ten-year Italian bond yields rose slightly after the auction to around 6.1 percent.

German government bond futures, used by investors as a safe haven in the crisis, were modestly firmer with the front month contract up 53 ticks on the day at 139.62.

COMMODITIES RETREAT

Oil prices were also in retreat on Monday, dipping below $111 a barrel after an expected Iranian vote to suspend crude exports to Europe was postponed and markets continued to wait for a deal on Greek debt.

Brent crude futures were little changed, trading at$111.401 a barrel and U.S. crude was down 46 cents at $99.09 a barrel. Both contracts gained more than 1 percent last week.

Gold ticked lower having earlier hit a seven-week high, as investors awaited the outcome of Greek debt talks. The precious metal was still supported though by safe-haven buying after the slower-than-expected U.S. fourth-quarter growth data on Friday.

Gold hit a high of $1,739 an ounce at one point, its strongest since Dec. 8, but then edged down to $1,723.20 an ounce. Bullion, which struck a record high $1,920 last September on concerns about a worsening euro zone debt crisis, is on track for a gain of more than 10 percent this month.

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