GLOBAL MARKETS-Stocks pare losses; US bond yields at record lows

Thu May 31, 2012 2:59pm EDT

* Stocks cut losses, on track to sharpest monthly loss since Sept

* Report of IMF plan for Spain lifts market, after depressing US data

* Euro turns positive on day

* U.S. Treasury yields hit fresh 60-year lows

By Barani Krishnan

NEW YORK, May 31 (Reuters) - Stocks and commodities cut their losses on Thursday and the euro turned positive after a report of possible plans to help Spain deal with its banking crisis eased some concerns about Europe.

Confidence remained fragile, however, after a spate of worrying U.S. economic data. Demand for safe-havens stayed strong, keeping U.S. benchmark bond yields at record lows.

Traders and investors also braced for Friday's monthly jobs report from the U.S. government, which will follow Thursday's disappointing data for May from a private payrolls processor.

Stocks pared losses after Dow Jones Newswires reported that the European department of the International Monetary Fund had discussed contingency plans for a rescue loan to Spain in case the country is unable to bail out one of its largest banks.

The report - citing people involved in the handling of Spain's debt crisis - came after an IMF spokesman told reporters the fund was not in talks with Spain on possible financial assistance.

"Any plan that could help with capital will cause our markets to rally as we're still so dependent on how the situation in Europe plays out," said Neil Massa, senior trader at John Hancock Asset Management in Boston.

The euro rose to $1.2365 per U.S. dollar after hitting a 23-month low of $1.2335.

The mild recovery aside, the single curreny and equity markets across the world were on course to their sharpest monthly loss since September.

Wall Street's S&P 500 was down 6 percent for May. European stocks were down 7 percent while global equities showed a 10 percent drop.

"There's a lot of instability in the world, and along with the weak economic signals there's going to be significant volatility that I don't expect to end anytime soon," said Don Steinbrugge, managing partner of Agecroft Partners in Richmond, Virginia.

He added that if Friday's employment report from the government was weaker than expected "it will definitely cause a big selloff."

Investors got a hint of what was to come in Friday's jobs report after private U.S. payrolls processor ADP said on Thursday that private employers created 133,000 jobs in May, fewer than the expected 148,000. New claims for unemployment benefits rose by 10,000 for the fourth straight weekly increase.

Investors were also dismayed by a report on U.S. economic growth and manufacturing in the U.S. Midwest that pointed to a slowdown in the recovery. The Chicago Purchasing Managers Index report came in well below expectations for May, sinking from 56.2 to 52.7 versus a consensus estimate of 56.5.

At 2:00 p.m., the Dow Jones industrial average was up 1.17 points, or 0.01 percent, at 12,421.03. The Standard & Poor's 500 Index was down 2.73 points, or 0.21 percent, at 1,310.59. The Nasdaq Composite Index was down 14.20 points, or 0.50 percent, at 2,823.16.

European stocks, tracked by the FTSEurofirst 300 index , closed down down 0.5 percent. Global equities, measured by an MSCI index, shed 0.2 percent.

NO ECB HELP

In Europe, ECB President Mario Draghi moved to rule out hopes that the central bank may step in to help ease the pressures in financial markets until EU leaders could agree on measures to tackle the structural problems at the root of the region's debt crisis.

"Can the ECB fill the vacuum of lack of action by national governments on fiscal growth? The answer is no," Draghi told the European Parliament. "Can the ECB fill the vacuum of the lack of action by national governments on the structural problem? The answer is no."

Concerns over Europe's debt crisis and the lack of a clear policy response have been rising since Spain unveiled unconvincing plans to recapitalise nationalised lender Bankia , raising the possibility it could need outside help.

Those worries kept Spain's 10-year bond yields at around 6.6 percent, not far from Wednesday's euro-era high of 6.79 percent and close to the crucial 7 percent mark, which has led to troubled nations like Portugal and Ireland needing bailouts.

The flight away from Spanish debt and also Italian bonds, which are under threat of contagion from Spain, has pushed up demand for the safety offered by German government paper. Germany's two-year bonds traded just above zero percent on Thursday, while benchmark 10-year Bund yields hovered around their record low of about 1.25 percent.

The U.S. benchmark 10-year Treasury note was up 10/32, with the yield at 1.5831 percent - lower than Wednesday's 1.6 percent levels, which already marked a 60-year bottom.

On the commodities front, oil's benchmark Brent crude in London traded at around $101 per barrel, heading for a 15 percent loss on the month - its worst monthly performance since December 2008.

Gold was near flat at around $1,563 an ounce, although it was on target for a 6 percent monthly drop that would mark its worst May in 30 years. Copper futures in London closed at below $7,425 a tonne, down 11 percent for the month.

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