Euro slips, sentiment sours after Greek vote

NEW YORK Mon Jun 18, 2012 4:49pm EDT

Traders talk in front of computer boards at the stock exchange in Madrid June 15, 2012. REUTERS/Andrea Comas

Traders talk in front of computer boards at the stock exchange in Madrid June 15, 2012.

Credit: Reuters/Andrea Comas

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NEW YORK (Reuters) - The euro fell and global equity markets were mixed on Monday after initial enthusiasm over a weekend victory for pro-bailout parties in Greek elections gave way to worry about the nagging debt crisis still facing the euro zone.

Market reaction was choppy as voters gave parties supporting Greece's economic bail-out a majority on Sunday, easing fears of a break-up in the euro zone and helping risk assets to rally, at least initially.

Safe-haven government debt gained in light volume as investors shrugged off Greece's election results and awaited a two-day meeting of Federal Reserve policymakers that starts on Tuesday for potential signs of new stimulus measures.

Investors also awaited news from Mexico, where world leaders at a G20 summit were set to put pressure on the euro zone to outline a lasting strategy to save the single currency.

Wall Street opened lower but rebounded after a senior official with Greece's conservative New Democracy party said parties that broadly back the country's international bailout will form a coalition government on Tuesday.

Greece will accelerate and widen a privatization program, while planned austerity cuts will be implemented over four years instead of two, said the source, who spoke on the condition of anonymity.

The euro fell from a one-month high of $1.2747 hit in Asia as it came under pressure on reported selling by Asian sovereign investors. It was down 0.5 percent at $1.2576.

The Dow Jones industrial average .DJI closed down 25.35 points, or 0.20 percent, at 12,741.82. The Standard & Poor's 500 Index .SPX rose 1.94 points, or 0.14 percent, at 1,344.78. The Nasdaq Composite Index .IXIC gained 22.53 points, or 0.78 percent, at 2,895.33.

"As we go through this period of indecisiveness ... you're going to see the markets basically whip around in a sideways pattern," said Tom Schrader, managing director of U.S. equity trading at Stifel Nicolaus Capital Markets in Baltimore.

An initial relief rally of risk assets fizzled and prices of safe-havens such as U.S. and German bonds, especially on the long end, rose. The swift reversal in sentiment was also fueled by data showing bad loans among Spanish banks rose to their highest since April 1994.

"Lots of focus on the Greek election today, but in the scheme of things, it is noise," said Jens Nordvig, global head of FX strategy at Nomura Securities in New York.

"Spanish yields have shot through the highs from November, and even the short-end is now looking shaky. Europe is facing much greater challenges than the risk of a Greek exit," he said.

European equity markets reversed early gains to finish down or flat. Declines of 3.0 percent and 2.9 percent, respectively, for Spain's IBEX .IBEX and Italy's FTSE MIB .FTMIB indexes, pushed regional shares lower.

The euro zone's blue chip Euro STOXX 50 .STOXX50E index ended 1.2 percent lower at 2,155.64 points, while the FTSEurofirst 300 .FTEU3 index of top European shares closed up 0.04 percent at 993.67 points.

Spanish 10-year bond yields were 26 basis points higher at 7.18 percent after hitting 7.30 percent earlier in the session, the highest in the euro zone's history. Yields over 7 percent are considered unsustainable.

"We're back to worries about Spain and a distrust in the euro zone in general. The question on everyone's mind is: 'At which level do Spanish bond yields become unbearable?'" said Frederic Rozier, a fund manager at Meeschaert Wealth Management in Paris.

The price of benchmark U.S. 10-year notes rose 2/32 to yield 1.58 percent, paring earlier gains. The 30-year U.S. Treasury bond rose 18/32 in price to yield 2.67 percent.

German 10-year bonds yielded 1.416 percent, after earlier sliding to a low of 1.384 percent.

Oil prices fell. Brent August crude fell $1.56 to settle at $96.05 a barrel. Brent's settlement and intraday low were the lowest since January 2011.

U.S. July crude slipped 76 cents to settle at $83.27 a barrel. The U.S. July crude contract expires on Wednesday.

Gold fell for the first session in seven. U.S. gold futures for August delivery settled down $1.10 at $1,627.

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