GLOBAL MARKETS-Hesitant Spain puts euro, share rally into reverse

Tue Sep 18, 2012 8:51am EDT

* FTSEurofirst 300 down 0.3 pct
    * Euro trades lower on Spain concerns
    * German Bund futures rise as safe haven demand returns

    By Marc Jones
    LONDON, Sept 18 (Reuters) - European shares and the euro
slipped on Tuesday, leading a broader drop in risk assets as
investors turned their attention from central bank stimulus to
slowing global growth and doubts about Spain's desire for an
international aid package.
    Taking their lead from weaker Asian markets, European
equities continued to fall away from 14-month highs hit last
week after the Federal Reserve promised to keep pumping money
into the U.S. economy and the euro zone's bailout fund got
crucial backing from a German court.
    London's FTSE 100, Paris's CAC-40 and
Frankfurt's DAX were down between 0.5 and 0.7 percent
by 1250 GMT, pushing European and global indexes
 into negative territory.
    In the United States, where housing market and current
account data will be in focus alongside problems at chip maker
AMD, Wall Street is expected to open lower for the second day
running. 
    Investors are becoming worried that Spain may try to avoid
accepting what would be a politically unpopular EU/IMF bailout.
Taking aid is a condition for the European Central Bank to start
buying bonds of any troubled euro zone government under its plan
to lower debt yields which has helped to achieve the recent lull
in the euro zone crisis.
    "We take the view that delaying tactics by the Spanish
government to request aid could backfire and lead to renewed
upward pressure on yields because markets are effectively
assuming that an aid request is more or less a done deal," said
Rabobank economist Elwin de Groot.
    Uncertainty was evident in bond markets. German Bund prices
 rose 32 ticks as the reversal of the recent falls
continued although borrowing costs for Italy and Spain eased.
    Ten-year Spanish bond yields dipped back below
the 6 percent barrier which was breached on Monday, to stand 5
basis points lower on the day at 5.97 percent. 
    The euro dropped 0.5 percent, putting it back below
$1.306. The yen was also feeling the pressure, with speculation
that the Bank of Japan might loosen policy on Wednesday
following last week's move by the U.S. central bank.
    Sterling plus the Australian and New Zealand dollars also
softened against the U.S. currency after all three had made
recent sharp gains. The Aussie slipped after the Australian
central bank left the door open for a rate cut. 
    "Unless we get this (Spanish) uncertainty out of the way, we
expect the euro to face some resistance around its highs," said
Adam Myers, senior currency strategist at Credit Agricole.
    Comments by Belgian ECB policymaker Luc Coene also put
downward on the euro. He said on Monday that an interest rate
cut, charging banks to deposit cash and a new offer of
ultra-cheap long-term funding were all potential options for the
ECB. 
  

    GROWTH FOCUS
    Coene also warned that Spain's borrowing costs would jump
again unless it accepts an aid programme.
    But Madrid, which is trying to cash in on the current benign
conditions with two bond auctions this week, saw its borrowing
costs fall slightly at a 4.5 billion euro sale of short-term
debt.. Greece also sold three-month T-bills.
    A more serious test will be on Thursday when Spain attempts
to sell the same amount of 3- and 10-year debt. It hasn't tried
to auction as much in one sale since early March, when an ECB
decision to flood the banking system with cheap three-year loans
had also temporarily calmed the markets.
    Economic worries were also back in focus. The Swiss
government cut its growth forecast for this year and next,
saying signs of a worldwide economic slowdown had intensified.
These comments came after fears about China's wobbling economy
had hit shares in commodity-rich Australia. 
    Oil prices, which are up almost 10 percent since
early August, were holding near $114 a barrel by mid-morning
following a drop in the previous session, while gold 
edged lower.
    "Investors are really in defensive mode today, and probably
will stay that way until Thursday, when we get the fresh read on
manufacturing out from China," said Juliana Roadley, a market
analyst at Commonwealth Securities. A flash reading of China's
purchasing managers' index for September is due on Sept. 20. 
    Brighter news came from Germany, where the ZEW index of
morale among analysts and investors rose more than expected in
August following the ECB's promise to preserve the euro.
 
    "The rise clearly reflects the positive reaction to the
ECB's announcement of the new bond-buying programme, which has
boosted financial market sentiment and significantly reduced the
big systemic risks to the euro," said Aline Schuiling, Senior
Economist, at ABN Amro.
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