GLOBAL MARKETS-Euro, shares edge up after Spanish vote

Mon Oct 22, 2012 7:57am EDT

* Euro gains after Spanish voting clears way to aid request

* Dollar hits 3-month high vs yen as Japan's exports tumble

* European shares edge up with eyes on corporate earnings

* U.S. stocks poised to recover some of Friday's sharp losses

* Oil gains on support from rising Middle East tension

By Richard Hubbard

LONDON, Oct 22 (Reuters) - The euro edged higher on Monday as a local election victory for Spanish Prime Minister Mariano Rajoy in his home region was seen as clearing an obstacle to Madrid seeking international aid.

But slow progress towards a banking union across the 17-member euro area and towards agreement on a common budget for the whole European Union limited the gains.

"Now (Rajoy) has the support of his region, perhaps he'll feel confident to actually press forward and ask for a bailout," said Fiona Cincotta, City Index market strategist.

Cincotta said markets had been patient in the run up to the weekend vote in Galicia, which had been seen as a referendum on the Spanish government's handling of the euro zone crisis, and will want to see action on a bailout request soon.

Spanish 10-year bond yields crept up 5 basis points in the wake of the election result to be at 5.43 percent, having fallen around half a point last week after the country retained its investment grade rating.

German 10-year bond yields, which would be expected to fall if tensions in the euro area had eased, were little changed at 1.61 percent.

Financial markets are still waiting for a bailout request from Spain to trigger the European Central Bank's new bond- buying programme, which many believe would draw a line under any threat of default from the euro zone's fourth-largest economy.

The euro was up 0.4 percent against the dollar at $1.3070 from a low of $1.3013 hit on Friday, and touched fresh multi-month highs against the yen < EURJPY=R> and the British pound.

A comment from ECB executive board member Joerg Asmussen reiterating the central bank's commitment do everything in its power to protect the euro from a breakup added support to the currency.

But the range of problems still facing the euro zone was keeping the gains in check.

European Union leaders face at least two months of tough bargaining on money, power and the future governance of the monetary area before they can convince investors that the threat to the single currency has faded.

Share markets showed much less reaction to the Galician election outcome as equity investor focus is firmly on corporate earnings with 155 S&P 500 companies scheduled to report this week.

U.S. stock index futures pointed to a slightly higher start on Wall Street on Monday, reversing some of the losses seen on Friday when shares had their worst day since late June.

The FTSEurofirst 300 index of top European shares was up 0.2 percent at 1,114.15 points, while London's FTSE 100 , Paris's CAC-40 and Frankfurt's DAX were all slightly firmer.

YEN TRADE BLOW

The dollar touched a three-month high against the yen of 79.680 yen on Monday as speculation grew of fresh moves by the Bank of Japan to boost the economy following an unexpectedly sharp drop in exports in September.

The 10.3 percent fall in year-on-year terms, reflected both the global economic slowdown, which worsened in the third quarter, and the impact of anti-Japan protests in China, a major trading partner.

Japan's Prime Minister Yoshihiko Noda told his cabinet last week to prepare a fresh stimulus package by next month, but the plan's limited scope and lack of detail failed to impress the markets, increasing pressure on the central bank to act.

"There is a lot of hope there that (the BOJ) will do something big. History is sadly a poor lead, and it would be prudent to pare down these long (dollar vs yen) positions early and maintain a strategy of buying on dips," said Sebastien Galy, strategist at Societe Generale.

The weaker global economic outlook implied by the Japanese data limited gains in oil markets. Energy prices were edging up in response to growing unrest in Lebanon, which has raised fears for the security of fuel supplies from the Middle East.

Having posted four days of declines last week, Brent crude for December delivery rose 33 cents to $110.47 a barrel. U.S. oil was up 48 cents at $90.53 a barrel.

Gold steadied above $1,720 an ounce, after a sharp selloff on Friday and remains well below an 11-month peak of $1,795.69, touched in early October.

Traders said some investors had been selling the precious metal on worries that the poor health of the global economy could curb demand.

FILED UNDER: