* 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 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
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.
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
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.