* Euro zone debt worries haunt risk asset markets
* Spanish bond yields rise above 7.1 percent
* Euro gives up gains made after Greek election
* European shares reverse early gains to be flat.
By Richard Hubbard
LONDON, June 18 Relief over the Greek election
result gave way rapidly to concerns about problems in Spain and
the wider euro zone on Monday, with European shares and the
single currency reversing early gains.
U.S. stock index futures also pointed to a softer open with
the worsening performance of the giant economy putting the focus
on the upcoming Federal Reserve policy meeting and the chances
of fresh action to stimulate flagging growth.
Greek voters gave a majority to parties supporting the
country's economic bailout, easing worries about a break up in
the euro zone and initially boosting risk assets, but the huge
problems the currency bloc still faces quickly wiped out the
"Whether or not the Greek election result succeeds in
averting an immediate crisis for the euro, the fundamental
problem of lack of growth in Europe remains," said Peter
Sullivan, Head of European Equity Strategy for HSBC.
The weakening growth outlook and its impact on debt-laden
nations struggling to implement tough government austerity
measures turned the spotlight immediately to Spain and Italy.
Spain's key 10-year government bond yields
shot up 22 basis points to 7.14 percent, the highest level in
the euro era and above the rate at which Greece, Ireland and
Portugal were forced to seek international bailouts.
Equivalent Italian bond yields rose 15 basis points to 6.08
Spanish and Italian stock markets also both underperformed
the broader European equity market with Spain's IBEX
falling nearly 1.8 percent and Italy's FTSEMIB falling
1.2 percent. The FTSEurofirst 300 index of top European
shares managed slight gains to be up 0.2 percent at 995.16
The euro was flat on the day at $1.2630, off a
1-month high reached during Asian trading in reaction to the
In Greece the centre-right New Democracy party was trying to
form a coalition government with other parties committed to the
130-billion-euro ($164 billion) bailout deal after narrowly
defeating the radical left SYRIZA bloc in Sunday's election.
Many investors were concerned that the overall political
picture in Greece remains uncertain, with SYRIZA vowing to
continue its opposition to the painful austerity measures.
"A new Greek coalition government is unlikely to be able to
restore economic growth or deliver effective reform without
substantial financial help from the rest of the euro area," said
Trevor Greetham, Director of Asset Allocation at Fidelity
Help was expected to be forthcoming, if only in a very
German Foreign Minister Guido Westerwelle said the substance
of Greece's austerity and economic reform programme, agreed in
exchange for a second bailout, was non-negotiable, but the
timing could be adjusted.
The comments were quickly downplayed by government officials
in Berlin with a spokesman saying now was not the time to give
Greece "a discount". But Deputy Finance Minister Steffen
Kampeter told local television: "It is clear to us that Greece
should not be over-strained."
It's likely the heads of the Group of 20 major
industrialised and developing nations will add to the pressure
on Europe's leaders to come up with a lasting solution to their
2-1/2 year old financial crisis when they meet later on Monday
Any major policy response markets are seeking will probably
have to wait until a meeting of EU leaders at the end of the
month, which follows a gathering of euro zone finance ministers
on Thursday and a mini summit of German, French, Italian and
Spanish leaders on Friday.
"What we want to see from European leaders right now is a
basically consolidated response to this crisis. They need to be
singing from the same hymn sheet," Michael Hewson, senior market
analyst at CMC Markets.
CENTRAL BANKS KEY
In the meantime the weaker global growth outlook and the
slow pace of European policy moves have turned the spotlight
back onto the world's central banks and whether they will step
in to try to boost flagging activity.
The market's main attention is firmly on the outcome of the
two-day meeting of the U.S. Federal Reserve's Open Market
Committee (FOMC) which begins on Tuesday.
Data released on Friday showing U.S. factory output
contracted in May for the second time in three months, the
latest in a series of weak economic reports, raised expectations
of a fresh round of stimulus measures.
Only a small number of economists polled by Reuters earlier
this month were expecting any move by the Fed at this week's
meeting, but that number could have been changed by the negative
response to the Greek vote and last week's Spanish bank bailout.
In the commodity markets, the concerns over the euro zone
erased initial gains in reaction to the Greek vote and gave gold
prices a boost as its safe-haven status returned to the fore.
Brent crude was down 1.24 cents at $96.37 a barrel,
sliding from a one-week high of $99.50 a barrel hit early in the
session. U.S. oil futures fell 21 cents at $83.82 a
barrel, also off a one-week high of $85.60 a barrel hit in the
initial redaction to the Greek vote.
Spot gold was down 0.2 percent at $1,624.04 an ounce,
off an early low of $1,606.49.