Markets remain nervous in face of euro debt woes

November 18, 2011|Pan Pylas, AP Business Writer

A man walks in front of the electronic stock board of a securities firm in… (AP Photo/Itsuo Inouye )

Financial markets remained volatile on Friday in the face of a European debt crisis that has widened and deepened over the past week.

Investors have become increasingly fidgety about the prospect of Spain and Italy succumbing to the same bond market pressures that have seen three countries bailed out. Stocks have taken a battering as borrowing rates rose, not just for Spain and Italy but also traditionally strong countries like France

“While investors still look for the light at the end of the tunnel, Europe’s debt woes continue to act as an anchor for stocks across global markets,’’ said Carl Campus, an analyst at BMO Capital Markets.

Trading in bond markets calmed on Friday, with Italy’s ten-year yield down 0.05 of a percentage point to 6.65 percent — below the 7 percent rate which eventually forced Greece, Ireland and Portugal into seeking bailouts. Spain’s yield was also 0.09 of a percentage point lower, at 6.35 percent.

The euro was 0.4 percent higher at $1.3511.

Stocks, while avoiding a rout, closwed lower across much of Europe. Germany’s DAX ended down 0.9 percent at 5,800.24 while the CAC-40 in France fell 0.4 percent to 2,997.01. The FTSE 100 index of leading British shares closed 1.1 percent lower at 5,362.94.

U.S. stocks were faring better, though they are heading for their worst weekly performance in two months — the Dow Jones industrial average was up 0.3 percent at 11,808.19 while the broader S&P 500 index rose 0.2 percent to 1,217.97.

The turmoil in the markets has already prompted change in governments in Italy and Greece, while Spain is likely to install a new administration on Sunday. The governing Socialists are expected to suffer a big defeat to the opposition Conservatives.

Some of the pressure on Italy and Spain has eased through the week thanks to suspected buying of their government bonds by the European Central Bank. Analysts expect figures on Monday to show that the ECB, now led by Italian Mario Draghi, stepped up its bond purchases this week, in effect to give politicians more time to get a grip on the mounting crisis. By buying their bonds, the ECB is hoping to keep a lid on their borrowing rates.

Italy’s key bond yield has hovered around the psychologically important 7 percent mark for the best part of two weeks, while Spain’s ratcheted higher this week after a disappointing bond auction which saw the country pay its highest rate of interest since 1997 to raise money from capital markets.

“Given reports of aggressive buying both towards the end of last week and yesterday, we would think it safe to assume the ECB now holds euro90 billion to euro100 billion of Italian bonds on its books,’’ said Gary Jenkins, an analyst at Evolution Securities.