GLOBAL MARKETS-Euro zone worries limit gains in euro, shares

LONDON: European shares and the euro edged higher in choppy trading
on Tuesday as reports of official preparations for a possible Greek
exit from the euro zone and rising scepticism over the Spanish bank
bailout plan limited demand for riskier assets.
U.S. stock markets were also poised for a recovery from the sharp falls posted on Monday.
However,
gains are being held in check by worries that the 100 billion euros
($125 billion) lent to Spain will worsen the country's debt problems,
and as attention turns to the state of Italy's finances and a June 17
election in Greece that could determine the fate of the common currency
bloc.
"Spain's problems are not fully solved, and there are
concerns of contagion to Italy. And then we have got the wild card of
the Greek elections," said Darren Sinden, senior sales trader at
Silverwind Securities.
Investors were closely watching Italian
and Spanish government bond yields, which have been rising in part on
concerns that the funding of the bailout puts the holders of existing
government debt further down the queue for repayment.
Spain's 10-year bond yields rose to near euro-era highs, up 14 basis points at 6.67 percent on Tuesday.
Italy's
equivalent yields rose 6 basis points to 6.1 percent ahead of an
auction of fresh debt on Thursday, when the Treasury may have to pay
dearly to sell its debt.
"We're looking at a major problem
possibly for Italy, with its bond yields climbing above 6 percent for
the first time in quite a long period of time," said Brenda Kelly,
senior market strategist at CMC Markets in London.
"It being the
third largest economy (in Europe), it does actually set the scene that
the contagion effect can't necessarily be contained to Spain," she said.
Concerns
that the Greek election on June 17 would return parties opposed to its
current bailout plan and force a disorderly exit from the euro zone
were rekindled by a report that EU officials were considering ways to
manage the fallout.
European finance officials told Reuters they
had discussed ideas such as limiting ATM withdrawals and imposing
tougher border checks on Greece as part of contingency planning for a
worst-case scenario.
PRICE MOVES LIMITED
The weekend
rescue for Spain's banks, which followed bailouts for Greece, Ireland
and Portugal, sent riskier asset prices on a roller-coaster ride on
Monday, and most spent Tuesday recovering much of the previous day's
losses.
The euro was just 0.2 percent higher at $1.2505, while
Brent crude oil traded just below $98 a barrel and gold edged down to
$1,591 an ounce.
"The 'risk on' trade is over as investors look to the Greek elections and Italy," said Jeff Sica, president of SICA Wealth Management.
MSCI's
world equity index was also little changed at 299.70 after ending 0.2
percent lower on Monday, though a weak session in Asia earlier helped
send MSCI's Emerging Markets Index down 0.5 percent to 910.46.
The
FTSEurofirst 300 index of top European shares was up 0.5 percent at
987.89 points after crossing into negative territory several times. The
index had hit its highest level since mid-May on Monday on the bailout
news from Spain.
While the Euro STOXX 50 volatility index,
Europe's main gauge of anxiety, known as the VSTOXX, dropped 1.2
percent to 32.37 on Monday, in the wake of Spain's bank aid deal.
GROWTH CONCERNS
The
growing impact of the euro zone crisis on the economic outlook was
underlined by data showing a surprise fall in British manufacturing
output in April.
"The manufacturing figures are very
disappointing and highlight the pressure the sector's under, given the
gravity of the debt crisis in the euro area, but also the lack of
confidence at home," said Philip Shaw, Chief Economist at Investec.
Britain
slipped back into recession around the turn of the year as the euro
zone crisis hit exports and made its companies reluctant to invest and
hire.
Manufacturing output fell 0.7 percent in April after a 0.9
percent rise in March, and against forecasts for an unchanged reading.
Global
growth concerns also pushed Brent crude oil prices down 0.5 percent to
$97.44 a barrel. U.S. oil was down 52 cents at $82.18 a barrel after
hitting a one-year low at $81.07.
"Europe is significantly
affecting the growth outlook and, given China is already weak, further
deterioration in the Eurozone crisis could tip the global economy into
a recession," said Guy Wolf, macro strategist at Marex Spectron.
Gold
eased below $1,600 an ounce as hopes faded that the worsening economic
outlook would prompt more easing measures from the U.S. Federal Reserve
at its meeting next week.
Commodities such as precious metals
are also being affected by investors pulling money out of the listed
funds (ETPs) that invest in them.
Data from asset manager BlackRock
showed investors had withdrawn some $2.9 billion from U.S. and
Europe-listed commodity ETPs last month, after withdrawing nearly $1
billion in April. About $1.5 billion of the May outflows came from
precious metals ETPs. - Reuters