Fading hopes for EU summit leave euro flat

LONDON: European shares edged up on Wednesday but the euro was flat,
with investors increasingly cautious a day ahead of an EU leaders
summit that few expect will do much to resolve the region's debt
crisis, now in its third year.
The German Chancellor meets new French President Francois Hollande
later to try to hammer out a common line to take to the meeting, but
Angela Merkel's reported comments that debt sharing would not happen in
her lifetime, dashed hopes of a breakthrough.
"The
disillusionment is palpable at the moment because, whatever happens
over the next couple of days during this summit, no one is expecting
anything concrete to come out the other side," said Richard Hunter,
Head of UK Equities at Hargreaves Lansdown.
The disappointment
left the dollar slightly firmer against a basket of major currencies,
while riskier assets like commodities eased, with all markets reluctant
to advance before the June 28-29 summit in Brussels.
The euro
was barely changed at $1.2491, recovering from the fall to a two-week
low of $1.2441 on Tuesday, which was its lowest level since June 8.
Markets
had been hoping this week's summit would deliver at least a high-level
agreement on greater fiscal and financial integration across the euro
area that could then ultimately lead to the issuance of common euro
bonds.
There were also hopes that Europe's bailout funds, the
European Financial Stability Facility and the soon to be launched
European Stability Mechanism, could use their money to ease the
pressure on peripheral debt markets.
But Merkel's rejection of
the idea of mutualising the region's debt burden - favoured by France,
Italy and Spain -, saying Europe would not share total debt liability
"as long as I live", signalled that deep divisions remain, though
Germany is expected to offer some flexibility on the use of bailout
funds.
"People are waiting for the inevitable - which is that
policymakers will probably fail to do what is necessary," said Neil
Mellor, currency analyst at Bank of New York Mellon.
EQUITY RECOVERY
Following
sharp falls last week and Monday as hopes for a quick solution to
Europe's crisis at the summit faded, stock markets around the world
have steadily recovered.
Rises in U.S. equities on Tuesday and
across Asia earlier lifted the MSCI world equity index by 0.25 percent
to 303.70 points, though the index is down around 1 percent for the
week so far.
The FTSEurofirst 300 index of top European shares
was up 0.3 percent at 989.77 points after ending unchanged on Tuesday
following falls in the three preceding sessions as investors positioned
for a poor outcome at the summit.
But there were signs in the derivatives market that some market players are expecting a rebound in the coming weeks.
The
put/call ratio of Euro STOXX 50 options, a ratio of the trading volume
of options to benefit from share price falls versus gains, has fallen
to 0.75, a level not seen in nearly two months.
The Euro STOXX
50 volatility index - Europe's main gauge of anxiety, known as the
VSTOXX - has also fallen sharply this month, down 27 percent since a
peak on June 4, breaking its usually strong negative correlation with
stocks.
The last time there was such a drop in the correlation
between the volatility index and underlying equities was in
mid-December, at the start of a 20 percent rally in euro zone stocks
that lasted three months.
EURO DEBT ON HOLD
Debt markets
continue to reflect the worsening funding outlook for many euro zone
nations and the impact of the crisis on the region's growth prospects,
with investors reluctant to increase their exposure, even to safe-haven
debt, ahead of the summit.
German 10-year Bund yields rose 4
basis points to 1.536 percent, while 10-year bond yields in Spain,
which has already requested EU bailout funds for its troubled banking
sector, were steady at 6.86 percent.
The Bank of Spain warned on Wednesday the rate of economic contraction was accelerating, and Prime Minister Mariano Rajoy said his country would be unable to keep financing itself at current yields for long.
Italy's
six-month borrowing costs rose sharply on Wednesday to nearly 3 percent
at an auction of 9 billion euros of new Treasury bills, which was
expected to have been largely bought by its domestic banks.
Ten-year
Italian government bond yields were steady at 6.14 percent, with Italy
facing a much bigger test of investor sentiment on Thursday when it
auctions up to 5.5 billion euros of new five- and 10-year bonds. -
Reuters