LONDON – A stark warning from the IMF about the global growth outlook and the prospects for Spain and Greece sent European stocks and the single currency lower on Tuesday, while oil rose on escalating tensions in the Middle East.
U.S. stock index futures pointed to Wall Street following the downward trend in equity markets when trading opens.
The gloomier picture of the economic outlook came as riskier asset markets such as equities are on the hunt for confirmation of a pick-up in activity after prices rose sharply last month when the world's major central banks eased policy aggressively.
The International Monetary Fund's decision to mark down future growth in emerging markets as well as developing economies sent global shares, as measured by the MSCI world equity index <.MIWD00000PUS>, down 0.2 percent.
In the IMF's latest World Economic Outlook, released ahead of the G7 Finance Ministers meeting in Tokyo, the global growth forecast for 2012 was cut for the second time since April to 3.3 percent compared to the 3.5 percent expected in its July report.
The Fund also warned that any failure by policymakers in the United States and Europe to fix their economic problems could even prolong the current slump.
In Europe the likely impact of the weaker growth on corporate earnings helped send the FTSEurofirst 300 index <.FTEU3> of top company shares down 0.1 percent to 1,099.64 points, adding to its 1 percent loss on Monday.
The euro fell 0.2 percent to $1.2940, over a cent below a two-week high of $1.3072 hit on Friday.
"The main driver for the market is the IMF report on Greece and they also have a more negative view on Spain, which raises questions about whether the budget deficit targets for next year will be achieved," said RIA Capital Markets strategist Nick Stamenkovic.
European Central Bank President Mario Draghi added his weight to the gloomier view, telling European lawmakers meeting in Luxembourg he expected weak activity to continue with the risks to even this forecast on the downside.
"Some things have improved in the last to two or three months, but I think the road ahead is still long and it's uphill," Draghi said.
The growth worries offset a slightly more positive mood in Asian markets which followed China's injection of around $42 billion of cash into its money markets. That boosted speculation its central bank may soon do more to support slowing growth.
The MSCI index of Asia-Pacific shares outside Japan <.MIAPJ0000PUS> added 0.5 percent, pulled higher by rises in Hong Kong and China shares after the move.
"Given the softness in the economy and given where inflation is, there is certainly scope for China to be more active on the policy front," said Ian Richards, global head of equities strategy at Exane BNP Paribas.
EURO ZONE PROGRESS EYED
Apart from the IMF report, the focus in Europe was on a summit of finance ministers and a visit to Athens by the German Chancellor Angela Merkel, which are both being closely watched for signs of progress in resolving the region's debt crisis.
The finance ministers and the IMF were reported on Monday to have held a "thorough and robust" debate on Greece, but failed to make significant progress in deciding how best to get the country back on track with its bailout program.
Greece is locked in talks with its "troika" of lenders - the European Union, ECB and IMF - to secure the next tranche of a 130-billion-euro ($170-billion) loan package, its second bailout since 2010. Without the next 31.5 billion euro payment, Greece says it will run out of money by the end of November.
The finance ministers also appeared to dash market hopes of an early bailout request from Spain by saying the country was taking steps to overhaul its economy, and successfully funding itself in the financial markets.
Investors are waiting for Spain's bailout request as it would trigger a new round of bond buying by the ECB which would likely lift the euro and send Spanish bond yields sharply lower.
"While uncertainty about Spain plays out, investors are also getting worried about the Greek situation," said Adam Myers, senior currency strategist at Credit Agricole.
The lack of progress saw Spanish 10-year yields gain 5 basis points to around 5.78 percent but they remain comfortably the six percent level that would likely push the government towards seeking help.
OIL SUPPLY THREAT
Attention in the oil markets was on the deteriorating situation in Syria and a warning from Turkish President Abdullah Gul that the worst case scenarios between his country and its neighbor are now playing out.
Turkey's armed forces have bolstered their presence along the border with Syria in recent days and have been responding in kind to gunfire and shelling from Syrian forces.
"There are latent supply risks on the oil market since Turkey might become involved in the conflict in Syria, which would affect key oil transport routes," said a Commerzbank research note.
Brent crude oil futures rose 54 cents to $112.36 and U.S. crude climbed 31 cents to $89.64 leaving the gap between the two at around $22.70 per barrel, the highest since October 20 last year.
(Additional reporting by Peg Mackey and Anirban Nag; Editing by Peter Graff and Giles Elgood)