European Shares Dip; Spain in Focus

Reuters

European shares eased off four-month highs and Spain's borrowing costs climbed back above their seven percent pain threshold on Friday, despite the expected approval of a bank bailout plan later in the day.

Oil prices also eased after hitting an eight-week peak on supply concerns linked to rising Middle East tension, but the rally in soft commodities, which has seen corn and soybean prices soar to record highs, showed no signs of abating.

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U.S. stock index futures pointed to a lower open on Wall Street, with futures for the S&P 500 down 0.4 percent and Dow Jones futures down 0.3 percent.

The FTSEurofirst 300 index of top European shares was down 0.5 percent at 1,059 by 1035 GMT. It closed at its highest level since early April on Thursday, helped by a robust start to the second quarter company earnings season.

In stark contrast, investors are now paying for the privilege of holding shorter-dated government debt of perceived safe havens such as Germany and France, suggesting a high degree of nervousness about the euro zone debt crisis.

Something may have to give, although underpinning stock markets at least is the belief that the gloomier the economic horizon, the more likely it is central banks will ride to the rescue with all guns blazing.

"I do see profit taking coming in sooner rather than later. I don't see how the UK and European markets can keep ignoring Spanish bond yields at above seven percent," JN Financial senior trader Adrian Redmond said of the rally that has seen leading European shares climb nearly 3.5 percent in little more than a week.

Euro zone finance ministers are expected to finally sign off on a deal to bail out Spain's banks with up to 100 billion euros but the exact amount will probably not be known until September.

The impending bank bailout was not having much impact on Spanish bonds, with the 10-year debt yield pushing above an unsustainably high 7.0 percent.

"We've had most of the details leaked already on what they're going to rubber stamp today. Spain didn't trade well after the auction yesterday - to me it's only a matter of time before it goes for the full bailout," a bond trader in London said.

The MSCI world equity index slipped 0.3 percent. Japan's Nikkei share average closed down 1.4 percent as positive U.S. earnings failed to dispel pessimism about the global economy.

The euro fell 0.2 percent against the dollar to $1.2230 , staying above a two-year low of $1.2162. It hovered near a record low versus the Australian dollar.

"We have still got a market that fundamentally does not believe Spain will be in a position to support itself going forward. The euro will probably stay in a range today but pressure will return to the downside," said Simon Derrick, head of currency research at Bank of New York Mellon.

RECORD GRAIN

Grain prices pushed to record highs as scattered rains in the U.S. Midwest did little to douse fears that the worst drought in half a century will not end soon, giving no relief to worries around the world about higher food prices.

U.S. new-crop corn rose on Friday, taking its rally to more than 55 percent in five weeks, as crops continued to wilt under searing Midwest heat.

Brent crude slipped one percent to below $107 a barrel after a near 18 percent surge in four weeks prompted some selling.

Oil hit an eight-week high on Thursday as escalating fighting in Syria, the bombing of a bus carrying Israeli tourists in Bulgaria and disruptions in output in the North Sea stoked supply fears. A strengthening of the dollar after a recent slide is also weighing on crude futures.

Gold held around $1,580 per ounce as investors clung to hopes for more monetary easing from the U.S. central bank after weak data in the previous session, but the dollar rebound is likely to cap gains.