European Stocks Slip as Debt Fears Persist
The euro rose on Friday as pressure on Spanish and Italian bonds eased after the European Central Bank stepped in to stabilise the market, but fears both countries' borrowing costs are at unsustainable levels sent European stocks to new five-week lows.
World stocks remained near their lowest levels since October and commodities were weak on persisting fears the euro zone's debt crisis is spiralling out of control.
The ECB intervened in the bond market a day after Spain's borrowing costs at a sale of 10-year debt soared to their highest in the euro's history, as the crisis now entering its third year increasingly threatens Europe's bigger economies.
The yield premium investors demand to hold Spain's 10-year bonds rather than safer German debt eased 8 basis points to 454 bps while the equivalent Italian premium fell below 5 percent.
The reprieve was expected to be temporary, with traders and strategists expecting Spanish yields especially to resume their rise ahead of the country's elections on Sunday and in the absence of more aggressive buying from the ECB.
The euro was last 0.5 percent up against the dollar at 1.3534 as investors unwound bearish bets on the single currency to book profits ahead of the weekend. But dealers said appetite to sell on such small rebounds was high.
"With so much up in the air there's nothing else to focus on apart from the immediate, which is that the euro zone looks to be heading into the precipice," Jane Foley, senior currency strategist at Rabobank. "Ahead of the weekend I don't think anyone is ready to counter that view."
DANGEROUS PHASE
European stocks cut earlier losses and were last 0.2 percent down, leaaving the pan-regional index on course for a 3 percent fall over the week.
The banking sector was among the losers, with the STOXX Europe 600 Banking Index 0.3 percent lower. It has lost more than 36 percent in 2011, as banks take writedowns on exposure to euro zone peripheral debt.
"The focus has very much moved towards the core of Europe, away from the periphery. Italy's in question. France is in question," Daniel McCormack, strategist at Macquarie, said.
"It really has pushed the sovereign crisis into a much more dangerous phase. You should have some kind of overweight in defensives, and avoid financials."
The MSCI world equity index was down 0.4 percent, near its lowest levels since Oct. 20 and falling for a fourth consecutive day.
Investors remained on edge as euro zone governments struggle to raise funds and given signs that banks are refraining from lending, causing market liquidity to seize up.
Euro/dollar three-month cross-currency basis swaps , the cost of swapping euros for dollars, widened to -136 basis points on Thursday, the most since the 2008 financial crisis.
Other safe-haven currencies such as the Swiss franc and the yen outperformed the dollar. The greenback hit a 2-1/2 week low against the yen of 76.68 and fell 1 percent against the Swiss franc to 0.9116.
"Generally safe havens are doing very well at the moment and once you've filled up your exposure on dollars, the yen is the next one in line irrespective of whether you might be worried about intervention," said Adam Myers, senior FX strategist at Credit Agricole in London.
Brent crude oil rose a dollar to over $109 a barrel, helped by a weaker dollar, after posting steep losses in the previous session, but analysts and traders said the risk remained to the downside given the economic weakness in Europe.
Brent crude was last up 0.8 percent at $109.27 a barrel, after closing down $3.66 in the previous session. U.S. crude oil futures were up 0.2 percent at $99.05.