Euro struggles on debt contagion fears, stocks

 

The euro struggled on Tuesday and Asian stocks fell as fears that Ireland's fiscal problems could spread to other weak euro zone countries weighed on investor sentiment.

European shares rose in early trade, however, bouncing back from eight-week closing lows in the previous session after U.S. stocks finished softer but well off their lows overnight.

The FTSEurofirst index of leading regional stocks .FTEU3 advanced 0.4 percent.

But financial markets in Asia were weighed down by concerns over Europe's festering debt problems as well as data showing Japanese and South Korean factories cut output last month, highlighting the fragile nature of the global economic recovery heading into 2011.

Strong Asian growth, particularly in China, has been one of the few bright spots for the world economy this year, giving ailing developed economies a much-needed boost in exports to the Far East and buoying commodity prices.

The euro wobbled but managed to hold above a 10-week low of $1.3064 hit on Monday on trading platform EBS, helped by short-term oversold technical signs. But it slid to its lowest in 10 weeks against the yen and the Swiss franc as investors moved into so-called safe-haven currencies.

Dealers said the single currency may pull back further on fears that Portugal and Spain may soon be the next fiscally weak European countries to be engulfed by debt problems, after a rescue package was agreed for Ireland at the weekend.

Italian and Spanish 10-year bond yields jumped by more than 20 basis points on Monday - their biggest daily rise in more than a decade - highlighting the lack of confidence in the European Union's ability to deal with the crisis.

"You probably have more selling to come through. Movements in European bond yields were savage last night ... and that's a reflection of the concern that is evident in the market. I don't think this is over just yet" said Richard Grace, a currency strategist at Commonwealth Bank.

The euro has fallen about 6 percent against the dollar this month alone and is on track for its biggest monthly fall since May, when it fell 7.5 percent.

Profit taking ahead of the year-end also continued to erode equities, with Japan's Nikkei sliding 1.9 percent and the MSCI ex-Japan index falling 0.4 percent.

The Nikkei, though, still gained 8 percent in November, its best monthly performance since March, helped by a global rally in stocks which took off in late summer.

China's key stock index fell 1.6 percent to close at a seven-week low, weighing on Hong Kong, as tight liquidity in the domestic money market and fears of more central bank policy tightening prompted retail investors to sell heavily weighted financial and resource stocks.

The Shanghai index has fallen 5.3 percent this month after rising 12 percent in October.

Purchasing managers surveys on Wednesday are expected to show China's manufacturing sector continued to expand at a solid rate in November, but stronger-than-expected readings could prompt authorities to take more aggressive tightening steps to curb inflationary pressures.

"Investors are dumping shares because they are afraid of rate increases down the road," said Alfred Chan, chief dealer at Pearl Investment. "Banks are not going to be lending money as liberally as they wish because the government has capped lending for next year. Corporate earnings will be restricted."

U.S. Treasuries rose in Asia, adding to the previous day's rally, as investors turned to government debt as a safe haven from the recent flare-up in volatility.

Spot gold was a touch higher at $1,367 an ounce, while oil slipped, retracing part of the sharp gains in the previous session.

U.S. crude for January fell 18 cents to $85.55 a barrel after rising $1.97 on Monday on the back of a rally in heating fuel as cold weather gripped Europe.