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Euro dips on persistent fears, Global stocks shaky

Source: Reuters - Tue 18th May 2010

Global stocks edged higher on Tuesday after a late rally on Wall Street and on cautious optimism that progress is being made on the euro zone rescue plan, but the euro itself remained under pressure.

Euro zone finance ministers said they hoped to clarify some technical and legal details of the 750 billion euro (643.4 billion pound) rescue plan this week. Spain and Portugal are also expected to outline measures to cut their budget deficits.

European stocks took heart, but the euro struggled to recover from Monday's four-year lows, and was little changed at $1.24.

Although the euro's sharp fall makes it ripe for a bounce, it is expected to stay under pressure over the longer term due to concerns that planned euro zone austerity measures will stunt European growth.

"In terms of levels, we expect to see a break lower. The fundamental story remains for the dollar to strengthen against the euro boths in terms of fundamentals and relative pricing on the money market" said Kasper Kirkegaard, currency strategist at Danske in Copenhagen.

The pound also rose, hitting a day's high against the dollar at $1.4522 shortly after government data showed inflation jumped more than expected in April.

The U.S. Senate voted on Monday for the U.S. government to oppose International Monetary Fund bail-outs to countries unlikely to repay them, which added to the euro's woes.

World stocks as measured by the MSCI All-Country index were up 0.3 percent whilst the more volatile emerging markets index was up 0.5 percent.

The FTSEurofirst 300 index of top European shares also edged higher, up 1.11 percent in early trading, boosted by late buying on Wall Street, with banks adding most points to the index.

"While the European debt is a dark cloud hanging over markets, the rest of the world looks quite bright" said Steven Bell, a director at hedge fund firm GLC.

"There is a frightening scenario on TV sets, but the European economy is chugging along, quite nicely, and U.S. consumer spending is growing, so ultimately there is upside for risk assets" he said.

Earlier, Asian stocks had fallen to three-month lows as traders continued to fret about the impact of euro zone spending cuts on exporters. Materials and consumer discretionary stocks were the worst affected.

The markets were also troubled by a Chinese leading economic indicator which appeared to show that growth may have already peaked.

Despite this, Shanghai stocks were up 1.31 percent as the market tried to claw back some of Monday's 5.1 percent tumble, its biggest one-day fall for eight months.

In Japan, the Nikkei closed little changed after a choppy session.


In the fixed income markets, Bund futures dipped in early trade with comments from European Union Economic and Monetary Affairs Commissioner Olli Rehn that not all countries would need to accelerate fiscal consolidation supporting a slight rise in risk appetite.

On Monday the European Central Bank also revealed that it had purchased 16.5 billion euros of bonds through its Securities Market Programme between 10 and 14 of May.

"The ECB has clarified its intervention" said Bernard McAlinden, an investment strategist at NCB Stockbrokers in Dublin. "The market is less concerned that the ECB is engaged in outright money printing."

Peripheral bond yield spreads also nudged lower, supported by limited central bank buying. The Greek/German 10-year bond yield spread tightened to 512 basis points from about 552 at Monday's settlement close.

The dollar was little changed against a currency basket at 86.156. The yen was up 0.22 percent to $92.84.

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