Greek shares lead world markets down as deficit reduction doubts resurface; euro down too

Greece leads world stocks down as doubts resurface

LONDON — Greek, Spanish and Portuguese stocks led European markets lower Wednesday amid mounting skepticism about the Greek government’s ability to get a grip on its finances as workers there threatened strike action against austerity measures.

Worries about crucial U.S. jobs data this Friday following a weaker than expected U.S. services sector survey have also put a brake on this week’s advance in world markets.

In Europe, the FTSE 100 index of leading British shares closed down 30.16 points, or 0.6 percent, at 5,253.15 while Germany’s DAX fell 37.57 points, or 0.7 percent, to 5,672.09. The CAC-40 ended 18.66 points, or 0.5 percent, lower at 3,793.47.

On Wall Street, the Dow Jones industrial average was down 38.70 points, or 0.4 percent, at 10,258.15 around midday New York time while the broader Standard & Poor’s 500 index fell 6.63 points, or 0.6 percent, to 1,096.69.

The big underperformers were three financially troubled countries — Greece, Spain and Portugal — as investors worried about an escalation in the government debt crisis that is currently engulfing Greece and threatening other countries on the periphery of the eurozone.

Greece’s main composite index, which had traded over 1.5 percent higher earlier in the day after the European Commission gave its backing to the Greek government’s plan to reduce its borrowing, ended down 1.9 percent at 2,019.

The turnaround in the Greek stock market was directly related to developments in the bond markets where the spread between Greek 10-year bonds and the benchmark Germany bunds narrowed, but then widened — a sign that investor concerns of a Greek debt default have not gone away despite the Commission’s endorsement.

At the start of the day the spread was around 350 basis points and that dropped to 330 basis points after the EU’s broadly positive pronouncement on the Greek government’s plan to reduce its budget deficit to below 3 percent by 2012 from 2009’s 12.7 percent. However, by mid-afternoon London time, the spread was back around 350 basis points. One hundred basis points equal one percent.

“News of a proposed general strike for the 24th February has undermined market confidence in the Greek government’s ability to implement a wage freeze and spending cuts in the face of rising social and political discontent,” said Neil Mackinnon, global macro strategist at VTB Capital.

“Widening in Portuguese — to a 10 month high — and Spanish yield spreads have also taken place highlighting the risk of contagion in the eurozone and the recovery in the euro against the dollar at the start of this week has stopped in its tracks on the re-emergence of the sovereign risk theme in the eurozone,” he added.

Those bond market jitters hit stocks too and Spain’s IBEX fell around 2.4 percent while Portugal’s PSI 20 index slid 2.8 percent.

Having advanced above $1.40, the euro was back down at $1.3920 by late-afternoon time and traders are speculating that it could soon be falling back down to Monday’s six and a half month low of $1.3854.

On Thursday, investors will focus in on what, if anything, European Central Bank president Jean-Claude Trichet says about the situation surrounding Greece when he delivers his monthly press conference following the expected decision to keep European rates unchanged at 1 percent.

Aside from Greece, the focus in markets remains on the economic data, culminating Friday with the U.S. nonfarm payrolls report for January, which often sets the stock market tone for a week or two.

“Already-nervous markets are becoming increasingly twitchy about the all-important non-farm payrolls on Friday,” said Tim Hughes, head of sales trading at IG Index.

A weaker than expected U.S. services sector survey from the Institute for Supply Management did little to soothe those nerves — though the main index of non-manufacturing activity rose to 50.5 in January from a revised 49.8 in December, the consensus in the markets was for an even bigger increase to 51.

The ISM survey wiped out any optimism that may have been stoked by a survey from the ADP payrolls firm, which showed that private sector employment fell by 22,000 during the month, the smallest decline since February 2008.

Earlier, Wall Street’s rally Tuesday in the wake of positive housing data helped Asian stocks march higher.

Japan’s Nikkei 225 stock average added 33.24 points, or 0.3 percent, to 10,404.33 and Hong Kong’s Hang Seng jumped 449.90 points, or 2.2 percent, to 20,722.08. South Korea’s Kospi was up 19.21, or 1.2 percent, to 1,615.02.

Elsewhere, Shanghai’s market marched 2.4 percent higher and Australian stocks rose 0.9 percent.

Oil prices rose modestly, with benchmark crude for March delivery up 34 cents at $77.57 a barrel. The contract jumped more than $2 overnight on reports crude demand could improve.

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AP Business Writer Jeremiah Marquez in Hong Kong contributed to this report.