World stocks down as euphoria over EU deal fizzles out; pound in focus amid political haggling

World stocks down as EU deal euphoria fizzles out

LONDON — World stocks and the euro dropped sharply Tuesday as the massive relief rally triggered by a $1 trillion plan to contain Europe’s debt crisis fizzled out amid talk that the plan doesn’t remove doubts about the long-term solvency of indebted countries.

In Europe, the FTSE 100 index of leading British shares was down 107.88 points, or 2 percent, at 5,279.54 while Germany’s DAX fell 52.95 points, or 0.9 percent, to 5,964.96. The CAC-40 in France was 72.23 points, or 1.9 percent, lower at 3,648.06.

Meanwhile on Wall Street, the Dow Jones industrial average was down 99.46 points, or 0.9 percent, at 10,685.68 soon after the open while the broader Standard & Poor’s 500 index fell 12.02 points, or 1 percent, to 1,147.71.

All the world’s major indexes enjoyed one of their best days in months Monday after the European Union unveiled a massive euro750 billion financial support package to defend the euro and prevent the debt crisis that started in Greece from spreading to other big debtor countries like Portugal and Spain.

“Markets are giving up a portion of yesterday’s sharp gains as some of the bailout-fuelled euphoria in Europe has died away,” said David Jones, chief market strategist at IG Index.

Though the package has helped ease near-term concerns about a wave of defaults across Europe, concerns about the solvency of the indebted countries remain — whether governments, which are still running sky-high deficits, will be able to push through massive austerity measures for years to come remain.

“Unless measures are taken to deal with the underlying structural problems affecting the most indebted of eurozone nations, then the bail out package merely kicks the can down the road,” said Michael Hewson, analyst at CMC Markets.

Moreover, the European Central Bank’s new role in sweeping up government bonds has stoked concerns about its independence from politicians — Axel Weber, president of Germany’s central bank and a leading member of the ECB’s governing council, appeared cautious about the bank’s new responsibility.

Whatever divisions exist within the ECB and whatever pressure may have been put on its President Jean-Claude Trichet to intervene directly in the debt markets, the central bank is on a different course from that being pursued elsewhere — while the ECB is expanding monetary policy, other banks like the U.S. Federal Reserve and the Bank of England are starting to normalize it.

Geoffrey Yu, a currency strategist at UBS, said the ECB’s participation increases the chances that the central bank will be among the last major banks to lift borrowing costs.

“While systemic concerns have dominated recent price action, policy rate differentials could assert themselves beginning in the middle of the year, when we expect several central banks to hike policy rates,” said Yu.

These concerns have dogged the euro all day following Monday’s euphoria, which sent the single European currency up to a high of around $1.31. By mid afternoon, the euro was down 0.9 percent on the day at $1.2694.

The other major currency in focus Tuesday is the British pound, amid growing uncertainty about what the next government will look like.

The currency suffered a bout of selling was put under pressure by the revelation Monday that the Liberal Democrats were opening discussions with the Labour Party as well as the Conservatives, who won most seats and votes.

However, mounting expectations in the market Tuesday that the Liberal Democrats will finally agree to a deal with the Conservatives has seen the pound clamber off earlier lows of $1.4716.

By mid afternoon, the pound was 0.2 percent lower at $1.4836.

So far, bond investors don’t appear to be worried — a 2.25 billion pound 17-year auction went smoothly for the government as the issue was covered nearly two and a half times by bids.

Earlier in Asia, stocks gave up much of their previous day’s advance.

Japan’s Nikkei 225 stock average fell 1.1 percent to 10,411.10 while South Korea’s Kospi dropped 0.4 percent and Australia’s S&P/ASX 200 shed 1.1 percent. Benchmarks in mainland China, Taiwan, India, and Singapore also slid, while Hong Kong’s Hang Seng index retreated 1.4 percent to 20,146.51.

Stocks in the Philippines bucked the regional trend, surging 3.9 percent as Sen. Benigno Aquino III, son of Philippine democracy icon Corazon Aquino, opened up a commanding lead in presidential elections after campaigning on an anti-graft platform.

Oil prices also lost their shine, with benchmark crude for June delivery down 31 cents to $76.49 a barrel in electronic trading on the New York Mercantile Exchange. The contract rose $1.69 to $76.80 per barrel on Monday.

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Associated Press Writer Alex Kennedy in Singapore contributed to this report.