Europe’s debt woes weigh on markets again; Chinese yuan revaluation talk supports Asia markets

Europe’s debt woes weigh on markets again

LONDON — European and U.S. stock markets were little changed Monday as a rally in Asia was offset by ongoing concerns about the government debt crisis gripping the euro currency and its potential impact on the banking sector.

In Europe, the FTSE 100 index of leading British closed up 6.68 points, or 0.1 percent, at 5,069.61 while France’s CAC-40 rose less than a point to 3,430.93. Germany’s DAX ended 23.57 points, or 0.4 percent, lower at 5,805.68.

On Wall Street, the Dow Jones industrial average was down 37.64 points, or 0.4 percent, at 10,155.75 around midday New York time while the broader Standard & Poor’s 500 index fell 2.06 points, or 0.2 percent, to 1,085.63.

Europe’s debt crisis remains the main focus in the markets — despite an early advance in Europe, investors continue to fret about the ability of governments across the continent to get a handle on their debts.

The latest bout of jitters have been stoked by the weekend news that the Bank of Spain was taking over regional bank CajaSur after merger talks with another similar entity broke down.

“Once again Europe was in focus with a small Spanish bank having to be bailed out by the government over the weekend, which hit some of the larger European financial institutions,” said Yusuf Heusen, a senior sales trader at IG Index.

“Sentiment remains as fragile as ever when it comes to the thorny subject of government debt and it looks likely that this is going to continue to cap any rallies for the foreseeable future,” Heusen added.

The euro’s advance since last Wednesday’s four-year low against the dollar certainly ground to a halt Monday — by late afternoon London time, the euro was down 1.2 percent on the day at $1.2392 — in spite of the fall, Europe’s single currency is still way up from its four-year low of $1.2146 in the wake of a unilateral German ban of naked short-selling that unnerved markets, who took it as a sign of an uncoordinated policy response to financial turmoil in Europe.

The rescue of CajaSur follows last week’s decision by the Bank of Italy to suspend mark to market requirements on Italian bank exposure to eurozone government bonds, which fueled fears that an Italian bank may be in trouble. Suspending the requirement means the banks do not have to reflect the fallen value of the bonds on their balance sheets or earnings statements.

“The attempt to prevent a European sovereign debt failure has been prompted by how exposed the banks are to such a crisis,” said Jeremy Batstone-Carr, director of private client research at Charles Stanley.

“No one wants a return to the days after the failure of Lehman,” he added.

Earlier in Asia, markets put Europe’s financial difficulties on the backburner, and mostly closed higher amid mounting talk that China’s monetary authorities would allow the yuan to rise in value against the dollar.

China’s Shanghai Composite index jumped 3.5 percent to 2,673.42 as jitters of tighter credit policies eased amid mounting hopes for the yuan to appreciate. Most other stock markets in the region were buoyed by Beijing’s apparent willingness to talk about currency reform.

China’s president Hu Jintao said at the opening of talks with a U.S. delegation headed by Treasury Secretary Timothy Geithner that the country “will continue to steadily advance reform of the yuan exchange rate.”

In response Geithner welcomed the fact that China’s leaders have “recognized that reform of the exchange rate is an important part of their broader reform agenda.”

Most analysts think it’s crucial that the yuan is allowed to rise against the dollar if the world economy is to grow in a more balanced manner in the months and years ahead.

For many years the Chinese authorities have kept their currency artificially low against the dollar, partly as a means of boosting their exports to the United States. As a result, China has built up a massive trade surplus with the U.S.

“Positive signals coming out of Geithner’s meeting in Beijing will add to risk appetite as it reduces the risk of a trade war,” said Hans Redeker, global head of foreign exchange strategy at BNP Paribas.

Elsewhere in Asia, Australia’s S&P/ASX 200 added 2.1 percent to 4,395.40 while Hong Kong’s Hang Seng gained 0.6 percent to 19,663.66. Stock markets in South Korea, India, Singapore and Indonesia all gained.

However, Japan’s Nikkei 225 stock average dropped 26.14 points, or 0.3 percent, to 9,758.40 while Thailand’s benchmark index fell 2.3 percent with investors cautious after the worst political violence in the Thai capital in decades last week.

Oil prices oscillated around the $70 a barrel mark — benchmark crude for July delivery was up 30 cents to $70.34 a barrel in electronic trading on the New York Mercantile Exchange.

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