Portuguese bond auction helps European stock markets despite deepening Greek recession

By Pan Pylas, AP
Wednesday, September 8, 2010

European stocks up on US gains, Portugal bond sale

LONDON — A solid showing on Wall Street and a relatively successful Portuguese government debt sale helped Europe’s stocks recover early losses Wednesday to close higher, though fears of a flare-up in the region’s debt crisis lingered amid news that Greece’s recession deepened in the second quarter.

The FTSE 100 index of leading British shares closed up 21.92 points, or 0.4 percent, at 5,429.74 while Germany’s DAX rose 46.55 points, or 0.8 percent, to 6,164.44. The CAC-40 in France ended 33.40 points, or 0.9 percent, higher at 3,677.21.

On Wall Street, the Dow Jones industrial average was up 69.85 points, or 0.7 percent, at 10,410.54 around midday New York time while the broader Standard & Poor’s 500 index rose 9.08 points, or 0.8 percent, to 1,100.92.

Europe’s main markets had been trading slightly lower earlier in the session amid renewed jitters over a debt crisis that nearly pushed Greece into bankruptcy earlier in the year. A Wall Street Journal report Tuesday that the EU’s stress tests into 91 banks in July understated some lenders’ holdings of potentially risky government debt was the catalyst behind Tuesday’s stock selling around the world.

However, the news that Portugal managed to raise euro1.04 billion ($1.3 billion) in a debt auction Wednesday that drew strong investor interest helped ease some of those concerns — after Greece, Portugal is widely thought to have the most shaky public finances of the 16 countries that share the euro.

The Portuguese government, though, had to pay higher interest rates on the bonds than previously — a sign that investors are getting worried again about investing in potentially risky assets.

Those lingering fears kept any rally in check, especially as official figures out of Greece showed the economy shrinking by 1.8 percent in the three months to end-June from the previous quarter.

That was up on the 1.5 percent drop previously estimated and heightened fears that the austerity cuts pursued by the government to satisfy its bailout pledges will push the Greek economy over the cliff.

On Tuesday, the finance ministers of the EU agreed to give Greece a second installment of emergency loans — worth euro9 billion — after the European Commission and the IMF praised the country for the efforts it has made since the massive euro110 billion bailout plan was agreed in May.

“With Greece likely to receive its second tranche of loans from the eurozone and IMF next week, the government will be able to meet its financing needs for the next few months but Q2’s dreadful GDP figures confirm that Greece’s problems are far from over,” said Ben May, European economist at Capital Economics.

Europe’s debt issues have returned to the forefront of investor interest following a two-month period when the primary driver in the markets centered on how fast the U.S. economy was growing. A run of downbeat economic news had triggered concerns that the world’s largest economy could be headed back to recession.

However, better than expected data last week, which culminated in a fairly upbeat jobs report for August, appears to have dampened down those concerns for now.

Investors will later turn to the Federal Reserve’s most recent assessment of the U.S. economy. Its “beige book” report breaks down economic activity across the country by region and comes as the central bank has turned more cautious about the U.S. economy.

Despite the divergence in sentiment, the euro was more or less unchanged on the day at $1.2735.

Earlier in Asia, market sentiment was dominated by the spike in the yen’s value and the toll it takes on exporters.

Japan’s benchmark Nikkei 225 stock index dived 2.2 percent to 9,024.60. A strong yen hurts Japanese companies like Toyota Motor Corp. and Sony Corp. as it cuts their overseas profits and threatens to derail the country’s fragile economic recovery.

By late afternoon London time, the dollar was 0.1 percent higher on the day at 83.88 yen, having fallen to a fresh 15-year low of 83.32 yen earlier.

Elsewhere in Asia, China’s benchmark Shanghai Composite Index shed 0.1 percent to 2,695.29 amid fears of new property curbs and Hong Kong’s Hang Seng index lost 1.5 percent to 21,088.86.

Investors worried that Beijing might impose new curbs to cool the housing market ahead of the peak sales season of September and October, analysts said. That may include halting mortgage discounts and loans to developers.

Elsewhere, South Korea’s Kospi declined 0.5 percent to 1,779.22. India’s Sensex was down 0.2 percent at 18,598.63 and Australia’s S&P/ASX 200 fell 0.8 percent to 4,537.20. Shares in Taiwan, Malaysia and Singapore all retreated.

Benchmark crude for October delivery was up 46 cents at $74.55 a barrel in electronic trading on the New York Mercantile Exchange. The contract fell 51 cents to settle at $74.09 on Tuesday.

Associated Press Writer Joe McDonald in Beijing contributed to this report.

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