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Spanish deal lifts world shares, euro steady

Reuters/London 10 Jul 12 | 05:52 PM

World shares inched up on Tuesday after euro zone finance ministers made limited progress on measures to help embattled Spain, but evidence of a sharp slowdown in China sent oil and industrial commodities lower.

U.S. stocks were poised to open higher as risk assets were supported by hopes Germany's top court would ultimately approve the European Union's new permanent bailout fund, paving the way for its funds to be used more flexibly to ease the crisis.

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The Constitutional Court has begun a hearing into whether the fund, known as the European Stability Mechanism (ESM), and planned changes to the region's budget rules are compatible with German law but no final decision was likely on Tuesday.

"Very little is expected to come out of the various meetings or constitutional court," said Ian Stannard, head of European FX strategy at Morgan Stanley.

The euro steadied near a two-year low against the dollar at $1.2319 but hit a five-week low versus the Japanese yen of 97.32 yen.

Sentiment was stronger in equity markets after an all-night meeting of euro area finance chiefs agreed a deal which will release 30 billion euros of bailout funds for Spain's troubled lenders by the end of July.

The euro zone ministers also decided to grant Spain an extra year, until 2014, to reach its deficit reduction target but made no apparent progress on how the bloc's new rescue fund, the ESM, will be used to help lower Madrid's elevated borrowing costs.

Gains in bank shares after the deal lifted the FTSE Eurofirst 300 index of top European shares by 1.2 percent to 1042.45, but volumes were less than a third of their 90-day average.

The MSCI world equity index ended four straight days of losses to be up 0.3 percent at 310.37 points.

Bond pressures ease

Spanish and Italian government bond yields dipped on the help given to Spain and hopes the German court will give its blessing to efforts to use euro zone rescue funds to ease the pressure in debt markets.

Spain's 10-year bond yields were 16 basis points lower at 6.9 percent, while their Italian equivalents fell 13 bps to 5.97 percent.

The euro finance chiefs plan to reconvene in Brussels on July 20 to finalise their latest agreement, having first obtained the approval of their governments or parliaments.

"I think we have a long ways to go before we reach the stage at which policymakers will be ready to act, particularly as it relates to potential bond purchases in the secondary market," said Todd Elmer, currency strategist for Citi.

China worries

Meanwhile the world's second largest economy, China, sharply curtailed its levels of imports in June in further evidence that Europe's three-year-long debt crisis is dragging down economic activity around the world.

Demand for Chinese goods in June was also below its usual pace in part because the U.S. economy has not fully recovered, a top Chinese customs official said.

Annual import growth was 6.3 percent in June, far short of the 12.7 percent forecast by economists and the 12.7 percent achieved in May. China's crude oil imports for June plunged to their lowest levels of the year from a record high in May.

The lacklustre trade numbers came a day after data showed inflation in China eased further in June, giving room to the central bank to loosen its monetary policy to stimulate growth without stoking upward price pressures.

Recent comments from central bankers have raised hopes for stimulus. Three top U.S. Federal Reserve policymakers called for more quantitative easing, while European Central Bank President Mario Draghi said the bank may cut interest rates again if economic data supported the move.

But commodity investors were reluctant to take sizeable positions in either direction ahead of Friday's release of China's second-quarter gross domestic product figures, which could show the slowest growth in at least three years.

Three-month copper on the London Metal Exchange shed 0.7 percent to $7,508 per tonne at one point before recovering to be unchanged at $7,560.

Brent crude oil was off 81 cents to $99.51 a barrel, while U.S. crude to $85.76 a barrel after the data with worries over supply disruptions also easing as a labour strike in Norway's oil industry ended.

Gold prices edged down as the nervousness about global economic growth saw investors turn towards the dollar for safety.

Spot gold was up 0.4 percent on the day at $1,593.14 an ounce while the U.S. gold futures contract for August delivery was up 0.3 percent to $1,593.60.

 

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