Friday, January 13, 2012

Strong Italy, Spain bond auctions buoy stocks

(AP) ? Strong bond auctions in Italy and Spain dramatically drove down their borrowing costs and lifted stocks Thursday, providing a reprieve from Europe's relentless debt crisis.

But analysts warned that economic fears lie just below the surface and relief could be short-lived. While strong corporate earnings in the U.S. have been buoying world stock markets recently, observers said that European companies would likely tell a markedly different story, squeezed as they are by government cost-cutting measures and pessimism that's driving down consumer spending.

When the European Central Bank announces its interest rate decision later in the day, traders will be hanging on bank President Mario Draghi's every word for indications about the eurozone economy, which many worry is slipping back into recession. A cut in rates would be a jolt to the economy, but most analysts expect the bank to hold rates steady after lowering them for two months in a row.

But on Thursday, the underlying fears were shrugged off as traders focused on solid auctions in Italy and Spain that saw both countries pay far less to borrow than in recent sales. Rising borrowing costs are at the heart of Europe's crisis, pushing three countries to seek bailouts when investors refused to lend to them except at astronomical rates.

In recent months, Italy and Spain have careered toward similarly unsustainable rates, so their bond auctions are closely watched to measure investors' willingness to bet on them. Both countries are generally considered too big to be rescued as Greece, Ireland and Portugal were, significantly raising the stakes.

Cautious early trading gave way to substantial gains in European markets after the auctions.

In France, the CAC-40 rose 1.1 percent to 3,239, while Germany's DAX climbed 1.3 percent to 6,234. The FTSE index of leading British shares was up 0.9 percent at 5,694.

Stocks in Italy got the biggest boost, rising a whopping 2.6 percent. The yields, or interest rates, on 10-year Italian and Spanish bonds on the secondary market dropped significantly ? a sign that investors see their debt as less risky.

Wall Street was set to open higher as well. Dow futures moved up 0.3 percent to 12,427, while S&P futures rose the same rate at1,293.

The euro also surged off 16-month lows hit in recent days to $1.2756. Amid the rally, oil prices also rose.

Still, analysts warned that markets remain jittery. Given that environment, Jane Foley of Rabobank said before the auctions that even "even mediocre auction results are likely to bring some relief."

That means that absent a more permanent solution to the crisis, markets would remain on edge.

"There is a general underlying worry about the state of the global economy at the moment," said Simon Furlong, a trader with Spreadex. "Despite a good start to the US earning season, the Eurozone still places serious question marks over the global economy."

In fact, equity markets in Asia lost ground earlier in the day, dragged down by data released Thursday that showed China's inflation eased only slightly in December to 4.1 percent, from November's 4.2 percent. Analysts had hoped to see more improvement.

Japan's Nikkei 225 Index fell 0.7 percent to close at 8,385.59, while Hong Kong's Hang Seng drifted 0.3 percent lower to 19,095.38. Australia's S&P ASX 200 fell 0.2 percent to 4,181.

Mainland Chinese shares also fell, with the benchmark Shanghai Composite Index down marginally to 2,275.01 and the smaller Shenzhen Composite Index shedding 0.4 percent to 876.81.

In energy trading, benchmark crude for February deliver rode the European equity rally, rising 98 cents to $101.85 per barrel in electronic trading on the New York Mercantile Exchange.


AP Business Writer Pamela Sampson contributed to this report from Bangkok.

Associated Press


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