Markets steady but tensions over Spain remain

PAN PYLAS
An investor talks to another, not in the picture, at a private securities company Tuesday July 24, 2012 in Shanghai, China. Asian stock markets mostly dropped Tuesday despite a sign China's manufacturing is beginning to recover as the possibility of a credit rating downgrade for Germany added to jitters over Europe's debt turmoil. (AP Photo)

LONDON (AP) — Global markets were steady Wednesday after a leading European central banker suggested the continent's bailout fund could be reformed to give it more financial firepower.

Markets have been rattled over the past few days by fears that Spain, the eurozone's fourth-largest economy, could need a bailout along the lines of Greece, Ireland and Portugal.

Following three days of market losses, some investors returned to buy beaten-up stocks, though downbeat economic data and underwhelming earnings from Apple kept sentiment in check.

Sentiment was given a bit of a boost by a suggestion from European Central Bank policymaker Ewald Nowotny that the European Stability Mechanism, the eurozone's planned permanent bailout fund, could be given a banking license. That would give it the ability to borrow money from the ECB, increasing its financial resources.

Vassili Serebriakov, an analyst at Wells Fargo Bank, said such a move would be of particular significance for Spain and Italy as the current bailout fund does not have enough money to rescue them both.

"While some European policymakers have in the past spoken against the idea of a banking license, the recent rise in European bond yields is testing the tolerance levels of the European authorities, while prompting a search for policy options," said Serebriakov.

The biggest market gain was seen in Spain, where the main IBEX 35 index rose 0.8 percent. The country's borrowing rates also eased after hefty increases of the past few days. The 10-year yield was down 0.16 percentage points at 7.37 percent — still way above the 7 percent rate considered to be unsustainable in the long-run.

Elsewhere in Europe, Germany's DAX rose 0.3 percent to 6,406.52 while the CAC-40 in France was 0.2 percent higher at 3,081.74. Britain's FTSE 100 index of leading British shares underperformed, trading 0.9 percent lower at 5,498.32 after official figures showed the country's economy shrank by a greater-than-anticipated quarterly rate of 0.7 percent in the second quarter.

The euro was faring better than in recent days, trading 0.5 percent higher at $1.2126. On Tuesday, it fell to a two-year low of $1.2052.

In the U.S., stock markets rose as investors brushed off weaker than expected earnings from Apple. The Dow Jones industrial average was up 0.8 percent at 12,720.40 but the broader S&P 500 index was up only 0.3 percent at 1,342.59.

The market focus over the coming days will likely remain on Europe's debt crisis, in particular Spain and Greece.

The cost of bailing out Spain would potentially be twice the size of aid for Greece, Portugal and Ireland combined. This factor has raised questions over how long Europe's stronger economies will continue rescuing the weaker ones.

Germany's Ifo survey of business sentiment fell for a third consecutive month in July, adding to concerns over the state of Europe's largest economy. This follows Moody's announcement earlier this week that the country's credit rating was under pressure by the crisis enveloping Europe.

Some officials in Berlin have called for allowing Greece to leave the euro to keep it from hurting Germany. Investors think such an exit could happen soon if Greece's international debt inspectors conclude that little progress has been made in reforming the country's economy.

Meanwhile, a minor ratings agency downgraded Italy's sovereign debt grade further into junk status. Egan-Jones dropped Italy's rating to CC+ from B+. Investors usually focus on the ratings given by the three main agencies, Standard & Poor's, Moody's and Fitch.

Another worry in the markets heading into August, when liquidity levels are low, is that price movements could be exaggerated, in much the same way as they were last year. That could make matters worse in Europe crisis resolution effort.

Earlier in Asia, Japan's Nikkei 225 stock average closed down 1.4 percent at 8,365.90 and Hong Kong's Hang Seng dropped 0.1 percent to 18,877.33. The Shanghai Composite slipped 0.5 percent to 2,136.15.

Oil prices were steady with benchmark crude for September delivery up 69 cents at $89.19 a barrel in electronic trading on the New York Mercantile Exchange.