Tuesday, May 17, 2011

World stocks hit a one-month low

PARIS: World stocks hit a one-month low on Tuesday, May 17 hit by rekindled worries over Greek sovereign debt and lingering doubts over the pace of the global recovery, while oil slid ahead of key U.S. data.

A lower-than-expected ZEW index measuring German analyst and investor sentiment as well as stronger-than-expected UK inflation data also weighed on sentiment.

World stocks as measured by MSCI .MIWD00000PUS were down 0.4 percent at 1220 GMT after hitting their lowest level since mid-April earlier in the day, while the euro zone's blue chip Euro STOXX 50 .STOXX50E index was down 0.4 percent, losing ground for the fourth consecutive session.

Jean-Claude Juncker, the chairman of the 17-country Eurogroup, said earlier there was a need to move toward a "soft restructuring" of Greek debt, acknowledging for the first time that the country may have to cut a deal with its creditors.

"Markets are currently pricing the worst-case scenario: a default of Greece and likely default of Ireland and Portugal. As long as we don't have a definitive plan to tackle Greece's debt problems, the sword of Damocles will remain over our heads," said Jacques Henry, analyst at Louis Capital Markets, in Paris.

"A restructuring of the country's debt would hurt banks across Europe, but more broadly it could stop the contagion and remove the uncertainty."

Other market players said the more limited intervention of extending maturities on Greek bonds might not be a bad option.

"It might take longer to get your money back, but on the plus side it is more likely you get your money back eventually," said Angus Campbell, head of sales at Capital Spreads, in London.

"The easiest option is most likely to be the extension of the maturities of the bonds. Let's face it, Greece will not be able to pay the bonds within the timeframe. You have to really extend things to give them time to get back on their feet."

The cost of insuring Greek debt against default rose on Tuesday after Juncker's comments, fuelling expectations that the country would undergo some form of debt revamp.

Five-year credit default swaps (CDS) on Greek government debt rose 23 basis points to 1,250 bps, according to data monitor Markit.


Germany's DAX index .GDAXI was down 0.9 percent, extending losses after the ZEW hit its lowest level since November 2010.

"The survey's decline is another indication that the German economy is beginning to cool off," said Ben May, economist at Capital Economics, in London.

"The ZEW survey is not a good indication of economic growth, but it has often shown turning points in the economic cycle. The German economy should lose its momentum in the coming months."

The euro inched higher, at $1.4169, rebounding from a seven-week low against the U.S. dollar, but worries over Greece kept on edge, with some traders expecting it to trade in a $1.40-1.4250 range in the next few days.

"The risk-off sentiment remains in place and until that is there it's tough for the euro to rise past $1.4250 -- the mid-March highs. I see strong support at $1.40," said Neil Mellor, currency strategist, at Bank of New York Mellon.

The euro found some respite in results from Spanish and Greek debt sales.

Spain's 12- and 18-month funding costs fell from a prior auction, while Greek borrowing costs also eased at a 3-month sale, as short-term yields eased momentarily across much of the euro zone periphery.

U.S. crude oil futures were down 22 cents at $97.15 a barrel as investors trod cautiously ahead of weekly U.S. data expected to show builds in U.S. crude and gasoline stocks and as the dollar index .DXY gained ground. - Reuters

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