Monday, December 5, 2011

GLOBAL MARKETS-Stocks, euro firmer on euro zone rescue hopes

TOKYO (Dec 5): Asian shares and the euro firmed on Monday on hopes European leaders would agree on a definitive rescue plan to solve the euro zone's debt crisis at a crucial summit this week, with sentiment getting a lift from Italy unveiling austerity steps.

MSCI's broadest index of Asia Pacific shares outside Japan rose 0.3 percent, after ending last week with its first weekly rise in a month, buoyed by joint global central bank liquidity action.

Japan's Nikkei opened up 0.6 percent after a climb of 6 percent last week.

Dow and S&P index futures opened up on Sunday, suggesting the previous week's rally -- the biggest since March 2009 -- could be extended in the coming week, after data showing a drop in the U.S. unemployment rate to a 2-1/2-year low reinforced views the economy remained on a recovery path.

But investors were expected to tread cautiously and cap the markets' upside ahead of an eventful week, which also includes the European Central Bank's last monetary policy meeting for the year on Thursday, with an expectation for a rate cut.

"Sentiment has improved but trading will likely stick to recent ranges, with so much still unclear about the European situation," said Hiroichi Nishi, equity general manager for SMBC Nikko Securities.

Later on Monday, French President Nicolas Sarkozy and German Chancellor Angela Merkel meet to outline joint proposals for more coercive budget discipline in the euro zone, which they want all 27 EU leaders to approve at Friday's summit.

The focus at the summit will be squarely on new rules to tighten fiscal integration.

An agreement could pave the way for an accelerated implementation of the euro zone's rescue scheme to help ensure debt-ridden countries have a vehicle to tap for funds while encouraging bondholders to buy euro zone bonds.

Germany is prepared to soften language in the euro zone's permanent bailout mechanism compelling bondholders to accept losses in exchange for much stricter budget rules, four sources have told Reuters.

Italy, one of the most severely debt-stricken euro zone countries which has faced soaring borrowing costs, unveiled a 30-billion-euro ($40.3 billion) package of austerity measures on Sunday, raising taxes and increasing the pension age.

The euro, which gained 0.8 percent last week, climbed as high as $1.3435 early in Asia on Italy's news, but was last at $1.3415, up marginally from $1.3404 late in New York.

Last week's coordinated move by major global central banks aimed at reducing dollar funding costs eased tension in the immediate aftermath, but financial stresses returned by Friday.

The three-month euro/dollar cross currency basis swap , which narrowed sharply after the central bank move, widened again on Friday, while London interbank offered rates for three-month dollars inched up on Friday after falling for the first time in more than four months after the central bank action.

Overnight borrowing from the ECB hit its highest since March.

Investor confidence recovered in Asian credit markets, with spreads on the iTraxx Asia ex-Japan investment grade index tightening by about 7 basis points early on Monday. - Reuters

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