Global shares slide,ESM pledge lifts €

Europe is having another testing week as it seeks to pull itself out of its debt woes.

Written by Agencies | London | Published:September 11, 2012 9:37 am

Safe-haven assets were back in demand on Tuesday as investors limited their risks ahead of a German ruling on the euro zone’s new bailout fund,an election in the Netherlands and potential new stimulus from the US Federal Reserve.

European shares,which jumped to 13-month highs last week after the European Central Bank laid out new plans to address the region’s debt crisis,were stuck in negative territory for the second day running,0.44 percent lower at 1,098.66 points.

The MSCI global share index was down a more modest 0.1 percent ahead of what was expected to a slightly higher open on Wall Street where investors are eyeing a potential new dose of stimulus from the Federal Reserve.

Europe is having another testing week as it seeks to pull itself out of its debt woes.

Despite a late legal challenge from a eurosceptic lawmaker,Germany’s constitutional court will rule on Wednesday on the powers of the euro zone’s new ESM bailout fund,which is vital to release funds to recapitalise struggling Spanish banks.

The decision is the sole thing that could blow the whole thing out of the water,said Gary Jenkins,managing director at Swordfish Securities. It’s unlikely they’ll do that,but if there’s one obstacle that it would be hard to see a way around,that would be it.

Dutch voters also go to the polls that day in the latest test of core Europe’s resolve to keep the bloc intact,while European authorities will lay out their blueprint for a new ‘banking union’ to synchronise bank supervision and bailouts.

The German court statement that it would not delay its ESM ruling sparked life into a subdued euro,sending it back above $1.2800 and towards its $1.2834 200-day moving average before retreating back slightly.

The dollar weakened elsewhere,too,hitting a three-month low against the Swiss franc,a six-week low against the yen and was fractionally down against a wider basket of currencies.

PERIPHERY SELL OFF

With the European action on Wednesday,Apple unveiling its latest iPhone the same day,and the Fed due to announce its plans on Thursday,traders expect U.S. markets to remain in a holding pattern for the day.

It is one of those ‘wait-and-see days’ where we have a week full of catalysts that basically start tomorrow,so with that,this market probably sees a day full of sideways action,said Art Hogan,managing director of Lazard Capital Markets in New York.

The European sell-off of riskier assets left German government bonds,typically favoured by risk-shy investors,back in demand.

Bund futures were up 13 basis points at 140.44 as uncertainty remained around the outcome of the ESM ruling and as worries resurfaced on Greece’s fiscal repair plans. In contrast Italian,Spanish and Portuguese borrowing costs were all on the rise.

Oil prices remained firm,with Brent crude futures back above $115 a barrel. Safe-haven favourite gold,which has rallied nearly 7 percent over the last month,added 0.4 percent to $1,731 an ounce.

Reflecting growing investor jitters,the CBOE Volatility index posted its biggest daily increase in seven weeks on Monday.

Speaking in China,International Monetary Fund deputy managing director Zhu Min warned that despite the recent positive step by the ECB the euro zone debt crisis still had a long way to run.

Overall I would say the crisis is not over. We are still in the middle of it and there is some way to go,Zhu told a World Economic Forum meeting in the port city of Tianjin.

STIMULUS HOPES

Monetary stimulus continues to prop up large parts of the global economy. Interest rates cuts are expected in the coming months from Europe to key parts of Asia and Latin America .

One of the factors currently weighing on the greenback is Thursday’s conclusion of the Federal Reserve’s September policy meeting,with economists increasingly eyeing another injection of stimulus following weak jobs data last week.

The dollar dropped during the two previous rounds of quantitative easing from the Fed,with the U.S. dollar index falling around 17 percent between March and December 2009,and by around 13 percent between August 2010 and May 2011.

Lee Hardman,currency analyst at Bank of Tokyo Mitsubishi,said the Fed’s actions were likely to have less of an influence this time,especially as other central banks were also acting to support their economies.

In these circumstances,a more extended US dollar sell-off on the back of QE3 will likely require more aggressive quantitative easing from the Fed than prior bouts … which appears unlikely,he said.

So far the U.S. dollar index has already fallen by close to 5 percent,he added.

European crisis darkens Asian growth outlook

The downside risks to the global economy from Europe’s debt crisis should not be understated and Asian export growth could be in particular jeopardy,Zhu Min,deputy managing director of the International Monetary Fund,said on Tuesday.

Zhu,speaking at a World Economic Forum meeting in the Chinese port city of Tianjin,said the crisis still had a long way to go and that the risk of a second European recession in three years would be bad news for global growth.

We should not underestimate the negative impact from the European crisis to the whole world. This is very important,he told an audience of international business leaders gathered for an annual meeting in China.

Europe’s debt crisis has festered for more than three years,and investors widely expect the 17-member euro zone economy to slide into recession in 2012 as a result of the failure to solve the crisis and engineer a recovery.

The growth side (of Europe’s crisis) has a profound impact on the global economy,Zhu said,adding that IMF models predicted as much as 1.5-2.0 percent being cut from economic activity in the U.S. and Japan and 1 percent from activity in China if there was a further deterioration in Europe.

The impact on Asian trade could be dramatic as Europe buys about a third of the region’s valued added exports.

When the growth in the euro area drops to zero,you will see export growth from this region drop to zero too. This is very important,Zhu said.

Falling demand from Europe has been a serious drag on Asian economic activity this year,compelling governments around the region to step up investment and other spending to stimulate domestic demand to compensate for the external decline.

CHINA CAN SPEND IF NEEDED

China said last week that it had approved more than $150 billion-worth of infrastructure projects. That comes on top of the monetary and fiscal easing undertaken since last year.

But some economists fear it will be insufficient to stop growth falling below the official 7.5 percent target for 2012.

In a key note speech to the WEF,Premier Wen Jiabao said the government was giving greater prominence in policymaking to stabilising the economy. And he sounded confident that the growth target was achievable,despite some dispiriting economic data released in the past few days.

China’s economic development trend is good,economic growth still remains within the target range set at the beginning of the year,and the economy is stabilising,Wen said. If needed,he said,Beijing would tap a special stabilisation fund – built from accumulated surpluses in previous years – if necessary to support growth.

There is around 100 billion yuan left in the stabilisation fund as of this year,Wen said,adding that Beijing was running a fiscal surplus of about 1 trillion yuan so far in 2012.

China’s role as the anchor economy for the region is increasingly evident in the slowdown spreading around Asia,and analysts say many politicians in Asia are as anxious as investors that Beijing steps up its policy response.

Latest economic data for August gave ammunition to critics who say more Beijing- backed spending is needed to repair damage done to the domestic economy by firms cutting production,inventories and imports in the face of anaemic global demand. Exports generate 25 percent of gross domestic product in China and support an estimated 200 million jobs. The economy is on course for its weakest year of expansion since 1999.

Investors worry that six successive quarters of slowing Chinese growth risk sliding into a seventh in the third quarter of 2012 as China’s factories run at their slowest rate of expansion since May 2009.

China’s last officially declared stimulus package was the 4 trillion yuan ($635 billion) spending plan unveiled in 2008,when global trade ground to a halt and at least 20 million Chinese workers lost their jobs in a matter of months as financial turmoil swept around the world.

Job losses on that scale have so far been avoided,but it remains a danger for Beijing ahead of a transition of power at the top of the Communist Party that is supposed to take place against a backdrop of prosperity and social stability.

Some analysts see the relatively tight conditions in China’s labour market as a sign of its ability to shoulder more of the burden of sustaining global economic activity.

But the IMF’s Zhu warned against that view.

China is having a big spill-over impact on the rest of the world. It is having an increasingly big impact on the world economy through investment,trade and manufacturing sector,he said. But China alone cannot save the world economy.

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