Euro fears spur fresh demand for safe assets

Thu May 31, 2012 7:45am EDT
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By Richard Hubbard

LONDON (Reuters) - Demand for safe-haven assets kept German and U.S. Treasury debt yields near record lows on Thursday, as worries over Spain and its troubled banks kept markets nervous, although shares and the euro regained some stability.

The single currency and world shares are poised for their biggest monthly drops since last September, while the oil price fall in May is set to be the largest for two years, as the escalation in the euro-zone crisis stokes concerns over its impact on the global economic outlook.

But markets were not in a mood to push prices on riskier assets much lower ahead of a batch of U.S. data, which includes weekly and private sector jobs numbers, regional manufacturing output and growth figures.

"We've got some serious numbers coming out of the States this afternoon, and if they're not good, given the backdrop in Europe, it could make the situation worse," Yusuf Heusen, sales trader at IG Index, said.

U.S. stock index futures pointed to a higher open on Wall Street ahead of the data.

Concerns over Europe's debt crisis and the lack of a clear policy response have been rising since Spain unveiled unconvincing plans to recapitalize nationalized lender Bankia (BKIA.MC: Quote), raising the possibility it could need outside help.

Those worries kept Spain's 10-year bond yields at 6.66 percent, near Wednesday's euro-era high of 6.79 percent and close to the crucial 7 percent mark, which has led to troubled nations like Portugal and Ireland needing bailouts.

The flight away from Spanish debt and also Italian bonds, which are under threat of contagion from Spain, has pushed up demand for the safety offered by German and U.S. government paper.   Continued...

A graph is seen above a worker as he puts the finishing touches to a stage decoration for an investment funds awards dinner at the Madrid stock exchange May 17, 2012. REUTERS/Paul Hanna