Hesitant Spain puts euro, share rally into reverse

Tue Sep 18, 2012 9:01am EDT
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By Marc Jones

LONDON (Reuters) - European shares and the euro slipped on Tuesday, leading a broader drop in risk assets as investors turned their attention from central bank stimulus to slowing global growth and doubts about Spain's desire for an international aid package.

Taking their lead from weaker Asian markets, European equities continued to fall away from 14-month highs hit last week after the Federal Reserve promised to keep pumping money into the U.S. economy and the euro zone's bailout fund got crucial backing from a German court.

London's FTSE 100 .FTSE, Paris's CAC-40 .FCHI and Frankfurt's DAX .GDAXI were down between 0.5 and 0.7 percent by 8:50 a.m. EDT (1250 GMT), pushing European .FTEU3 and global indexes .MIWD00000PUS into negative territory.

In the United States, where housing market and current account data will be in focus alongside problems at chip maker AMD, Wall Street is expected to open lower for the second day running.

Investors are becoming worried that Spain may try to avoid accepting what would be a politically unpopular EU/IMF bailout. Taking aid is a condition for the European Central Bank to start buying bonds of any troubled euro zone government under its plan to lower debt yields which has helped to achieve the recent lull in the euro zone crisis.

"We take the view that delaying tactics by the Spanish government to request aid could backfire and lead to renewed upward pressure on yields because markets are effectively assuming that an aid request is more or less a done deal," said Rabobank economist Elwin de Groot.

Uncertainty was evident in bond markets. German Bund prices rose 32 ticks as the reversal of the recent falls continued although borrowing costs for Italy and Spain eased.

Ten-year Spanish bond yields dipped back below the 6 percent barrier which was breached on Monday, to stand 5 basis points lower on the day at 5.97 percent.   Continued...

Traders are pictured at their desks in front of the DAX board at the Frankfurt stock exchange September 14, 2012. REUTERS/Remote/Amanda Andersen