LONDON (Reuters) - Soothing data about China’s economy provided some succor to investors on Wednesday although Europe’s debt crisis rolled on with Irish government bond yields hitting record highs after a downgrade to junk.
Wall Street looked set to open higher with focus on testimony from U.S. Federal Reserve Chairman Ben Bernanke.
Following minutes of the Fed’s latest meeting which suggested the possibility of more stimulus measures, Bernanke is likely to be asked why the Fed’s current stimulus measures have not been more effective at bringing down unemployment.
European shares recovered after the previous session’s losses, helped by a better-than-expected China second-quarter GDP reading, which also lifted oil and commodity prices, while the euro reversed some of its recent weakness against the dollar.
Moody’s downgraded Ireland’s credit rating to junk status on Tuesday, the latest in a series of blows to European economies struggling to get out from under a huge debt mountain. The Irish 10-year bond yield rose above 14 percent.
The rating agency warned that Ireland would probably need a second bailout. A week ago, it slashed Portugal’s rating to junk status with a similar warning.
Investors are also beginning to fear that the euro zone debt crisis is spreading from the bloc’s small economies to the larger ones.
The International Monetary Fund called on Tuesday for “decisive implementation” by Italy to cut its public debt as the country sought this week to calm market worries about the sustainability of its debt burden, which amounts to 120 percent of GDP.
“The big countries are in this crisis now, it’s getting pretty dangerous,” one trader said.
On the global economic front, however, investors were lifted by China’s GDP data.
The country’s annual gross domestic product grew 9.5 percent in the second quarter of 2011, slightly above 9.4 percent forecast by a Reuters poll, despite a spate of monetary tightening measures from Beijing.
Retail sales in the world’s second-biggest economy grew 16.8 percent in the six months ended June year-on-year, showing that domestic demand still held up relatively well despite policy tightening, China’s statistics bureau said.
“What today’s numbers are telling us is that higher rates are not having a sharply negative impact. We’ve seen the economy ratchet down a gear,” said Adrian Foster, head of Asia Pacific financial markets research, at Rabobank in Hong Kong.
Although investors are concerned about overheating in China, they are perhaps more edgy at the moment about a hard landing which would strip growth across the world.
The China data lifted commodities, including oil <O/R> and copper, which in turn helped European shares shake off the debt crisis at least temporarily. The FTSEurofirst 300 .FTEU3 index of top European shares was up 0.2 percent, snapping a three-session sell off.
World stocks as measured by MSCI .MIWD00000PUS gained half a percent, with Japan’s Nikkei .N225 closing up 0.4 percent and emerging market stocks .MSCIEF up 0.9 percent.
The euro paused from its selloff but longer-term gains were seen likely to be checked by concerns about the debt crisis and a European Union leaders’ emergency summit expected on Friday.
The euro was up 0.8 percent at $1.4085, after hitting a four-month low around $1.3838 at one point on Tuesday.
“The euro is very much vulnerable to any negative news about Italy or any peripheral euro zone country,” said Niels Christensen, FX strategist at Nordea.
Oil prices were slightly higher, with Brent for August up a cent at $117.76 a barrel, supported by China’s GDP data and an upbeat report on demand from the International Energy Agency.
Gold rose for an eighth day on concerns about the euro zone debt crisis, putting it on course for its longest stretch of gains in nearly five years. It was trading at $1,570.66 an ounce, less than half a percent off its record high.
Additional reporting by Anirban Nag and Emelia Sithole-Matarise; Writing by Jeremy Gaunt; Editing by Susan Fenton