January 24, 2012 / 6:38 AM / 6 years ago

Greek debt setback depresses world shares

<p>France's Finance Minister Francois Baroin (L) talks with Greece's Finance Minister Evangelos Venizelos (R) at a Eurogroup meeting at the European Union council headquarters in Brussels January 23, 2012. REUTERS/Yves Herman</p>

LONDON (Reuters) - Worries about the implications of the latest setback in efforts to restructure Greek debt weighed down the euro and shares on Tuesday, overriding positive data showing the region’s economy may be headed for a weaker slowdown than many had feared.

The fears threatened to drag U.S. markets lower with futures pointing to a weaker open ahead of a key meeting of the Federal Reserve’s policy making committee, and President Barack Obama’s last ‘State of the Union’ address before the next election.

The problems restructuring Greek debt need to be resolved before the country can secure the bailout funds it needs to avoid a disorderly default, which could hurt global economic growth and Europe’s fragile banking system.

“Greek debt payments are looming and the situation needs to be resolved. We are concerned about financials that still need to raise capital,” said Andrea Williams, who manages $2.1 billion in assets for Royal London Asset Management.

In the latest development, euro zone finance ministers have rejected an offer by private creditors to write down the nominal value of their debt by 50 percent in return for new longer-term bonds paying an interest rate of 4 percent.

The euro was little changed at around $1.3020 after a choppy trading session which had seen it hit $1.3603, its highest level since January 4, as fresh economic data pointed to a recovery in the region’s economy.

The Markit flash Eurozone Purchasing Managers’ Composite Index (PMI), often seen as a growth indicator, jumped to 50.4 from December’s 48.3, its highest reading in four months and easily beating the highest forecast of 49.5 in a Reuters poll.

“The index seems to have bottomed out in October and we’ve had three months of improvement. Three months we see as a turning point signal, and we are beginning to get a bit more confident,” said Chris Williamson, chief economist at data provider Markit.

A reading above 50 indicates economic expansion and below this level, a contraction.

“Although we still see downside risks for activity in early 2012, today’s report suggests that the EMU (European) economy is not going to fall in a deep recession near-term,” Annalisa Piazza, market economist at Newedge said.

DEBT FEARS HIT BANKS

European share markets however spent the session in negative territory, due mainly to weakness in financial stocks, with the pan-European FTSEurofirst 300 .FTEU3 index of top shares off 0.9 percent at around 1,038.23 points.

The STOXX Europe 600 Banks index .SX7P was down 2.5 percent on worries about further debt writedowns for the sector.

Investor sentiment was also hurt by results from German conglomerate Siemens (SIEGn.DE), a bellwether for Europe’s manufacturing industry, which showed a 23 percent decline in its first-quarter core operating profit, missing the most pessimistic analysts’ forecasts.

Safe-haven German debt prices fell after PMI data also showed Germany’s manufacturing sector grew in January for the first time since September, but later climbed as the Greek worries drove up demand.

German government bond futures were about 18 ticks higher on the day at 137.64. Benchmark 10-year German yields were slightly easier at 1.95 percent.

Debt markets are also growing nervous about the outlook for Portugal, the next weakest euro zone member, whose bond yields have been rising steadily over the past week.

The MSCI world equity index .MIWD00000PUS was down about 0.45 percent at 314.83 point after another quiet day in Asia where many markets are still closed for the Lunar New Year.

Risks posed by Europe’s debt woes had prompted the Bank of Japan to cut its growth forecasts on Tuesday.

In the commodities markets, Brent crude oil slipped to $110 a barrel as investors looked away from the tension between Iran and the West to focus more of the problems stemming from protracted negotiations over Greece’s debt.

Spot gold eased down from a six-week high to be around $1,667 an ounce as investors await the outcome of a two-day Federal Reserve meeting, which ends on Wednesday, for any signs that interest rates will stay lower for longer, as that could put some pressure on the U.S. dollar.

Additional reporting by Neal Armstrong; Editing by Catherine Evans

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