June 28, 2012 / 7:33 AM / 5 years ago

Euro, shares slide as EU summit hopes dim

A trader looks at data sheets at the Madrid stock exchange June 18, 2012. REUTERS/Paul Hanna

LONDON (Reuters) - World shares fell and the euro hit a three-week low as divisions among European leaders dashed hopes of urgent measures to tackle the region’s debt crisis when they meet later on Thursday in Brussels.

The pessimism pushed yields on 10-year Spanish bonds above 7 percent, and U.S. stock index futures pointed to a lower open on Wall Street .N ahead of the latest weekly jobless claims data.

The European Union’s two-day leaders’ meeting is expected to produce a broad roadmap for fiscal, financial and political union across the 17-nation currency bloc and may agree measures to boost growth, but German Chancellor Angela Merkel has brushed aside demands from Italy and Spain for rapid action to lower their soaring borrowing costs.

She also poured cold water on proposals backed by France for euro zone countries to assume joint liability for each other’s debts.

“It’s rare that we’ve seen this amount of discord going into a summit,” said Chris Turner, head of foreign exchange strategy at ING. “On the face of it, it looks like it’s going to be reasonably negative for the euro.”

A German government source downplayed expectations for the summit, telling Reuters it would take time to resolve the region’s sovereign debt crisis, already in its third year.

Data showing German unemployment rose more than expected in June also weighed on investor appetite for euro zone assets.

The common currency fell 0.4 percent to three-week lows of $1.2422 versus the dollar and to 98.65 against the safe-haven Japanese currency.

Equity investors also beat a retreat ahead of the summit, sending MSCI’s world equity index .MIWD00000PUS down 0.17 percent to 303.06 points, ending two days of gains.

“The current environment does not justify increasing our equities exposure,” said Francois Savary, chief investment officer at Swiss bank Reyl.

Falls in banking stocks, which are most exposed to the euro zone crisis, led the FTSEurofirst 300 index .FTEU3 of top European company shares down 1.1 percent to 989.35 points, while the blue-chip Euro STOXX 50 .STOXX50E declined by 1.3 percent.

The STOXX European banking index .SX7P was down 2.4 percent, with France’s BNP Paribas (BNPP.PA) down over 3 percent and Germany’s Deutsche Bank (DBKGn.DE) off 1 percent.

Barclays Bank (BARC.L) in Britain fell over 10 percent after agreeing to pay a $453 million fine for manipulating interest rates on the London interbank market.

EURO DEBT SLIDES

The prospects for Europe’s beleaguered sovereign debt market - assuming not much happens at the summit - pushed yields on Spanish 10-year debt above the 7 percent level, widely regard as unsustainable.

Yields on existing 10-year Italian government bonds also rose slightly to about 6.22 percent as Italy was forced to pay 6.19 percent to borrow new 10-year funds at an auction on Thursday, up from 6.03 percent a month ago.

With interest payments on its 1.95 trillion euro ($2.4 trillion) debt already at alarming levels, Italy also had to pay 5.84 percent to borrow for five years, compared with 5.66 percent at a late-May sale.

GOLD LOSES OUT

Gold also dipped ahead of the summit on signs a disappointing outcome might prompt investors to turn to the safety of the U.S. dollar.

Gold has been losing some of its safe-haven appeal after financial market turmoil caused by the prolonged debt crisis in Europe and the U.S. Federal Reserve’s decision to take only a modest step to boost the economy prompted investors to cash in bullion to cover losses.

After an 11-year bull run, bullion is heading for its largest quarterly fall in eight years and is almost flat for the year to date.

Wall Street investment bank Morgan Stanley on Thursday lowered its precious metals price forecasts for 2012 through 2014, saying the move was in line with the bank’s cut in its global commodity price forecasts.

Spot gold dipped about 0.25 percent to $1,568.80 an ounce, having briefly risen above $1,581 on Wednesday. The precious metal is on track for more than a 5 percent drop this quarter.

ECB EYED

While concrete steps towards further economic integration of the currency bloc are now seen unlikely this week, some in the markets are looking ahead to next week’s meeting of the European Central Bank for some action to help the euro area’s battling economies, with a rate cut seen as a growing possibility.

ECB Executive Board member Peter Praet said on Wednesday that there was nothing to stop the bank cutting interest rates, now at 1 percent, and 48 out of 71 economists polled by Reuters expected a cut.

“We think the European Central Bank is best suited for post-summit fire-fighting at short notice,” analysts at Standard Chartered Bank said in a note. “We expect a 25 basis point rate cut at its July 5 meeting.”

Additional reporting by Sudip Kar-Gupta and Jessica Mortimer; Editing by Will Waterman

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