Cliff’ Concerns Sink Europe Markets



European stocks sank, the euro fell against the dollar and U.S. stock futures and U.S. Treasurys edged lower as investors’ concerns regarding the U.S. budget negotiations escalated Friday.

The U.S. House of Representatives will meet Sunday in a last-ditch effort to reach a deal on the budget. A White House meeting between Democrat and Republican leaders and U.S. PresidentBarack Obama is scheduled Friday. A series of tax increases and spending cuts known as the “fiscal cliff” are set to take effect at the beginning of January, which in turn could push the U.S. economy toward recession.

“Investors will need to see some kind of proposal to emerge or risk appetite could falter,” said UBS‘s UBSN.VX +0.21% FX team in a note to clients.

Even a fairly decent Italian bond auction did little to help European markets. Italy’s borrowing costs on five- and 10-year government bonds ticked marginally higher at Friday’s auction compared with last month’s levels but demand was solid, with the Treasury selling €5.871 billion ($7.77 billion), close to the maximum targeted amount.

Italy has been a focal point of late after the recent resignation of Prime Minister Mario Monti and the scheduling of elections in February.

Commenting on the auction, Nicholas Spiro, managing director of Spiro Sovereign Strategy, said, “That Italy is able to sell 10-year paper at a yield of 4.5% eight weeks before a crucial parliamentary election says much about the dramatic shift in sentiment toward the euro zone.

“A number of factors are conspiring to reduce pressure on yields: thin holiday trading, the European Central Bank’s fiscal backstop and expectations of postelection continuity in policy.”

Italy’s 10-year government bond yield eased following the auction.

While European stock markets slumped, Japan’s Nikkei Stock Average hit a 2012 high for a second consecutive day after the dollar continued its rally against the yen. Newly appointed Japanese Prime Minister Shinzo Abe and his government are expected to continue to push for stronger easing measures and a weaker local currency to revive the flagging economy. The dollar climbed to a fresh 28-month high of ¥86.64 early Friday in Asia.

In corporate news, shares in platinum group metal producer Lonmin LMI.LN -2.07%PLC fell after the company said that Chief Executive Ian Farmer will step down from his role due to ill health. Simon Scott will continue in his role as acting CEO, but has requested to not be considered as a permanent replacement.

Shares in troubled Spanish lender Bankia SA BKIA.MC -23.37% dropped sharply. The technical advisory committee of Spain’s main stock market index, the IBEX-35, decided that shares of the lender will stop trading on the blue-chip index as of Jan. 2. The decision follows the planned injection of state funds into Bankia.

Courtesy: The Wall Street Journal