Last Market news @ Empire Global FX broker

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GLOBAL MARKETS-World stocks, euro slide on Greece default fears

* US stocks fall more than 1 pct as financials weigh

* Euro drops to 8-1/2 month low versus dollar

* Bank shares down in Europe on fears of Greece default



NEW YORK, Oct 3 (Reuters) - World stocks fell on Monday and the euro slid to an 8-1/2 month low versus the dollar as growing fears of a Greek default stoked appetite for safe-haven U.S. Treasury bonds.

Better-than-expected U.S. economic data initially cushioned a fall in U.S. stocks as Wall Street indexes briefly turned positive after the release of a key manufacturing activity index. But they fell more than 1 percent in the afternoon as financials weighed.

Bank shares were also battered in Europe as investors feared the impact of a Greek default on holders of the country's bonds, such as Franco Belgian financial group Dexia (DEXI.BR), whose stock slumped more than 10 percent.

Greece admitted it will miss its deficit target of 7.6 percent this year, making a Greek debt default look more likely. In a draft budget sent to parliament on Monday, the government forecast a deficit of 8.5 percent of gross domestic product for 2011.

"This news isn't surprising, but if Greece continues to have problems, that could really drag Europe into recession, and possibly the U.S. as well," said Randall Warren, chief investment officer of Warren Financial Service in Exton, Pennsylvania.

European policymakers appeared no nearer to agreeing on a definitive solution to the crisis. Officials meeting on Monday were discussing ways to leverage the bloc's rescue fund and pressure Greece to implement agreed structural reforms. For details, see [ID:nL5E7L20LD].

"Ultimately, Greece would need to see its debt written down by more and with that you need probably some kind of shoring up of the banking sector," said Alec Letchfield, chief investment officer at HSBC Asset Management.

U.S. stocks extended losses in the afternoon as the KBW bank index .BKX fell 2.4 percent. On Friday, stocks closed their worst quarter since 2008.

The Dow Jones industrial average .DJI lost 184.02 points, or 1.69 percent, at 10,729.36. The Standard & Poor's 500 Index .SPX was down 22.41 points, or 1.98 percent, at 1,109.01. The Nasdaq Composite Index .IXIC was down 53.89 points, or 2.23 percent, at 2,361.51.

The MSCI All-Country World index .MIWD00000PUS was 2 percent lower, near a 14-month low set in September. The FTSEurofirst 300 .FTEU3 of top European shares ended 1.2 percent lower.

The October-December period is, traditionally, the best quarter for equities. Reuters data shows that since 1971, world stocks have on average risen 3.7 percent in the fourth quarter.

Dexia closed 10.16 percent lower after credit agency Moody's announced a rating review for possible downgrade on concerns about liquidity. French daily Les Echos said on Friday that Belgian and French finance ministers would meet to discuss ways of shoring up the firm's balance sheet.

U.S. crude oil CLc1 fell 1.5 percent to $77.99 a barrel.

The euro EUR=EBS fell as low as $1.32372 EUR=EBS on trading platform EBS, a fresh 8-1/2-month low. It was last down 0.9 percent at $1.3261.

Against the safe-haven yen, the euro was down 0.9 percent at 102.194 yen EURJPY=EBS on EBS, not far from its decade low of 101.946 struck in September.

"Euro zone bank issues remain a big issue and we expect the euro's downside to continue," said George Saravelos, G10 FX strategist at Deutsche Bank.

The benchmark 10-year U.S. Treasury note US10YT=RR was up 33/32 in price, causing its yield to fall to 1.802 percent. Treasuries prices were also supported by the Federal Reserve's first bond purchase for Operation Twist, its latest bond program aimed at helping the U.S. economy.

 

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Moody's slashes Italy credit rating


(Reuters) - Moody's lowered its rating on Italy's bonds by three notches on Tuesday, saying it saw a "material increase" in funding risks for euro zone countries with high levels of debt and warning that further downgrades were possible.

The agency downgraded Italy to A2 from Aa2, a lower rating than it holds on Estonia and on a par with Malta and kept a negative outlook on the rating.

The euro pared gains against the dollar and Japanese yen immediately following the announcement which comes after Moody's rival Standard and Poor's cut its rating on Italy by one notch to A/A-1 on September 19.

The cuts underline growing investor concern about the euro zone's third largest economy, which is now firmly at the center of the debt crisis and dependent on help from the European Central Bank to keep its borrowing costs under control.

"The negative outlook reflects ongoing economic and financial risks in Italy and in the euro area," Moody's said in a statement.

"The uncertain market environment and the risk of further deterioration in investor sentiment could constrain the country's access to the public debt markets," it said.

It added that Italy's rating could "transition to substantially lower rating levels" if there were long term uncertainty over the availability of external sources of liquidity support.

Italy's mix of chronically low growth, a public debt mountain amounting to 120 percent of gross domestic product and a struggling government coalition has caused mounting alarm in financial markets.

Moody's decision came as little surprise after the agency said on September 17 that it would finish a review for possible downgrade of its rating on Italy within a month.

But it highlights the growing vulnerability of the euro zone, which is already struggling to contain the crisis in the far smaller Greek economy and which would be overwhelmed by a crisis of a similar scale in Italy.

"It's not that unexpected but it doesn't help the situation at all," said Robbert Van Batenburg, Head of Equity Research at Louis Capital in New York.

"They have already traded as if there was somewhat of a downgrade in the works, so it will probably force Italian policymakers to embark on more austerity programs. It will put another fiscal strait-jacket on them."

VULNERABILITY

Moody's said the likelihood of a default by Italy was "remote" but it said the overall shift in sentiment on the euro area funding market implied a greater vulnerability to a loss of market access at affordable rates.

Italy's relatively modest budget deficit, conservative financial system and high level of private savings had kept it on the sidelines of the euro zone crisis while countries like Greece and Ireland were sucked down.

"Italy is being punished not because its finances suddenly deteriorated, but because investors have become more sensitive to its long-standing weaknesses," said Nicholas Spiro, managing director of Spiro Sovereign Strategy in London.

He said markets appeared to be focusing on the weakened center-right government's lack of progress in stimulating the stagnant economy, which many analysts expect to stall or even slip into recession next year.

"The bond markets are more concerned about Italy's ability to grow than its commitment to reducing a fiscal deficit that is already one of the smallest in the euro zone," he said.

Prime Minister Silvio Berlusconi shrugged off the downgrade immediately, saying the Moody's announcement had been expected and the government was committed to its public finance target, which sees the budget being balanced by 2013.

The government last month pushed through a 60 billion euro austerity package -- bringing forward its original balanced budget target by one year -- in return for support for its battered government bonds from the ECB.

Berlusconi's center-right coalition has been deeply divided over policy and personal issues and further distracted by an array of scandals surrounding the prime minister.

Opposition leaders have called repeatedly for the government to resign over its handling of the economy and there is widespread speculation that Berlusconi could be forced out of office before his term expires in 2013.

Italy's borrowing costs have soared over the past three months and have only been kept under control by the ECB support but in recent weeks they have begin to climb back to potentially dangerous levels.

An auction of long term bonds last month saw yields on 10 year BTPs rise to 5.86 percent, their highest level since the introduction of the euro more than a decade ago.

The center-right government has been under heavy pressure over its handling of the escalating crisis and recently cut its growth forecasts through 2013.

It is now expecting the economy to expand by just 0.6 percent next year, down from a previous projection of 1.3 percent.

 

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Buyers rush in as Wall Street toys with bear market

(Reuters) - Investors rushed in to buy technology and other beaten-down sectors as the S&P 500 dipped in and out of a bear market on Tuesday, and a late rally drove the index to its largest gain in more than a week.

Markets once again turned on news out of Europe.

Reports that European finance ministers agreed to prepare action to safeguard their banks, following the first lender bailout as a result of the crisis, were cited as giving stocks a boost heading into the close.

Others pinned the comeback on technical levels and on bargain hunting after the broad S&P 500 briefly fell more than 20 percent from its 2011 closing high set four months ago.

"To me, it looked mostly technical. It looked like the capitulation on the sell side," said Keith Springer, president of Springer Financial Advisors in Sacramento, California.

He said the reports out of Europe just added to the buying frenzy that had started earlier.

"You could see it (the market) starting to turn anyway and that gave people an excuse" to buy, he said.

Chip makers and large-cap technology companies led the way even after Apple Inc fell 0.6 percent to $372.50 as the unveiling of its latest iPhone didn't live up to the hype. Apple shares had earlier fallen more than 5 percent.

Volume increased late in the day - with nearly 15 percent of the day's composite trading taking place in the last half hour of the session. The Dow industrials rose 345 points in the last hour of trading.

The Dow Jones industrial average gained 153.41 points, or 1.44 percent, to 10,808.71. The S&P 500 gained 24.72 points, or 2.25 percent, to 1,123.95. The Nasdaq Composite gained 68.99 points, or 2.95 percent, to close at 2,404.82.

Despite the large gains, it is still not clear whether the latest reports mean there is progress in Europe's effort to keep its sovereign debt crisis from spreading out of Greece and into the banking system.

The European finance ministers put their heads together for a plan to shore up their banks after collapsing confidence in municipal lender Dexia forced France and Belgium to rush to its aid.

The Dexia bailout came as euro-zone finance ministers delayed a vital aid payment to debt-stricken Greece, which could run out of cash shortly.

Investors fear that a Greek default will force banks to write down billions of dollars from their books and kick-start another credit crisis like the one that brought lending to a halt three years ago and generated a recession.

The U.S. bank sector index, down nearly 30 percent since the 2011 market high hit on April 29, posted strong gains. The index finished the session up 4.1 percent.

Morgan Stanley shares gained 12.3 percent to $14.01 but are still off 48.5 percent this year. Shares of Bank of America rose 4.2 percent Tuesday to $5.76.

About 13.1 billion shares traded on the New York Stock Exchange, NYSE Amex and Nasdaq -- more than 60 percent above the daily average so far this year of 8 billion shares.

Advancing stocks outnumbered declining ones on the NYSE by a ratio of about 3 to 2, while on the Nasdaq, about three stocks rose for every one that fell.

 

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Stocks rise on hopes for bank support steps


(Reuters) - World stocks rose for a second day Thursday while government bonds fell as expectations grew policymakers would take steps to support European banks, under threat from the impact of a possible Greek default.

German Chancellor Angela Merkel said Wednesday Berlin was ready to recapitalize its banks if needed, adding to pledges by European finance ministers to safeguard banks in the face of mounting concerns about a Greek default [ID:nL5E7L53W7]

The Financial Times reported Thursday that the European Banking Authority, mid-way through a two-day crisis meeting to assess the potential hit of mass sovereign restructurings, is re-examining the strength of the region's banks.

Investors are focusing on euro zone and UK central bank policy meetings for hints on future monetary easing.

A majority of analysts predict the European Central Bank will refrain at least until next month from cutting interest rates and the Bank of England from pumping more money into the economy. But there are those in both markets who see a risk of such moves already Thursday and the ECB is expected to take further steps to help banks.

Hopes for near-term policy measures -- both from politicians and central banks -- are helping investors to take a break from a sell-off triggered by growing concerns about the damage to the banks from any Greek sovereign default.

"Significant talk of bank recapitalization is certainly the driving factor behind positive sentiment," said Keith Bowman, equity analyst at Hargreaves Lansdown.

"But there is still a lot of uncertainty. Speed is of the essence and that would make a difference. If we see another week or so go by without some significant step forward, that is likely to inject nerves back into the markets."

The MSCI world equity index .MIWD00000PUS was up 0.9 percent, having hit a 15-month low earlier this week. The index is around 5.6 percent above this low.

U.S. stock markets also finished higher Wednesday. VIX index .VIX, Wall Street's fear gauge, fell 7 percent to 37.81 Wednesday, down sharply from this week's peak of 46.88, lending support to investors cautiously putting some risk back on in the near-term.

European stocks .FTEU3 rose 0.4 percent and emerging stocks .MSCIEF added 2.2 percent.

U.S. crude oil gained a quarter percent to $79.91 a barrel.

Bund futures fell slightly on the day.

Spain will sell up to 4.5 billion euros of bonds, with comments from the IMF that it may buy peripheral bonds seen helping, although the fund later stepped back from a firm pledge to do this.

The dollar .DXY against a basket of major currencies

The euro fell 0.2 percent to $1.3324.

"Inflation fears may not allow the ECB to cut rates, but we're bound to see some form of support for Europe's banking system -- and that should help the euro rise," said Katsunori Kitakura, chief dealer at Chuo Mitsui Trust and Banking in Tokyo.

 

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Euro steady, market holds breath before ECB

(Reuters) - The euro held steady against the dollar on Thursday as uncertainty gripped markets before an ECB meeting that could see rates cut or the rebirth of long-term lending to banks, while Europe's efforts to resolve its debt crisis and solid U.S. data provided tentative support for riskier assets.

The euro, last at $1.3331, maintained most of its overnight gains made after Germany said it would help its own banks if necessary and opened the possibility of using a regional bailout fund to strengthen the euro zone banking system.

Investor focus now shifts squarely to the European Central Bank's monetary policy meeting, whose outcome -- due at 7:45 a.m. EDT -- seems increasingly uncertain.

The ECB has been widely expected to keep rates unchanged at 1.5 percent, but calls for a cut have grown louder amid signs the euro zone economy is deteriorating further and as Greek default fears weigh heavily on confidence in the bloc's banks.

"Inflation fears may not allow the ECB to cut rates, but we're bound to see some form of support for Europe's banking system -- and that should help the euro rise," said Katsunori Kitakura, chief dealer at Chuo Mitsui Trust and Banking.

Kitakura cited measures such as more liquidity, bringing back the ECB's 12-month tender last used at the end of 2009, and, possibly, the resurrection of its program for buying covered bonds.

In a Reuters survey taken last week, 56 out of 75 economists said they expected the ECB to hold rates this time around, though 13 saw a 25 basis-point cut and 7 predicted a 50 basis-point cut.

JP Morgan Chase is forecasting a drastic 50 basis point cut by the ECB saying the bank's move to "balanced" inflation risk at the last meeting came sooner than expected especially since the "inflation hump" is far from over.

"Because the market remains split in its views on what the ECB should do, it's hard to say to what extent any move is already priced in the euro," said a trader for a Japanese bank.

He added that if there is no cut, but additional measures like more liquidity are implemented, the euro could jump to take out stop losses looming between $1.3400 and $1.3450.

A decisive break above that level could pave the way for a correction toward $1.3680 -- the 38.2 percent retracement of the $1.4550-$1.3145 slide.

The single currency has lost about 10 percent against the dollar since that late August peak at $1.4550, but stands well-off a nine-month trough of $1.3145 struck this week.

WAITING FOR SOLUTION

European finance ministers agreed to safeguard banks, many of which could face heavy losses if a planned second bailout package for Greece does not go ahead, after France and Belgium agreed to bail out the debt crisis' first banking casualty, Dexia.

The countries are expecting to finalize the rescue of the troubled lender, but disagreements remain over details of the plan as the two countries try to defend their respective national interests.

"The crisis is far from over and I'm still negative on the euro looking beyond the ECB," said Minori Uchida, senior analyst at the Bank of Tokyo-Mitsubishi UFJ, adding that the currency may eventually drift below $1.30 in the coming days.

The Netherlands votes on widening the role of the EFSF euro zone bailout fund, as agreed in July, after Malta delayed its ratification of the facility, while Slovakia -- the last country to vote on the issue next week -- is bitterly divided over it.

"They are voting over it, but these measures are already seen as not satisfactory and the wholistic structural solution is still far away," said Uchida.

The British pound shed 0.3 percent to $1.5425 as the Bank of England was due to meet on Thursday amid talk it may open the way for more quantitative easing.

The single currency hovered around 1.2318 Swiss francs, having hit its highest since May on Wednesday.

With markets highly concerned about the threat of a systemic shock in Europe, they barely took notice of another round of better-than-expected U.S. data showing the economy is still growing, albeit slowly.

The recent flow of data suggests fears of recession in the U.S. and a hard landing in China are possibly overdone. A good number from Friday's U.S. non-farm payrolls could set the stage for a rally in risk assets.

The dollar index came off a nine-month high of 79.838 earlier in the week to last trade at 79.028. It was steady against the yen at 76.74, off a three-week peak of 77.26 struck on Monday.

 

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Euro rises on Barroso comments, ECB could support

Barroso comments on recapitalising banks push euro to session high

* Rates seen on hold, liquidity measures likely from ECB

* Euro spikes versus Swiss franc, traders cite media report



LONDON, Oct 6 (Reuters) - The euro climbed versus the dollar on Thursday after a top euro zone official said policymakers are proposing coordinated action to recapitalise banks, raising expectations the region's banking sector would be ringfenced from the Greek debt crisis.

The euro was last up 0.3 percent on the day versus the dollar, near a session high of $1.3397. It jumped sharply following European Commission President Jose Manuel Barroso comments, and stops were cited above $1.3420.

Investors were also focused on the European Central Bank meeting where policymakers are expected to provide longer-term funding to banks and keep interest rates on hold.

But there was some speculation of a rate cut and that uncertainty meant some investors were more likely to go into the announcement at 1145 GMT with positions squared.

Some market players were reluctant to initiate fresh positions ahead of ECB President Jean-Claude Trichet's last policy meeting. He could pave the way for a cut before year-end, even if rates are kept on hold at 1.5 percent today.

"We expect there will be no rate cut today which should be some kind of support for the euro as long as the market does not come to the conclusion the ECB is behind the curve and not taking action quickly enough," said Lutz Karpowitz, currency analyst at Commerzbank.

Calls for a cut have grown louder amid signs the euro zone economy is deteriorating further and as Greek default fears weigh heavily on confidence in the bloc's banks.

In a Reuters survey taken last week, 56 out of 75 economists said they expected the ECB to hold rates this time around, though 13 saw a 25 basis-point cut and 7 predicted a 50 basis-point cut.

Analysts said other measures to support Europe's banking system could include more liquidity, bringing back the ECB's 12-month tender last used at the end of 2009, and possibly the resurrection of its programme for buying covered bonds.

A trader at a Japanese bank said if there was no cut, but additional measures like more liquidity are flagged, the euro could rise, taking out stop losses between $1.3400 and $1.3450.

A decisive break above that level could pave the way for a correction towards $1.3680 -- the 38.2 percent retracement of the late August to early October slide from $1.4550 to $1.3145, a nine-month trough struck this week.

WAITING FOR SOLUTION

Optimism that Germany was taking steps to safeguard the financial sector and improved U.S. economic data provided some support for the single currency after a volatile week in which the French and Belgian governments pledged to rescue troubled bank Dexia .

European finance ministers have agreed to safeguard banks, which could face heavy losses if a planned second bailout package for Greece does not go ahead, but analysts said event risk for the euro remained high.

"The crisis is far from over and I'm still negative on the euro looking beyond the ECB," said Minori Uchida, senior analyst at the Bank of Tokyo-Mitsubishi UFJ, adding that the currency may eventually drift below $1.30 in the coming days.

The single currency jumped to a four-month high of 1.2430 Swiss francs . Traders cited media reports quoting a senior Swiss official as saying a higher exchange rate floor in euro/Swiss would be better for the economy.

Sterling fell 0.2 percent versus the dollar to $1.5438 ahead of a Bank of England rate decision, also on Thursday, amid talk policymakers may open the way for more quantitative easing.

Once ECB and BoE rate decisions are out, market attention is likely to focus on the U.S. economy. A good number from Friday's U.S. non-farm payrolls could set the stage for a rally in risk assets.

The dollar index came off a nine-month high of 79.838 earlier in the week to last trade at 79.055. The greenback was steady against the yen at 76.71 , off a three-week peak of 77.26 struck on Monday.

 

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World stocks keep firm tone after BoE, eyes on Trichet

(Reuters) - World stocks kept a firmer tone on Thursday after the Bank of England surprised the market by launching a fresh round of monetary easing this month, before cutting gains as the European Central Bank left interest rates on hold.

The euro hit the day's low and German government bonds rose after the ECB held interest rates at 1.5 percent, disappointing some who had expected a cut in borrowing costs this month.

Such expectations grew after the Bank of England pledged to buy a bigger-than-expected 75 billion pounds in assets to bolster the UK economy -- a move that pushed sterling to a 14-month low against the dollar.

Investors are now focusing on ECB President Jean-Claude Trichet's news conference at 1230 GMT -- his last, and at which he is expected to announce a set of fresh liquidity measures to help banks.

Growing hopes that policymakers would take coordinated steps to support European banks, under threat from the impact of a possible Greek debt default, kept the underlying tone positive for risky assets.

European Commission President Jose Manuel Barroso proposed a coordinated recapitalization of banks to restore confidence, while the European Banking Authority said it was examining the resilience of lenders' capital positions.

Optimism over near-term policy measures -- both from politicians and central banks -- are helping investors to take a break from a sell-off triggered by growing concerns about the damage to the banks from any Greek sovereign default.

"It's a good injection of capital. We now just need to see a coordinated effort from the rest of Europe to sort out the recapitalization of European banks and it should form a decent base to move forward," said IG Index sales trader Yusuf Heusen.

"It takes away quite lot of risk. This is positive for the market."

The MSCI world equity index .MIWD00000PUS rose 1 percent, off the day's highs, having hit a 15-month low earlier this week. The index is now around 6 percent above that point.

U.S. stock futures were up 0.1 percent, pointing to a slightly higher open on Wall Street.

European stocks .FTEU3 rose 1 percent and emerging stocks .MSCIEF added 2.6 percent.

The dollar .DXY rose 0.3 percent against a basket of major currencies. The euro fell 0.5 percent to $1.3264.

"The ECB is now likely to prepare an interest rate cut within the next four months, by March at the latest," said Berenberg Bank economist Holger Schmieding.

Sterling hit a 14-month low of $1.5270 after the BoE announcement.

Bund futures erased earlier losses to rise 17 ticks on the day.

The cost of insuring peripheral euro zone debt against default fell earlier. Five-year credit default swaps on Italian government debt fell 18 basis points to 450 bps, according to data monitor Markit.

Equivalent CDS prices fell for Spain, Portugal and Belgium.

U.S. crude oil gained 0.7 percent to $80.28 a barrel.

 

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Wall Street extends rally after payrolls data

(Reuters) - Stocks opened higher, rising for a fourth day on Friday after stronger-than-expected payrolls data suggested the economy may avoid another recession.

The Dow Jones industrial average .DJI gained 80.19 points, or 0.72 percent, to 11,203.52. The S&P 500 .SPX rose 4.50 points, or 0.39 percent, to 1,169.47. The Nasdaq Composite .IXIC added 0.71 points, or 0.03 percent, to 2,507.53.

 

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Exclusive: Gold to stay strong, top performing funds say

(Reuters) - Gold will stay strong due to a lack of alternative havens for investors operating in a slowing global economy, top performing commodity fund managers told Reuters after taking a defensive approach and going into cash during September's gold sell off.

"We consider the current weakness in gold as temporary and also the slump in commodity prices should come to an end soon," said Kurt Hug, an investment adviser for the Antares Precious Metals Fund.

The fund came third in the Lipper Global commodity sector rankings in the third quarter of 2011 by keeping a high percentage of "strategic liquidity" in Swiss francs in anticipation of "a severe, but short-lived commodity shock."

Fund research and analysis organization Lipper, a Thomson Reuters company, covers more than 108,000 funds. The commodity segment covers funds investing in both commodities futures and natural resources-related equities.

Reuters approached the best performers to ask for details of their winning strategies.

Also staying defensive was Paula Bujia, manager of the $330 million Schroders Gold and Precious Metals Fund, which came fourth. Steering clear of precious metals other than gold, and investing in mid-cap gold miners rather than seniors and juniors, helped her outperform, she said.

The gold price has risen by nearly 17 percent so far this year, having hit a record $1,920.20 an ounce in early September before correcting sharply downwards. It was around $1,655 an ounce on Friday.

Bujia said gold's correction from its peak was still only half of its declines in 2008 and she would wait for more selling of gold, particularly in exchange traded funds (ETF), before she felt able to resume aggressive buying of other precious metals and of mining equities.

"In this environment, it's very difficult to believe that other precious metals could do well," she said. "Until we see more capitulation in gold and more ETF outflows it is not the right time to turn aggressive."

Bujia is sticking with her gold tilt, saying the recent correction has been meaningful, but gold is not yet at a capitulation point. She believes gold may trade sideways for another couple of months, or come off another 10 percent.

Precious metals funds dominated the upper end of the Lipper league table of over 130 funds in the third quarter.

The LGT Dynamic Gold Fund came first, returning 9.36 percent over a quarter which saw the commodity index S&P GSCI fall 11.69 percent.

Peter Sigg, head of investment management for commodities at LGT Capital Management, said the $73 million fund had been invested between 96 percent and 115 percent over the quarter.

"We have been slightly leveraged during the move to (gold at) $1,900 (an ounce) and we were slightly invested in cash during the sell-off in September," he said.

TESTING QUARTER

Reuters' analysis of the Lipper data showed that the third quarter was testing for all commodity managers, with the average actively-managed fund in the Lipper Global commodity sector down 8.34 percent.

S&P said equity market weakness and U.S. dollar strength had culminated in the worst quarter for the S&P GSCI since the fourth quarter of 2008.

Energy prices came under pressure due to fears of slowing demand and even precious metals did not escape, with profit-taking overwhelming the market in September. The S&P Precious Metals index ended September down more than 14 percent.

"Our conclusion of the last month is that gold is not immune in a very negative global commodity and equity market environment, which was similar to the autumn 2008 experience," said LGT's Sigg.

But, like Bujia and Hug, he remains relatively bullish on gold, saying that whilst the recent sell off had washed out the CFTC net long positions held by professional investors, individual investors had only marginally reduced their physically-backed gold ETF holdings.

Bujia also noted that an equity exposure of just 20-25 percent may have protected her from stock market losses, helping her outperform those with higher equity tilts.

There is still a big gap between the performance of gold futures and gold mining stocks, which she said is partly because the miners are unable to decouple from overall equity markets.

"When you have a fear trade, gold can perform well but not the equities," she said.

She believes gold equities offer great value, with record earnings and cash levels and increasing dividends, but these fundamentals will not come good until the stock market calms down.

Bujia remains cautious, focusing on mid-caps such as Randgold Resources, Yamana Gold and Eldorado which she said have good production growth.

Among the more diversified funds, Neuberger Berman's $100 million Enhanced Commodities fund, managed by Gresham Investment Management, also acquitted itself well largely due to a fairly high exposure to precious metals.

Douglas Hepworth, director of research at Gresham, added that a tilt to crude oil over natural gas, and to meats over grains and softs, had helped.

"Macroeconomic factors have been the drivers of the entire commodities asset class for several months, and nothing there looks particularly encouraging," he said.

The worst-placed funds were the BI Basic Long Commodity Fund, which invests in natural resource equities and futures and cannot go short, and the BBGI Commodities fund which invests in a mix of commodity ETFs and commodity equities.

 

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Fitch cuts Italy, Spain ratings; outlook negative

(Reuters) - Fitch Ratings on Friday cut Italy's sovereign credit rating by one notch and Spain's by two, citing a worsening of the euro zone debt crisis and a risk of fiscal slippage in both countries.

The cuts underline the growing vulnerability of the euro zone, which is already struggling to contain the turmoil in the far smaller Greek economy and which would be overwhelmed by a crisis of a similar scale in Italy.

Fitch cut Italy's rating to A+ from AA- and lowered Spain to AA- from AA+.

It kept both countries, respectively the third and fourth largest in the euro zone, on a negative outlook suggesting further downgrades could come in future.

Italy and Spain are embroiled in the region's debt crisis and are reliant on the European Central Bank to buy their government bonds to prevent yields rising to unsustainable levels.

"A credible and comprehensive solution to the (euro zone) crisis is politically and technically complex and will take time to put in place," the ratings agency said in separate statements explaining its downgrades of both countries.

Fitch's rating for Italy is now at the same level as it rates Malta and Slovakia.

After remaining on the fringes of the euro zone crisis until the summer, Italian benchmark 10-year bonds now yield around 5.5 percent, having overtaken Spain's yield of around 5 percent in a sign of markets' increasing unease about Italy.

ECB HELP

Both yields would be higher but for the ECB, which was cited by traders as supporting both countries' bonds in the market again on Friday.

Fitch, the third ratings agency to downgrade Italy in recent weeks following similar moves by Standard & Poor's and Moody's, said market confidence in Italy had been eroded by the government's initially hesitant response to the rise in yields.

The euro fell against the dollar and the yen following the downgrades and U.S. shares fell, but analysts said the move on Italy was largely discounted.

"Fitch's motivations do not differ much from what the other two agencies said. I don't foresee big moves in the markets as a reaction," said BNP Paribas strategist Alessandro Tentori.

ING analyst Paolo Pizzoli said the downgrade should be seen as further pressure on the government to adopt growth enhancing structural reforms which were lacking from a recently approved austerity plan aimed at balancing the budget in 2013.

"There has been a chorus of appeals from the ECB, the EU and the IMF. They have all asked for structural reforms for growth and this (Fitch) is another element in that direction."

Silvio Berlusconi's scandal hit government plans to present a package of measures to help growth later this month but his coalition is so weak and divided that few analysts have any confidence in its ability to adopt the deep reforms required.

Spain's Socialist government has slashed its budget deficit with a series of austerity reforms, although much of the country's debt lies in its autonomous regions which are still implementing cuts.

"LIKE A HERD"

"We respect the decision but we don't agree with it," said a spokesman at Spain's economy ministry.

Italian officials sought to make light of the downgrade. Foreign Minister Franco Frattini said it was fully expected and added dismissively that "markets don't care much about the role of Fitch, Moody's and company."

Fabrizio Saccomanni, deputy governor of the Bank of Italy, said ratings agencies "move like a herd, they all go in the same direction and at the same time." Fitch's move "doesn't change the picture," he added.

Berlusconi flew to Russia on Friday to celebrate Prime Minister Vladimir Putin's birthday, but a statement from his office said Fitch's comments were more positive than the other agencies', and Italy's fiscal efforts were widely appreciated.

Fitch said both Spain and Italy were solvent but pointed to their weakening economic growth prospects and urged Italy, one of the world's most sluggish economies for over a decade, to make "a more radical and sustained economic reform effort."

 

[EmpireGlobalfx]

Merkel, Sarkozy promise new crisis package, offer no details


(Reuters) - The leaders of Germany and France promised Sunday to unveil a new comprehensive package for solving the euro zone's debt crisis by the end of the month, but offered no details and papered over differences on how to shore up European banks.

German Chancellor Angela Merkel and French President Nicolas Sarkozy said after talks in Berlin their goal was to come up with a sustainable answer for Greece's woes, agree how to recapitalize banks and present a plan for accelerating economic coordination in the euro zone by a G20 summit in Cannes on November 3-4.

"We are very conscious that France and Germany have a particular responsibility for stabilizing the euro," Sarkozy told a joint news conference.

"We need to deliver a response that is sustainable and comprehensive. We have decided to provide this response by the end of the month because Europe must solve its problems by the G20 summit in Cannes."

Sarkozy will host the Cannes summit and is keen to deliver a big success that might bolster his flagging chances of winning re-election in a presidential vote next year.

But even if the two leaders can agree on a way forward, the experience of the past two years has shown that they could struggle to get the other 15 countries in the euro zone on board in a timely fashion.

Pressed by reporters, both leaders refused repeatedly to discuss details of their plan. Sarkozy said he and Merkel were in "total agreement" on the recapitalization of European banks, even though officials in Paris and Berlin have made clear in recent days that the countries are far apart.

The two euro zone heavyweights have come under pressure worldwide to resolve a crisis which is roiling markets.

U.S. President Barack Obama Thursday urged Europe to "act fast," calling the common currency bloc's crisis the largest obstacle to a recovery in the United States. World Bank President Robert Zoellick told German magazine Wirtschaftswoche magazine that there was a "total lack" of vision in Europe and Germany in particular needed to show more leadership.

Following the news conference, the leaders of the euro zone's two biggest economies were due to hold a working dinner at the Chancellery.

BANK IMPLOSION

The implosion of Belgian lender Dexia, the first bank to fall victim to the two-year-old euro zone debt crisis, has added a sense of urgency to the talks.

The prime ministers of France and Belgium and the finance minister of Luxembourg agreed a rescue plan for Dexia Sunday ahead of the meeting in Berlin. [ID:nL5E7L903A]

Other French banks have come under intense pressure because of their exposure to Greece and other weak countries on Europe's southern periphery.

BNP Paribas and Societe Generale denied a report Sunday that they could seek to raise a combined 11 billion euros as part of a broader European recapitalization plan.

Ireland estimated at the weekend that European banks may need more than 100 billion euros ($135 billion) to withstand the debt crisis. The International Monetary Fund (IMF) has said they need double that figure.

Paris wants to tap the euro zone's 440-billion-euro European Financial Stability Facility (EFSF) to shore up its banks, worried that pouring its own money into them could compromise its coveted triple-A credit rating.

Officials in Berlin have made clear that they believe the fund should be used only as a last resort, when euro zone member states don't have the means to support their banks on their own.

Another area of contention is how to use a new, enhanced EFSF to buy sovereign debt -- an issue that would become particularly crucial if Greece failed to secure its next tranche of aid.

Greece is expected to run out of cash as soon as mid-November. Inspectors from the European Commission, the IMF and the European Central Bank -- the so-called "troika" -- are currently assessing whether Athens has fulfilled the criteria for more aid.

"We are working closely with the troika which is currently in Greece and we expect them to present a sustainable solution for Greece that keeps it in the euro zone and also ensures the financial stability of the euro zone," Merkel said.

European Commission head Jose Manuel Barroso told German newspaper Bild at the weekend that a Greek default would have unforeseeable consequences and may cause the crisis to spread.

"This is new territory for us and we are discussing solutions which have not really been tested before," he said.

Merkel said France and Germany were working on steps to boost economic coordination in the euro zone and said their proposals would necessitate changes to the bloc's Lisbon Treaty.

Sarkozy made clear, however, that Europe needed to "take decisions now," rather than announce new long-term plans that would take time to implement. Changing the treaty could take several years.

"Comprehensive, sustainable and rapid responses before the end of the month. That is the result of this Franco-German meeting," he said.

 

[EmpireGlobalfx]

Euro edges up on EU pledge, markets cautious


* Euro up 1/4 cent on Germany, France pledge to recap banks

* Thin trading expected due to Japan holiday

* Key China data due this week



SYDNEY, Oct 10 (Reuters) - The euro inched up in Asia on Monday after leaders of Germany and France promised a new comprehensive plan to recapitalise euro zone banks by the end of the month, though markets remain wary as they have been disappointed many times before.

The euro eked out a gain of around a quarter of a cent to $1.3390 , from $1.3375 on Friday when it had come under pressure following ratings downgrades of Italy and Spain.

Hourly resistance is found at $1.3423 and a break above should ease the downward pressure, according to a trader. Against the yen, the euro eased to 102.84 yen , off a one-week peak of 103.85 on Friday.

The meeting between German Chancellor Angela Merkel and French President Nicolas Sarkozy offered no details, but drew a pledge to do what is necessary to shore up banks, settle the Greek crisis and help growth in Europe, giving a gentle boost to risk sentiment. .

Markets, however, are cautious as EU leaders have promised to resolve the debt crisis before and that could keep the common currency within Friday's range of $1.3360-$1.3525. Trading is expected to be thin with Japan off while the U.S. celebrates Columbus Day.

France, Belgium and Luxembourg agreed a rescue plan for Dexia, while other French banks have come under intense pressure because of their exposure to Greece and other weak European countries. BNP Paribas and Societe Generale denied they would seek to raise a combined 11 billion euros as part of a broader European recapitalisation plan.

Adding to pain, the next aid tranche for Greece is far from being a done deal with the IMF indicating the nation is at a crossroads and will need to implement "much stricter structural reforms" than seen so far.

Athens could run out of cash as soon as mid-November without the new 8 billion euro aid installment, increasing the risk of a default that would drag the region deeper into a debt crisis already shaking financial markets worldwide.

The dollar index was steady at 78.718, having fallen to a 9-day trough of 78.061 on Friday, despite better-than-expected U.S. payrolls. The dollar, at 76.71 against the yen, remained stuck in the 77.29-76.09 range of the past month.

This week's focus will be on key China data with trade and CPI due Thursday and Friday. Strong trade numbers and a lower CPI would be the best combination to ease concerns of a hard landing and boost risk sentiment.

 

[EmpireGlobalfx]

Euro rises after Germany, France promise crisis plan

(Reuters) - The euro jumped to its highest in over a week against the yen and the dollar on Monday after Germany and France pledged to deliver a plan soon to protect banks and the euro region from its sovereign debt crisis.

The single currency was on track for its best daily rise against the greenback since July 2010, helped by buying to exit short positions and on unexpectedly strong industrial output data from France and Italy.

After their weekend meeting, German Chancellor Angela Merkel and French President Nicolas Sarkozy promised to present a plan before a G20 summit in early November to shore up euro zone banks, settle the Greek debt crisis and help growth in Europe.

"Certainly Merkel and Sarkozy pledging a plan to support European banks by November helped. So we're seeing risk coming back on and that's helping the euro and this rally could go on given the extent of short positioning in the market," said Marc Chandler, global head of currency strategy at Brown Brothers Harriman in New York.

The euro climbed 2 percent to $1.3648, above a nine-month low of $1.3145 set last week on trading platform EBS, as investors closed out their short positions initiated earlier.

It was also up 2 percent on the day versus the yen after touching 100.74 yen a week ago, which was the lowest since May 2001, according to Reuters data.

Investors had piled into the U.S. and Japanese currencies in a safe-haven move on fears over the euro zone debt crisis.

The euro's rebound could fade if no comprehensive plan emerges in coming weeks, with the risk of renewed bickering between euro zone policymakers seen as a threat to a decision.

"But at the end of the day Greece still has problems," Chandler said.

Officials of the European Union, International Monetary Fund and the European Central Bank met with Greece's finance minister on Monday to complete talks on 8 billion euros worth of aid so Athens could avert a default in November.

Stronger-than-expected French and Italian output in August reduced fears of sharp economic pullbacks in euro zone's second- and third-biggest economies. That helped propel the euro higher on the day.

Trading volume was muted due to holidays in Canada and United States.

SLOVAKIA VOTE

The pledge from Merkel and Sarkozy, albeit short on details, boosted the euro and other currencies perceived as risky.

Improved sentiment led to a selling of the U.S. dollar against the Swiss franc and the Canadian and Australian dollars.

Traders will now focus on voting in Slovakia and Malta to ratify changes to the European Financial Stability Facility, a 440 billion euro bailout fund. They are the remaining euro zone countries still to approve the changes. Any delay on passing the legislation could affect sentiment toward the euro.

Adding to traders' concerns for the euro, the next aid tranche for Greece is far from a done deal. The IMF said Greece is at a crossroads and would need to implement "much stricter structural reforms" than seen so far.

"Short positions against the euro have been stopped out, which is why the euro has bounced," said Adam Myers, senior currency strategist at Credit Agricole.

The euro slipped against the Swiss franc after touching a 4-1/2 month high at 1.24358 francs on EBS. It had risen on lingering speculation Swiss authorities could raise the floor on euro/Swiss franc from 1.20 francs currently.

The dollar was little changed against the yen at 76.65 yen while it fell 2.6 percent against the Swiss franc at 0.9028 francs.

The dollar index declined 1.6 percent against a basket of currencies at 77.47.

 

[EmpireGlobalfx]

Euro holds huge gains on EU optimism


(Reuters) - The euro held huge gains in Asia on Tuesday after hopes for a new EU debt plan sparked a correction in a deeply bearish market, though sentiment remains fragile as European leaders have disappointed many times before.

The euro rose three cents to a peak of $1.3698 on Monday, its biggest daily gain versus the U.S. dollar in 15 months. It last traded at $1.3627. It also flew to 104.99 yen, the highest in three weeks, showing a rise of 1.65 percent, before steadying at 104.46.

The rally followed an Franco-German pledge on Sunday that they would do what is necessary to shore up banks, settle the Greek crisis and help growth in Europe.

Commodities, stocks and high yielding currencies joined the "risk on" wave with copper close to 13 percent higher in just one week. The Australian dollar enjoyed the biggest one-day rally in over a year, surging 2.3 percent after briefly touching parity at $1.0016. It was last at $0.9980.

The revival in risk flushed out long positions in the U.S. dollar across the board, including the Swissy. It collapsed 2.5 percent to 0.9032 francs. The dollar index fell sharply to near three-week lows at 77.561, down 1.48 percent.

Major resistance for the euro is found at $1.3680-90, the 38.2 percent Fibonacci retracement of the $1.4550/$1.3145 move and the September 28 trend high. A clear break above $1.3700 targets $1.3845.

Dealers were surprised by the scale of the reaction given EU leaders have disappointed many times before.

"Unfortunately, Europe has a history of delivering far too little far too late," said Robert Rennie, chief currency strategist at Westpac.

"Europe doesn't have the political will, the cohesion and the sense of what needs to be done."

He said the rally was temporary and would be looking to sell the euro into strength which means in the $1.365-$1.385 range.

Investors were looking for an excuse to price out bad news that have been gripping markets since September. While there is little doubt the problems in Europe will resurface at some stage, recent economic data was better than feared, countering the danger of a global recession.

Traders will focus on voting in Slovakia on Tuesday, the only country among the bloc's 17 members that has yet to ratify changes to the euro zone's 440-billion-euro bailout fund. Any delay on passing the legislation could affect sentiment toward the euro. Malta gave its backing earlier on the day.

The dollar remained stuck at 76.65 yen, within the tight 77.29-76.09 range of the past month.

UK industrial production and minutes of the FOMC meeting will be released later on Tuesday.

This week's focus will be on key China data with trade and CPI due Thursday and Friday. Strong trade numbers and a lower CPI would be the best combination to ease concerns of a hard landing and boost risk sentiment.

 

[EmpireGlobalfx]

Wall Street holds steady, ready for earnings

(Reuters) - U.S. stocks took a breather on Tuesday after the best five days for the S&P 500 in more than two years as investors look to earnings for a reason to extend the market's rebound.

Stocks wavered between gains and losses throughout the session. Markets have been reacting to news from the euro zone where officials are trying to contain a debt crisis that threatens large European banks and global financial stability.

The focus now will shift to earnings season, which begins with Alcoa Inc's (AA.N) report after the close of trading. U.S. economic indicators have shown signs of slow growth and investors are waiting to see how this has affected company profits.

"Earnings are always important but even more so here after several quarters of solid earnings across many industry sectors. I think investors are going to want to see that continuing or solidifying itself. Otherwise you could see further selloffs," said Michael Cuggino, president and portfolio manager of Permanent Portfolio Funds in San Francisco.

Materials stocks fell throughout the third quarter on worries about global growth slowing. Alcoa gained 2 percent to $10.30 in regular trading but is down 35 percent since the beginning of the third quarter.

After the market closed, Alcoa said third-quarter profit jumped from a year ago, but earnings and revenue slipped from the second quarter as economic growth slowed from the first half of this year.

A delay in a key vote by Slovakia on expanding the euro zone rescue fund has also kept investors cautious.

With 16 of 17 euro zone states having ratified a pact to boost the size and powers of the European Financial Stability Facility bailout fund, all eyes turned to Slovakia. The country's finance minister said the country was expected to approve the changes this week.

Any more delays in coming up with a plan intended to head off crisis could give the market an excuse to sell. Stocks have reached the top of a recent range, hitting resistance around 1,195 on the S&P 500. Another area of resistance is seen at 1,215 on the S&P 500, said Larry Peruzzi, senior equity trader at Cabrera Capital Markets Inc in Boston.

"The bounce we've had is kind of getting us close to resistance levels ... we're looking to see if it can break through," he said.

Apple (AAPL.O), which gained 3 percent to $400.29, lifted the Nasdaq and S&P 500.

The Dow Jones industrial average markets/index?symbol=us%21dji">.DJI was down 16.88 points, or 0.15 percent, at 11,416.30. The Standard & Poor's 500 Index .SPX was up 0.65 point, or 0.05 percent, at 1,195.54. The Nasdaq Composite Index .IXIC was up 16.98 points, or 0.66 percent, at 2,583.03.

After the close, Alcoa, the largest U.S. aluminum company, dipped slightly $10.03 after it posted results.

In the past week, analysts have lowered their consensus earnings estimates for Alcoa, citing a precipitous drop in metals prices in recent months sparked by global economic concerns.

About 6.90 billion shares were traded on the New York Stock Exchange, NYSE Amex and Nasdaq for the day, well below the year's daily average so far of 8.03 billion.

Advancing stocks outnumbered declining ones on the NYSE by a ratio of roughly 16 to 13, while on the Nasdaq, advancers beat decliners by about 3 to 2.

 

[EmpireGlobalfx]

Italian debt sold, China hits equities

(Reuters) - Italy's sale of 6.2 billion euros in bonds on Thursday eased investors' immediate concerns about its funding in the euro zone debt crisis, but stock markets were hit by weaker Chinese trade data.

European shares fell 0.9 percent after recent gains and Wall Street looked set to open lower following data showing China's trade surplus narrowed for a second straight month in September, with both imports and exports lower than expected.

It reflected global economic weakness, which along with the euro zone debt crisis has kept investors avoiding aggressive risk taking over the past months.

In Europe, there appeared some traction to the idea that policymakers were working on a cogent plan to solve the debt crisis, or at least reduce its threat.

Jose Manuel Barroso, president of the European Commission, outlined a broad plan on Wednesday to tackle the euro zone's two-year debt crisis, fuelling optimism.

"Maybe the political decisions are finally coming through," said Justin Urquhart Stewart, director at Seven Investment Management.

The sale of Italian bonds went relatively smoothly, although a lot of the buying may have been prompted by cheaper prices ahead of the sale.

Traders said the European Central Bank began buying Italian bonds focused around the 10-year sector shortly after the release of auction results.

Earlier 10-year yields rose to 5.87 percent, their highest since the central bank began purchasing Italian debt in August as part of an effort to cap the country's rising cost of borrowing. The 10-year yield was last at 5.80 percent, 6 basis points higher on the day.

STOCKS MIXED

On stock markets, the FTSEurofirst 300 finance/markets/index?symbol=gb%21FTPP">.FTEU3 fell but was still heading for its third straight week of gains, something it has not achieved since March/April.

World stocks as measured by MSCI .MIWD00000PUS were down a bit.

Earlier, Japan's Nikkei .N225 rose nearly 1 percent, catching up with U.S. and European gains from Wednesday.

The euro fell broadly, pulling back from a one-month high versus the dollar after the European Central Bank warned about the impact on the currency and the region's banks of involving bondholders in euro zone bailouts.

The euro hit a session low of $1.3711 after an article in the ECB's monthly report said forcing private bondholders to accept losses on euro zone sovereign debt could damage the euro's reputation, prompting traders to take profits on a rally which has been built on investors backing off bets for further euro weakness rather than betting on future gains.

The euro had rallied earlier in the week, climbing to $1.3834 on Wednesday after German Chancellor Angela Merkel and French President Nicolas Sarkozy late last week said they would announce a plan to solve the euro zone debt crisis by the end of the month.

 

[EmpireGlobalfx]

Italian debt sold, China hits equities

(Reuters) - Italy's sale of 6.2 billion euros in bonds on Thursday eased investors' immediate concerns about its funding in the euro zone debt crisis, but stock markets were hit by weaker Chinese trade data.

European shares fell 0.9 percent after recent gains and Wall Street looked set to open lower following data showing China's trade surplus narrowed for a second straight month in September, with both imports and exports lower than expected.

It reflected global economic weakness, which along with the euro zone debt crisis has kept investors avoiding aggressive risk taking over the past months.

In Europe, there appeared some traction to the idea that policymakers were working on a cogent plan to solve the debt crisis, or at least reduce its threat.

Jose Manuel Barroso, president of the European Commission, outlined a broad plan on Wednesday to tackle the euro zone's two-year debt crisis, fuelling optimism.

"Maybe the political decisions are finally coming through," said Justin Urquhart Stewart, director at Seven Investment Management.

The sale of Italian bonds went relatively smoothly, although a lot of the buying may have been prompted by cheaper prices ahead of the sale.

Traders said the European Central Bank began buying Italian bonds focused around the 10-year sector shortly after the release of auction results.

Earlier 10-year yields rose to 5.87 percent, their highest since the central bank began purchasing Italian debt in August as part of an effort to cap the country's rising cost of borrowing. The 10-year yield was last at 5.80 percent, 6 basis points higher on the day.

STOCKS MIXED

On stock markets, the FTSEurofirst 300 finance/markets/index?symbol=gb%21FTPP">.FTEU3 fell but was still heading for its third straight week of gains, something it has not achieved since March/April.

World stocks as measured by MSCI .MIWD00000PUS were down a bit.

Earlier, Japan's Nikkei .N225 rose nearly 1 percent, catching up with U.S. and European gains from Wednesday.

The euro fell broadly, pulling back from a one-month high versus the dollar after the European Central Bank warned about the impact on the currency and the region's banks of involving bondholders in euro zone bailouts.

The euro hit a session low of $1.3711 after an article in the ECB's monthly report said forcing private bondholders to accept losses on euro zone sovereign debt could damage the euro's reputation, prompting traders to take profits on a rally which has been built on investors backing off bets for further euro weakness rather than betting on future gains.

The euro had rallied earlier in the week, climbing to $1.3834 on Wednesday after German Chancellor Angela Merkel and French President Nicolas Sarkozy late last week said they would announce a plan to solve the euro zone debt crisis by the end of the month.

 

[EmpireGlobalfx]

Global week ahead: Bright spots amidst the gloom

(Reuters) - An improvement in manufacturing, employment and retail sales data in the United States, and mounting signs that Europe will agree on a rescue plan large enough to contain the Greek debt crisis, have lifted some of the gloom overhanging the global economy.

But the gains are highly tentative and policy mistakes in Brussels this week could easily upend the outlook.

Over the past three months, political gridlock in Washington over the U.S. budget deficit and infighting in European capitals resulted in the biggest falls in the prices of risk assets since the collapse of Lehman Brothers in late 2008.

Global stock prices have since stabilized, and in Europe even posted gains over the past week, easing fears that the developed world would drive the global economy off a cliff.

"Despite the dark policy backdrop, not all is bad," said Joachim Fels, head of global economics at Morgan Stanley.

Energy and commodity prices also have fallen sharply, boosting spending power, particularly in the United States where crude oil has tumbled 14 percent since July.

The relaunch of unusual liquidity measures by the Federal Reserve, European Central Bank, and Bank of England has alleviated strains in bank funding and calmed markets, buying politicians some extra time to sort out their fiscal woes.

"Things are looking a little bit brighter out there, but there are still enormous out-sized risks," said Nigel Gault, U.S. chief economist for IHS Global Insight.

Prime among them is Europe. If European Union leaders fail at their summit next weekend to deliver a comprehensive plan to resolve its sovereign debt crisis and recapitalize its banks, market volatility will return with a vengence, analysts warn.

Even the extraordinary steps that central banks have taken to prevent the crisis worsening have brought large risks.

Global liquidity, as measured by foreign exchange reserves and central bank balance sheets, has soared to $18.3 trillion, equal to 30 percent of global GDP, from $10.4 trillion three years ago, Bank of America/Merril Lynch has estimated. This massive monetary policy easing has stirred inflationary fears.

There is only one solution. "Better policy decisions on both sides of the Atlantic are needed to get us out of this fix," said Fels.

Otherwise the negative feedback loop will resume, where bad policy decisions intensify risk aversion and worsen the sovereign debt crisis by destabilizing financial markets, undermining bank solvency, and upending world economic growth.

U.S. AND CHINA

In the United States, there are few signals that lawmakers have the appetite for a medium-term resolution to the budget deficit before November 2012 elections.

The U.S. Senate this week rejected President Barack Obama's $447 billion jobs package after disagreement over how to fund the minor stimulus measure, with two Democrats facing tough re-election joining Republicans.

Senators next week may agree to vote on some piecemeal jobs measures such as extending jobless benefits and cutting payroll taxes.

Joel Prakken, economist at Macroeconomic Advisers in St. Louis, calculates that extending unemployment benefits for the long-term jobless would add 0.25 percent to real GDP growth in 2012, and support 200,000 jobs. Continuing the payroll tax holiday for employees would add 0.50 percent to GDP over the year and raise employment by 600,000, he said.

"It is modest at best," Prakken said.

But combined with recent improvements in auto sales, retail sales in August and September, and better manufacturing and employment reports, the U.S. economy looks on more solid footing than a few months ago, he said.

That would be good news for China, which relies heavily on its exports to the United States and where economic growth is clearly slowing. The question is by how much.

Figures on Tuesday are expected to show China's third-quarter GDP up 9.2 percent from a year earlier, according to a Reuters poll of economists. That would be down only modestly from the second quarter, when China recorded 9.5 percent growth.

A less closely watched indicator, urban investment, may provide a better signal. Last week's disappointing trade figures underscored China's vulnerability to a global slowdown. Domestic growth has cushioned the blow so far, and investment is a big reason why.

The data on Tuesday is expected to show urban investment up 24.8 percent from a year earlier, only slightly below the second quarter's 25 percent rise. If external demand weakens dramatically, economists think China will compensate by ramping up investment, which accounts for the bulk of its GDP.

 

[EmpireGlobalfx]

Euro off 1-mth high as crisis plan optimism ebbs

Euro off 1-mth high after Germany undercuts hope on crisis plan

* Short-covering of euro may ebb, positions seen more square

* Bearish engulfing candlestick may bode ill for euro -trader

* Traders cite talk some offshore funds turning bearish on yen



SINGAPORE, Oct 18 (Reuters) - The euro rose on Tuesday but remained below the previous day's one-month high, having taken a hit after Germany tempered hopes that European leaders would soon come up with a quick, comprehensive solution to the euro zone's debt crisis.

The euro regained some ground after a 1 percent drop the previous day, with market positioning and some technical signals suggesting that its recent short-covering rally may be running out of steam.

German Finance Minister Wolfgang Schaeuble poured cold water on the euro's rally on Monday, saying an Oct. 23 European Union summit would not provide a "definitive solution" to the region's debt crisis.

While some gauges of market positioning suggest speculators may still be short the euro, the amount of their euro bearish bets is likely to have declined over the course of the recent rally, and the euro may now be more vulnerable.

"The rise we saw recently was just a result of markets having gotten ahead of themselves," said Daisuke Karakama, market economist for Mizuho Corporate Bank in Tokyo.

"I think we will start to see it fade," Karakama said, referring to the euro's recent upward momentum. "The euro's outlook from here looks weak," Karakama added.

The euro edged up 0.3 percent from late U.S. trade on Monday to $1.3780 , but remained below a one-month high around $1.3914 hit on Monday on trading platform EBS.

Traders said there were a mixture of buy orders and stop-loss offers in the euro at levels below $1.3750.

Risky assets and the euro have bounced in the past week as investors pared bearish bets after the leaders of Germany and France pledged to unveil a comprehensive package by the end of the month to resolve the euro zone's debt crisis, including an agreement on how to recapitalise banks.

While European leaders may decide on an overall stance to beef up banks' capital at the Oct. 23 EU summit, they will probably opt to decide on specifics at a later date, said Mizuho Corporate Bank's Karakama.

In any event, efforts to recapitalise euro zone banks can carry a cost. If countries in the euro zone were to shoulder the burden their fiscal conditions could worsen, and if money from the euro zone's EFSF (European Financial Stability Facility) rescue fund were to be used, that could rekindle the issue of whether the size of the rescue fund is sufficient, Karakama added.

The Australian dollar edged up 0.4 percent to $1.0218 , supported by short-covering after a 1.7 percent drop the previous day. The Aussie dollar has retreated after hitting a one-month high of $1.0372 on Monday.

A batch of Chinese data were broadly in line with market expectations, confirming that China's economic growth was moderating but not weakening sharply, and had limited impact on the Australian dollar.

The Aussie dollar can be sensitive to shifts in China's economic fundamentals since China is a major buyer of Australia's commodity exports.

BEARISH ENGULFING PATTERN

In a development that could come back to haunt the euro in coming months, Moody's warned on Monday it may slap a negative outlook on France's Aaa credit rating in the next three months if the country fails to make progress on crucial fiscal and economic reforms.

One factor that may bode ill for the euro in the near-term outlook is a bearish engulfing candlestick pattern that appeared on charts on Monday, said Tsutomu Soma, senior manager for Okasan Securities' foreign securities department in Tokyo.

The euro may come under pressure if it drops below last Friday's intraday low near $1.3720, Soma said.

A bearish engulfing candlestick pattern appears on a day when a currency closes below its opening level, after an opposite move the day before. In addition, the gap between the opening and closing levels must be wider than the previous day.

When such a pattern appears after an uptrend, it can be a sign that the trend may start to reverse.

The dollar held steady against the yen at 76.84 , having hit a one-month high near 77.48 yen last week.

"We've heard a number of funds and a number of investors talking about going long dollar/yen," said Rob Ryan, FX strategist at BNP Paribas in Singapore.

Still, it is unclear what types of factors may push dollar/yen higher at this stage, Ryan said. For example, it seems unlikely that Japanese institutional investors will turn aggressive about taking on foreign exchange risk when the yield gap between Japanese and U.S. bonds is pretty narrow.

Indeed, Japan's ***oku Mutual Life Insurance has said it will cut its net buying of U.S. and German bonds in the half-year to March from its original plan and shift to domestic bonds instead as the yield gap between overseas and Japanese bonds has narrowed sharply.

"We've gone short from 77.40, we're looking for a break lower," said Ryan at BNP Paribas.

 

[EmpireGlobalfx]

EU short of time as Spain downgraded

(Reuters) - A double-notch downgrade to Spain's credit ratings has piled more pressure on European leaders to make rapid progress on solving the region's debt crisis or face unbearable borrowing costs.

The fresh blow from Moody's Investors Service came just a day after the agency warned France its triple-A rating could be at risk and overshadowed a report that Germany and France were nearer a deal on leveraging the euro zone's rescue fund.

"If the euro zone can't figure a way to handle the situation, you are going to see Spanish yields continue to go up, and they are going to have a problem to funding themselves," said Jessica Hoversen, currency and fixed income analyst at MF Global in New York.

Investors are counting down to a summit of EU leaders this weekend that was originally hailed as a watershed event.

Britain's Guardian newspaper on Tuesday said Germany and France had agreed to leverage the euro zone's bailout fund to over 2 trillion euros as part of a "comprehensive plan" but a senior euro zone source poured cold water on the report, telling Reuters that there had been no mention of such a deal.

The report initially caused a sharp rally in shares and the euro, only to be snuffed out by the downgrade to Spain.

Moody's cut the country's bond rating to A1, from Aa2, the third of the major agencies to act in recent weeks and taking it a notch below the ratings of Standard & Poor's and Fitch.

Moody's reasoning made worrying reading for those hoping for a speedy resolution to country's troubles.

"Since placing the ratings under review in late July 2011, no credible resolution of the current sovereign debt crisis has emerged and it will in any event take time for confidence in the area's political cohesion and growth prospects to be fully restored," the agency said.

In the meantime, Spain's large sovereign borrowing needs, heavily indebted banking system and challenging growth outlook left it vulnerable to further downgrades, a judgment that would encompass all too many of EU members.

PINCH OF SALT

The Guardian, citing senior European Union diplomats, had reported the euro zone would endorse a five-fold increase in the 440-billion-euro bailout fund to help troubled governments and banks survive should Greece or any other member default.

The much-touted idea would be for the European Financial Stability Facility (EFSF) to insure the first 20-30 percent of any losses on new government debt.

Brian Dolan, chief strategist at Forex.com in Bedminster, New Jersey, said an expanded $2 trillion bailout fund would be about the right size to restore come confidence.

But he added: "I have to take it with a grain of salt. We've seen a lot of these European reports that something was imminent only to be disappointed the next morning."

Indeed, German policy makers have been doing their best to play down the chances of a ground-breaking deal anytime soon.

German Chancellor Angela Merkel on Tuesday warned that leaders would not solve the debt crisis at a single meeting.

"These sovereign debts have been built up over decades and therefore one cannot resolve them with one summit but it will take difficult, long-term work. Nonetheless, I do think we will also be able to take relevant, important decisions," she said.

Markets have been on edge for fear European leaders would not agree on a plan to address the crisis, which has already forced Greece, Ireland and Portugal to seek bailouts and has driven up borrowing costs in Italy and Spain.

France saw its borrowing costs jump on Tuesday after Moody's warned it may slap a negative outlook on the country's Aaa rating in the next three months if slower growth and the costs of helping to bail out banks stretch its budget too much.

Economy Minister Francois Baroin insisted the rating was not at risk but acknowledged that the 1.75 percent growth forecast on which the government had based its 2012 budget was over-optimistic and would have to be revised down.

"The triple-A is not in danger because we will be even ahead of schedule on passing deficit reduction measures," Baroin said on France 2 television.

"We will do everything to avoid being downgraded."