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GLOBAL MARKETS-Euro bounces, stocks edgy ahead of German vote

Published 09/29/2011, 02:29 AM
Updated 09/28/2011, 08:44 PM

* Nikkei up 1 pct, MSCI Asia ex-Japan down 0.1 pct

* Euro STOXX 50 futures down 0.5 pct, S&P 500 futures up 0.7 pct

* Gold rebounds to around $1,620 an ounce

* Copper down nearly 3 pct

* Euro bounces to around $1.3618, dollar index down 0.2 pct

By Alex Richardson

SINGAPORE, Sept 29 (Reuters) - European index futures fell on Thursday ahead of a vote in Germany's parliament that is expected to approve new powers for the euro zone's bailout fund, but also underline the political divisions hampering efforts to solve the region's debt crisis.

The euro bounced and oil and gold prices struggled back into positive territory, but a widening of corporate and sovereign credit spreads in Asia signalled that markets remained on edged before the German vote at 0900 GMT.

Japanese shares rose but shares elsewhere in Asia fell, although losses in the regional benchmark were limited by a 3.7 percent gain for heavyweight Samsung Electronics on optimism about its third quarter earnings.

The past week has seen a broad sell-off of commodities, equities and emerging markets bonds and a rally in the dollar, driven by worries that Europe's debt problems will plunge the world into a second global financial crisis.

"The market situation is still tough, with worries about global growth," said Fujio Ando, senior managing director at Chibagin Asset Management in Tokyo.

Euro STOXX 50 index futures futures fell 0.5 percent. Futures for Germany's DAX and France's CAC-40 were also lower, while financial spreadbetters called the FTSE 100 to open down as much as 1.1 percent.

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After opening down around 1 percent Tokyo's Nikkei share average turned around to close up 1 percent.

MSCI's broadest index of Asia Pacific shares outside Japan pared gains to stand down 0.1 percent, although its materials sub-index remained 1 percent in the red.

S&P 500 index futures also turned positive to trade up 0.7 percent, pointing to a firmer start later, after Wall Street's broad benchmark dropped 2.1 percent on Wednesday.

Market sell-offs such as the one that began in late July are often punctuated by rallies, either due to bargain-hunting by investors tempted by lower valuations or on "short-covering" -- when players realise gains by buying back borrowed stock they had sold in a bet on falling prices.

Portfolio rebalancing was also a factor in play, as money managers switched funds between markets and asset classes as the end of the quarter approached.

GERMAN VOTE

While opposition votes will ensure the German bill passes, a big rebellion within Chancellor Angela Merkel's centre-right coalition could weaken her politically and cloud future policy making at a time when financial markets and other nations are urging euro zone leaders to act boldly and decisively.

"It seems periods of optimism are getting shorter and the pessimism is getting longer," said David Land, analyst at CMC Markets in Sydney.

"This is being driven by the clear realisation that while there are many plans as to how to deal with the Euro situation, the reality of getting agreement will be that much harder."

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The euro bounced 0.6 percent to around $1.3618, with dealers citing short-covering, while the dollar fell 0.2 percent against a basket of currencies.

But the euro has lost nearly 7 percent against the dollar this quarter, hammered by nagging worries over the prospect of Greek default and constant bickering by European policy-makers over the response to the crisis.

This in turn has sparked jitters over contagion to Italy and Spain and fuelled fears about the sovereign debt exposure of European banks that have seen the euro slide 9 cents from above $1.45 at the end of June, prompting many to think the end of its decline has yet to be reached.

"You would suspect weakness until Germany votes, given that it is the big guy that has to fund it," said Gavin Stacey, head of Australia and New Zealand research at Barclays Capital.

"The euro is most likely to continue its trend deterioration until it gets really bad, forcing a resolution to come."

GROWTH EXPECTATIONS

Copper , which is highly sensitive to expectations for global growth, continued its recent decline, trading down 2.8 percent at around $7,046.50 a tonne, although it pared losses after being down more than 5 percent earlier.

Oil futures crawled about 0.1 percent higher, with U.S. crude gaining 9 cents to $81.30 a barrel and Brent crude up 13 cents at $103.94.

Gold , which had seen a shift from a negative to a positive correlation with riskier assets over the past week or so as investors seeking safety have turned their back on the metal in favour of the dollar and U.S. Treasuries, rose 0.8 percent to around $1,620.95 an ounce.

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In credit markets, spreads on Asian investment grade corporate bonds widened, according to an iTraxx measure, while the cost of insuring Chinese sovereign debt against default jumped 10 basis points on fears of an economic slowdown.

Japanese government bonds were in demand for their safe haven appeal, with the benchmark 10-year yield falling 1 basis point to 0.995 percent following similar moves in Treasuries, where the 10-year yield dipped back below 2 percent on Wednesday.

"Even if the euro zone debt crisis eases, concerns over global economic slowdown won't fade and this should support JGBs," said a fund manager at a Japanese asset management firm. ($1 = 0.735 Euros) (Additional reporting by Miranda Maxwell in Melbourne, Antoni Slodkowski and Lisa Twaronite in Tokyo and Umesh Desai in Hong Kong; Editing by Ramya Venugopal)

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