World stocks edge up as sentiment improves

TOKYO Tue May 8, 2012 11:17am IST

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TOKYO (Reuters) - World shares edged up on Tuesday after the previous day's plunge, as sentiment improved on hopes Spain will use public funds to bolster its struggling banks, although persistent worry over Greece capped gains and weighed on the euro.

European shares will likely be mixed, with financial spreadbetters predicting that major European markets would open between a 0.2 percent drop and a 0.3 percent rise. U.S. stock futures were down 0.1 percent.

The anti-austerity backlash by voters in Greece and France initially caused jitters but overnight, U.S. and European stock markets showed resilience, with the banking sector outperforming, as Spain signalled it was opening the door to using public funds to aid the country's troubled lenders.

"Spain is a much bigger economy compared with Greece or Portugal, so public funds will have to be injected because a bankruptcy scenario just isn't an option there," said Takao Hattori, senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities in Tokyo.

MSCI's broadest index of Asia-Pacific shares outside Japan was up 0.3 percent. It slid more than 2 percent the day before - its worst daily fall in about five months - and hit its lowest in about three months.

Japan's Nikkei stock average rose 0.7 percent, after suffering its biggest fall in six months and touching a three-month low on Monday.

"I think that today people are having a few second thoughts and thinking that maybe the political situation isn't that volatile in Europe and so we have bounced back a little bit, but clearly we haven't recovered all of yesterday's losses," Damien Boey, equity strategist at Credit Suisse, said about the Australian market. It added 0.2 percent, led by mining stocks.

London copper was boosted by bailout hopes for Spanish banks, rising 0.7 percent to $8,228 a tonne, after falling 0.7 percent on Monday.

GREECE BACK IN FOCUS

The euro recovered from Monday's low of $1.2955, its lowest since January 25, hit after an anti-austerity backlash by voters in Greece and France caused jitters across markets as the defeat of incumbents raised fears that Europe's collective efforts to resolve its debt crisis may falter.

The euro remained pressured, easing 0.2 percent at $1.3031 while the Australian dollar, another gauge of investor risk appetite, fell 0.2 percent at $1.0182, also off a four-month low of $1.0110 hit on Monday.

Europe's election result "suggests a lot of delays, at a minimum, in the policies that are in place to reduce the deficits. As far as markets are concerned, we've seen repeatedly that fiscal irresponsibility gets punished more than a lack of growth," said Simon Grose-Hodge, head of investment advisory for South Asia at LGT Bank in Singapore.

Evidence of deep public resentment against using severe austerity measures to solve Europe's refinancing problems prompted the International Monetary Fund (IMF) to show some new flexibility on Monday over how quickly it would press deeply indebted countries to bring their budgets under control if economic growth weakens.

The shift in tone could prove important for Greece, where Europe's sovereign debt crisis began in 2009.

Greece's two mainstream parties, which backed a painful European Union/IMF bailout, failed to win a parliamentary majority, reviving uncertainty over whether Athens will stay in the euro zone.

Barclays Capital analysts cautioned that as Europe's issues are more structural than cyclical, boosting growth with more spending or lower taxes would only bring temporary relief.

"Bank recapitalization seems to be the best option for Europe to get the biggest bang for their bucks," they said.

Sebastien Galy, strategist at Societe Generale, said the next key events included negotiations for a coalition government in Greece and the announcement of some form of bad bank scheme for Spain.

Sources said a government announcement on ailing Spanish lender Bankia SA, with its chairman stepping down on Monday, could come on Friday once a successor is in place.

FUNDAMENTALS KEY

Oil was mixed on Tuesday, with U.S. crude futures down 0.3 percent at $97.65 a barrel after tumbling to a low of $95.34 on Monday while Brent crude gained 0.3 percent to $113.47, rebounding from Monday's lows near $110 per barrel.

Hattori of Mitsubishi UFJ Morgan Stanley Securities said economic fundamentals were still the main driver for markets, with the United States only showing moderate pace of growth.

Several Federal Reserve officials are due to make speeches this week and likely will reiterate their pledge to keep a very accommodative monetary policy in light of the fragile economy, Hattori said.

Analysts said Chinese data due later this week, including April trade figures and industrial output, was also in focus. Signs of slowdown in the world's second-largest economy could underscore how vulnerable the global growth outlook is and dent investor risk appetite.

Sentiment was slightly better in Asian credit markets, with the spread on the iTraxx Asia ex-Japan investment-grade index tightening by 1 basis point.

(Additional reporting by Amy Pyett in Sydney and Masayuki Kitano in Singapore; Editing by Richard Borsuk)

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