Euro rises on ECB lending hope, world stocks fall

(Reuters) ― The euro gained yesterday on hopes that the European Central Bank may get involved in a plan to help struggling euro zone countries, but world stocks fell as many investors continued to fear a spread of the region’s debt crisis into core European economies.

Key US stock indices were mixed in the late afternoon, though supported by reports that the ECB is considering lending to the International Monetary Fund to bail out troubled euro zone economies.

US Treasury prices fell as the borrowing costs of troubled European countries declined slightly, reducing the appeal for safe-haven assets. Yields on Spain’s bonds eased modestly before weekend elections.

Speculation that the ECB could also step up purchases of European sovereign debt helped shore up investor sentiment.

Either ECB approach would be satisfactory, said Andrew Busch, senior currency strategist at BMO Capital Markets in Chicago. “The broader point is that the ECB is finding a way to stabilise the European debt crisis,” he said.

Economists say only the ECB would have enough fire power to quell a confidence crisis spreading throughout the euro zone. But EU law forbids the bank to finance government borrowing directly, thus the possible arrangement with the IMF.

“This third-party lending arrangement not only works around ECB laws, but also provides an avenue for the ECB to create enough funding to stabilise the crisis while maintaining its appearance of independence,” Busch added.

The euro zone common currency rose 0.4 per cent to US$1.3509 (RM4.36), pulling away from a five-week low of US$1.3420 struck on Thursday.

Apparent disagreement between Germany and the UK about how to solve the European debt crisis kept investors on the edge, however.

At a news conference in Berlin, the leaders of both countries sent out conflicting messages to markets, with British Prime Minister David Cameron calling for “decisive action” to stabilise the euro zone and German Chancellor Angela Merkel favouring a “step-by-step” approach.

Wall Street indexes were mixed, with the S&P 500 holding above a key resistance level around 1,200.

The Dow Jones industrial average up 31.29 points, or 0.27 per cent, at 11,802.02. The Standard & Poor’s 500 Index was up 0.04 point, or 0.00 per cent, at 1,216.17. The Nasdaq Composite Index was down 13.81 points, or 0.53 per cent, at 2,574.18.

In Europe, the FTSEurofirst 300 finished 0.7 per cent lower. World stocks, measured by the MSCI All-Country World Index .MIWD00000PUS, declined 0.4 per cent.

“The (market’s) scepticism comes from the realisation that there is no magic bullet in place to solve this crisis,” said Giancarlo Perasso, chief economist at Redux-Matrix.

US crude oil prices settled US$1.26 down at US$97.67 (RM208.63).

Benchmark 10-year US Treasury notes fell 13/32, sending their yield up to 2.01 per cent, as a decline in Italian government bond yields reduced their safe-haven bid.

Yields on Italian 10-year bonds eased to 6.7 per cent but stayed near levels investors consider unsustainable.

Spanish 10-year bond yields fell to 6.4 per cent from Thursday’s 6.5 per cent before weekend elections in which the centre-right People’s Party is expected to win a resounding mandate to slash public spending.