World markets remain volatile in face of euro debt fears

Financial markets remained volatile today in the face of a European debt crisis that has widened and deepened over the past week.

Investors have become increasingly fidgety about the prospect of Spain and Italy succumbing to the same bond market pressures that have seen three countries bailed out. Stocks have taken a battering as borrowing rates rose, not just for Spain and Italy but also traditionally strong countries like France

"While investors still look for the light at the end of the tunnel, Europe's debt woes continue to act as an anchor for stocks across global markets," said Carl Campus, an analyst at BMO Capital Markets.

Trading in bond markets calmed on Friday, with Italy's ten-year yield down 0.05 of a percentage point to 6.65 percent — below the 7 percent rate which eventually forced Greece, Ireland and Portugal into seeking bailouts. Spain's yield was also 0.09 of a percentage point lower, at 6.35 percent.

The euro was 0.4 percent higher at $1.3511.

Stocks, while avoiding a rout, closed lower across much of Europe. Germany's DAX ended down 0.9 percent at 5,800.24 while the CAC-40 in France fell 0.4 percent to 2,997.01. The FTSE 100 index of leading British shares closed 1.1 percent lower at 5,362.94.

U.S. stocks were faring better, though they are heading for their worst weekly performance in two months — the Dow Jones industrial average was up 0.3 percent at 11,808.19 while the broader S&P 500 index rose 0.2 percent to 1,217.97.

The turmoil in the markets has already prompted change in governments in Italy and Greece, while Spain is likely to install a new administration on Sunday. The governing Socialists are expected to suffer a big defeat to the opposition Conservatives.

Some of the pressure on Italy and Spain has eased through the week thanks to suspected buying of their government bonds by the European Central Bank. Analysts expect figures on Monday to show that the ECB, now led by Italian Mario Draghi, stepped up its bond purchases this week, in effect to give politicians more time to get a grip on the mounting crisis. By buying their bonds, the ECB is hoping to keep a lid on their borrowing rates.

Italy's key bond yield has hovered around the psychologically important 7 percent mark for the best part of two weeks, while Spain's ratcheted higher this week after a disappointing bond auction which saw the country pay its highest rate of interest since 1997 to raise money from capital markets.

"Given reports of aggressive buying both towards the end of last week and yesterday, we would think it safe to assume the ECB now holds (euro) 90 billion to (euro) 100 billion of Italian bonds on its books," said Gary Jenkins, an analyst at Evolution Securities.

The ECB's bond-buying program, which is limited and has to be offset with the sale of assets elsewhere so that the money supply in the eurozone doesn't increase, has been hugely controversial. British Prime Minister David Cameron was expected to have recommended that the ECB step up its purchases — in effect to use its potentially unlimited firepower by printing new money — when meeting German Chancellor Angela Merkel in Berlin.

Germany, though, has been a critic of such a change in policy, arguing that the ECB hasn't the mandate to bail out governments and that printing new money potentially fuels inflation.

Merkel acknowledged that more had to be done to solve the debt crisis, but insisted there was no quick-fix.

"I think that you win back credibility by using the strength you have, and the British demand that we should put a lot of strength into winning back credibility for the euro is right," Merkel said. "But we also have to take care not to pretend to have strength that we don't have, because markets very quickly figure out that that won't work."

Many in the markets think the ECB's policy has to be cleared up soon if the crisis is to come under some sort of control.

"Without a change in the ECB's remit market participants will constantly question both the bank's willingness and its ability to continue intervening in markets and this reduces the effectiveness of the interventions," Jenkins said.

Earlier in Asia, South Korea's Kospi tumbled 2 percent to 1,839.17 while Hong Kong's Hang Seng dropped 1.7 percent to 18,491.23. Japan's Nikkei 225 index slid 1.2 percent to 8,374.91.

In mainland China, the benchmark Shanghai Composite Index fell 1.9 percent to 2,416.56, its lowest close in almost a month. The smaller Shenzhen Composite Index lost 2.7 percent to 1,031.54.

A Chinese government report showed new house prices in October fell in more than half of 70 cities measured from the month before, stoking fears about the country's once-buoyant housing market.

China says credit and investment curbs imposed to cool its real estate boom will stay in place. The measures appear to have worked in tamping down property prices, but have also slowed the real estate and construction industries, which account for about 10 percent of China's economic output.

Oil prices spiked higher towards $100 a barrel — benchmark crude for December delivery was down 46 cents at $98.36 a barrel in electronic trading on the New York Mercantile Exchange.

AP