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While you were sleeping: Euro worry returns

Friday 2nd December 2011

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The optimism of the past three days fizzled amid concern that concerted central bank action to alleviate stress caused by Europe's fiscal problems can only do so much.

Another worry was a report indicating signs of a slowdown in Chinese manufacturing, which posted the worst performance in two years.

In afternoon trading in New York, the Dow Jones Industrial Average fell 0.29 percent and the Standard & Poor's 500 Index declined 0.21 percent. The Nasdaq Composite Index gained 0.21 percent.

In Europe, the Stoxx 600 Index ended the day with a 0.7 percent drop, after four straight days of gains.

There was good news as US manufacturing expanded in November at the best clip in five months. However, the labour market is still struggling as more Americans than expected filed applications for unemployment benefits last week.

“The economic data was positive, but Europe is still a concern," Timothy Ghriskey, chief investment officer of Solaris Group LLC in Bedford Hills, New York, told Bloomberg News. "The coordinated central bank action is not a solution to what’s going on in Europe. It buys them some time,”

European Central Bank President Mario Draghi indicated the central bank was ready to act if euro zone leaders stepped up their efforts.

"A new fiscal compact would be the most important signal from euro area governments for embarking on a path of comprehensive deepening of economic integration. It would also present a clear trajectory for the future evolution of the euro area, thus framing expectations," the central bank chief told the European Parliament.

The ECB is expected to support banks and an economy heading into recession by lowering interest rates next week and announcing longer-term cheap liquidity tenders with easier collateral rules, according to Reuters. Markets are pricing in a quarter point reduction to 1.0 percent on December 8 and Draghi said nothing to dissuade them.

However, German Chancellor Angela Merkel seems determined to hold on to her conviction that the role of Europe's central bank in the fiscal crisis should remain limited.

In the days before a speech to German lawmakers tomorrow outlining her stance for a December 9 European summit, Merkel has repeated her push to rework EU rules to lock in budget monitoring and enforcement and seal off the ECB from political pressure, according to Bloomberg.

The crisis is taking its toll on the global economy. As a result, the International Monetary will probably lower its growth forecasts next month.

Since the latest forecasts were released in September “there’s been a marked slowdown in economic activity,” particularly in Europe, IMF spokesman Gerry Rice told reporters in Washington. “We will likely be revising downwards the forecast” near the end of January, he said, without specifying which projections may be affected, according to Reuters.

Bond auctions in France and Spain today went well. Spain sold 3.75 billion euros of notes and had to pay the most since at least 2005 to borrow for five years, with investors ordering more than twice the amount sold, according to Bloomberg. France auctioned 4.3 billion euros of debt, including 10-year bonds at 3.18 percent, less than at the November 3 sale.

The successful debt sales were accompanied by a sharp easing in yields on 10-year bonds in Europe. The yield on Spain's 10-year bond dropped 49 basis points to 5.74 percent.

As if banks don't have enough to worry about with Europe's crisis, here's more. The Massachusetts attorney general has filed a lawsuit against five large US banks accusing them of deceptive foreclosure practices.

Attorney General Martha Coakley said on Thursday the lawsuit was filed in state court in Boston against Bank of America, JPMorgan Chase & Co, Citigroup, Wells Fargo & Co and Ally Financial, according to Reuters.

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