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While you were sleeping: Latest correction looks to be nearing end

Tuesday 1st June 2010

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In holiday-thinned trading stocks edged higher in Europe and Canada as traders said it was starting to look like the latest correction was nearing an end.

"The fact that European stocks are not selling off today on the downgrade of Spain is a positive signal. It means that the sovereign debt risks have now been priced in," Pierre Sabatier, president and head of strategy at PrimeView in Paris told Reuters.

The Stoxx Europe 600 Index rose 0.3%. Germany’s DAX gained 0.31%. France’s CAC 40 slipped 0.21%. Volume on the CAC 40 represented only 40% of the index's 90-day daily average and on the DAX volume was only 32% of the average.

Markets were closed in London and the US and will resume trading tomorrow.

Among the most active stocks in Europe were Sanoma Oyj, Daimler AG and Deutsche Bank AG.

In Canada, the Standard & Poor’s/TSX Composite Index climbed 0.6% as of 12.50pm New York time.

“It’s almost at a point where if bad news doesn’t make stocks go down, it’s a sign the worst has been priced in,” Greg Taylor, a money manager at Aurion Capital Management in Toronto, told Bloomberg News. “Also, it sounds like the US is delaying raising interest rates. With them staying on the gas, that could keep the markets going.”

Spanish government bonds fell after Fitch Ratings late on Friday stripped the nation of its AAA rating, and shares fell in Israel after Israeli troops intercepted a flotilla of aid ships bound for Gaza.

The European Central Bank overnight warned that euro zone banks faced up to 195 billion euros in a "second wave" of potential loan losses over the next 18 months. Euro banks wrote off about 238 billion euros of bad debts by the end of 2009.

Although total write-downs from bad loans and securities between 2007 and the end of 2010 were likely to be lower than previously expected, the ECB said in its latest Financial Stability Report, write-downs this year and next year would be still larger if heightened sovereign debt risk and the impact of government belt-tightening dragged down economic growth.

Adding to the gloom, European confidence in the economic outlook unexpectedly worsened in May.

An index of executive and consumer sentiment in the 16 euro nations fell to 98.4 from 100.6 in April, the European Commission in Brussels said. Economists had forecast an unchanged reading, based on the median of 25 estimates in a Bloomberg News survey.

Consumer prices in Europe rose 1.6% in May from a year ago, a separate report showed, below the 1.7% rate forecast by economists. Inflation was 1.5% in April.

The Dollar Index, which measures the greenback against a basket of six major currencies, fell 0.32% to 86.50.

By 0920 GMT, the euro was little changed on the day at US$1.2300, pulling back from the day's high of US$1.2334 hit in early European trade.

The single currency looks set to end the month of May around 7.5% lower against the US dollar as ongoing debt problems in euro zone countries have rocked confidence in the euro system.

In Seoul, where a meeting of global central bankers was being held, US Federal Reserve Bank of Chicago president Charles Evans said the crisis in Europe would delay the increase in interest rates in the US.

“The European situation adds uncertainty to the economic outlook,” Evans told reporters.

Oil climbed above US$74. Even so, it is set for its biggest monthly loss in 18 months after the European economic crisis raised the prospect of reduced fuel demand.

Chinese Premier Wen Jiabao underlined the possibility of more bad news to come, saying on Monday that global growth was still vulnerable to sovereign debt risks.

US crude for July delivery rose 22 cents to US$74.19 a barrel by 1548 GMT, after settling down 58 cents on Friday.

London Brent crude rose 36 cents to US$74.38.

Front-month US crude, which hit a 19-month high of US$87.15 at the start of May, has dropped 14% since the end of April in the steepest monthly drop since late 2008 when the market was crashing from a record of US$147.27 in July that year.

Spot gold rose to US$1,213.90, up US$1.15 from New York's notional close on Friday. US gold futures for August delivery added US$1.1 an ounce to US$1,216.1 an ounce.

Gold hit a record of US$1,248.95 in mid-May amid concern euro zone credit problems were spreading.

"There is a chance for some wild movements if you get a bit of volume come in, but for the time being I wouldn't expect too much," Darren Heathcote, head of trading at Investec Australia in Sydney, told Reuters.

The world's largest gold-backed exchange-traded fund, the SPDR Gold Trust, said its holdings were unchanged at a record of 1,267.930 tonnes as of May 28.

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