Euro, stocks stabilise as oil rises

London : The euro stabilised yesterday after last week's steep losses against the dollar and yen and rose off nine-month lows versus the Swiss franc while higher oil prices helped European stocks higher in thin year-end trade.

Rumours of a coup in Pakistan had sent the safe-haven Swiss franc surging in early dealing, but it slipped after the reports were denied, with dealers saying the currency was also pressured by expectations of intervention by the Swiss National Bank.

Markets calmed after Pakistan President Asif Ali Zardari said there was no coup, dousing rumours that started after a government minister suspected of corruption was barred from leaving the country.

But geopolitical concerns continued to jangle nerves later in the session and the dollar recovered ground after reports that Iranian troops briefly entered Iraqi territory on Thursday and spent several hours at an Iraqi oilfield.

German sentiment

The dollar, which had surged on Thursday to a three-month high against a basket of currencies, had earlier been knocked back against the euro by a higher-than-expected reading from German Ifo Institute's sentiment index for December.

"The markets are fairly illiquid which is exaggerating moves," said Lee Hardman, currency economist at Bank of Tokyo-Mitsubishi UFG.

The euro rose briefly 0.4 per cent to $1.44 after falling close to $1.4300 on Thursday, the lowest since early September. But it slipped back to $1.4350 later. It has been under pressure due to fiscal problems in euro zone member Greece which has been hit by two ratings downgrades this month — the latest on Thursday by Standard & Poor's.

The FTSEurofirst 300, the index of top European shares was up 0.2 per cent after losing 1.3 per cent on Thursday. Oil firms led the gains with Total, BP, BG, Royal Dutch Shell and StatoilHydro rising between 0.7 and 2 per cent. Banking shares however continued to decline.

"When there's a sell-off, it seems there are investors coming back in there, though volumes are lower," said Mike Lenhoff, strategist at Brewin Dolphin, in London. "Fourth-quarter earnings should be good, and show top-line growth, and that could be what's helping to keep the market up."

World stocks were flat on the day, after Thursday's retreat and despite an early bounce.

The index has risen nearly 29 per cent this year, on track for one of the biggest gains in the past 20 years. "Most of the people are getting cautious. Everybody is closing books. They say ‘OK we had a great year so why do we have to risk more?'," said Koen de Leus, economist at KBC Securities.

"We are at the end of the year so volumes are not going to be very high."

Asian shares fell half a per cent as Chinese and Hong Kong bourses hit three-week closing lows on tough new government regulations on the real estate and banking sectors.

Emerging equities lost 0.3 per cent. The index has gained about 70 per cent this year.

US stocks are expected to open on a firmer note with futures for the Dow Jones average, S&P 500 and the Nasdaq Composite up 0.3-0.7 per cent.

In bond markets, ten-year Bund yields were slightly lower at 3.126 per cent, with analysts expecting the futures contract to hold its recent gains, fuelled by the worries in Greece.

But the sell-off in Greek and other peripheral euro zone bonds continued, pushing the premium on ten-year Greek yields over benchmark Bunds back up by more than 10 basis points to 270 bps — near levels hit on Thursday after the S&P ratings downgrade.

"We saw this morning Greece again under limited pressure with the spreads widening moderately. We continue to see the demand for safety driving the market. This offers core debt markets some support," said Patrick Jacq, a rates strategist at BNP Paribas in London. "We are going into end of year where people are probably looking for less risk positioning, so that offers the market some support as well."

Looking ahead

In addition to downgrading Greece, Standard & Poor's also cut Mexico's credit ratings last week by one notch on fiscal concerns, while worries about Britain's fiscal and econ-omic health are nagging investors after sterling hit two-month lows against the dollar last week.

Such fiscal fears could easily chill sentiment for world stocks as the benchmark MSCI world equity index wraps up one of the best annual performances in its 20-year history — up nearly 29 per cent.