Stock exchange gorilla in the room: Europe

Stock exchange jitters reverberated from Shanghai to New York because of debt problems in Europe.

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    An investor gestures in front of an electronic board showing stock information at a brokerage house in Shanghai, Nov. 30. China's key stock index fell 1.6 percent to close at a seven-week low on Tuesday. Europe's debt woes triggered stock exchange jitters around the world.
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Worries that Portugal or even Spain will have to seek outside help for their debts continued to unsettle financial markets Tuesday though buoyant U.S. consumer confidence figures helped to contain the damage.

In Europe, the FTSE 100 index of leading British shares closed down 22.68 points, or 0.4 percent, at 5,528.27 while Germany's DAX fell 9.48 points, or 0.1 percent, at 6,688.49. The CAC-40 in France ended 26.52 points, or 0.7 percent, lower at 3,610.44.

In the U.S., the Dow Jones industrial average was down 58.62 points, or 0.5 percent, at 10,993.87 around midday New York time while the broader Standard & Poor's 500 index fell 8.56 points, or 0.7 percent, to 1,179.20.

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Some comfort emerged with the news that consumer confidence in the U.S. has ratcheted up in November ahead of the crucial Christmas buying season, another sign that the recovery in the world's largest economy is picking up pace.

The Conference Board reported that its main U.S. consumer confidence index rose to a five-month high of 54.1, from a revised 49.9 in October. Analysts were expecting a far more modest rise to 52.

However, Europe's debt crisis again dominated the markets' focus, with the bond markets in particular considering the likelihood of further bailouts, following the weekend's €67.5 billion ($88 billion) rescue package for Ireland.

Although Portugal is widely considered to be the most at risk of a bailout, the major worry in the market is a possible bailout for Spain. Most analysts think European authorities can handle bailing out the relative minnows of Greece, Ireland and Portugal, but Spain — at around 12 percent of the euro-zone economy — would be different matter altogether.

"The question of whether Portugal will get a bailout of its own seems to have been swept aside as investors ponder whether the authorities can afford to pre-emptively bailout Spain as they look well into the distance to review how much debt the local banking system has coming due over the next 12 months," said Andrew Wilkinson, senior market analyst at Interactive Brokers.

There's been a noticeable narrowing in the cost Portugal and Spain are having to pay in the bond markets over the past few days. Once again, the yield on Spain's ten-year bond raced ahead — up 0.16 percentage point at one stage before settling 0.09 higher at 5.51 percent — while Portugal's remained more or less flat at 7 percent.

Italy is also getting dragged into the mix. Italy's yield was up 0.3 percentage point to 4.67 percent. The yield had earlier risen as high as 4.74 percent.

"Worryingly, the deterioration in the European bond markets has now started to spread to Italian debt," said Wells Fargo analyst Vassili Serebriakov. "While the situation remains fluid and uncertain, European jitters are unlikely to fade away."

Unsurprisingly, all this government debt uncertainty is hitting the euro hard, though upbeat U.S. data and ongoing tensions in the Korean peninsula continue to give the dollar a boost.

By late-afternoon London time, the euro was trading 0.7 percent lower at $1.3030. Earlier it had fallen to a low of $1.2968, the first time it had dropped below $1.30 since Sept. 16.

Trading across financial markets was complicated somewhat Tuesday by the month's end, when investors traditionally square off positions.

Bank of New York Mellon analyst Michael Woolfolk actually thinks that investors may be closing their books up for the year already as a result of these concerns and that may be providing the dollar a further boost.

"If last year is any guide, the dollar has further to rally," said Woolfolk.

Earlier in Asia, Chinese shares trimmed some losses after volatile trading that took the Shanghai benchmark down 3.4 percent at one stage on worries over fresh inflation-fighting measures. However, the Shanghai Composite Index closed down 1.6 percent to 2,820.18 while the Shenzhen Composite Index for China's smaller, second exchange fell 2.4 percent to 1,307.83.

Soaring prices in China, the world's No. 2 economy, are so far limited mostly to food, but analysts say price pressure could spread to other areas unless Beijing hikes interest rates and further tightens credit. Investors worry that might slow economic growth or reduce the amount of money flowing through the economy that is helping to finance stock trading.

Japan's Nikkei 225 stock average dropped 1.9 percent to close at 9,937.04 while Hong Kong's Hang Seng fell 0.7 percent to 23,007.99. Australia's S&P/ASX200 index shed 0.7 percent to 4,584.4.

Benchmark oil for January delivery was down 63 cents to $85.10 a barrel in electronic trading on the New York Mercantile Exchange.

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