Debt worries loom, but stocks move up

Debt problems in US, Europe don't stop investors from buying up stocks. But analysts warn debt woes remain markets' primary concern.

Sonya Schoenberger/Remote/Reuters
Traders are pictured at their desks in front of the DAX board at the Frankfurt stock exchange July 19, 2011. Despite debt worries on both sides of the Atlantic, European and US stock markets moved up.

LONDON – Global shares recouped losses Tuesday as investors bought up beaten-down stocks, but with Europe's debt crisis still brewing and the U.S. yet to sanction an increase in its debt ceiling, investors remain wary of pushing the gains too far.

After a hammering Monday that saw bank shares lead a global rout and investors flee to gold and other safe haven assets, markets staged a comeback Tuesday. Oil prices and the euro jumped, too.

However, the factors that contributed to the previous day's slump remain unchanged, including concern that Europe's debt crisis could swallow Italy and Spain and that the U.S. won't raise its debt ceiling in time to avoid a default. Analysts warned that these will remain the predominant concern of investors.

"In spite of a positive opening call for European equities, we would advise caution," said Neil MacKinnon, global macro strategist at VTB Capital.

In Europe, the FTSE 100 index of leading British shares was up 0.7 percent at 5,793 while Germany's DAX rose 1.3 percent to 7,197. The CAC-40 in France was 1.3 percent higher at 3,699.

Wall Street also rallied at the open, aided by the release of strong home construction figures. The Dow Jones industrial average surged 1 percent at 12,510 while the broader Standard & Poor's 500 futures rose 1 percent to 1,318.

The market value of News Corp. rose by around $1.5 billion while Rupert Murdoch and his son were being grilled by a British Parliamentary committee over phone hacking at the News of the World tabloid. The stock was trading 3.8 percent higher at $15.54.

The main point of interest this week will likely be Thursday's meeting of European Union leaders in Brussels. They are due to discuss a second bailout package for Greece, which relies on such lifelines to meet its obligations.

Just two days ahead of the meeting, it remains unclear whether a mechanism whereby Greece avoids a default will be clinched. German Chancellor Angela Merkel said Tuesday that the meeting would not yield a quick and comprehensive solution to crisis.

One key concern is if the credit rating agencies say Greece is in default following the bailout package, which could create new market instability.

The European Central Bank, for example, has warned it won't accept Athens' bonds as collateral for the money it loans to Greek banks. That would mean Greek banks would need to find another source of funding.

Germany, the EU's biggest economy, wants private bondholders to absorb some losses on Greek bonds — which the agencies have previously stated would likely constitute a default.

The euro has largely managed to withstand pressures of a potential Greek default in recent weeks, and was trading 0.5 percent higher at $1.4196.

Markets are also keeping a close watch on developments in the U.S., where lawmakers are wrangling over raising the debt ceiling, which caps the amount of government borrowing. The limit must be raised by Aug. 2, or Washington could be forced to choose who to pay back and who to stiff — in other words, to default.

Observers say that politicians are using the debate to grandstand ahead of 2012 elections and are unlikely to actually let the date pass without raising the ceiling, but the dithering is killing investor confidence.

"There has not been a sincere change overnight in sentiment toward the debt issues suffered in the eurozone and the United States," said Giles Watts, the head of equities at CityIndex. "Investors remain uneasy about the situation as a whole."

Upbeat housing starts — June saw a 14.6 percent increase from May — helped support sentiment, though analysts warned the increase was unlikely to be sustained if the economy didn't add jobs. June's employment figures were dismal.

"As much as I would like to embrace this as the start of a pattern, as you can see from the charts below, this is just a blip in the overall flat-lining trend of homebuilding activity," said Jennifer Lee, an economist with BMO Capital Markets.

Earlier, some Asian stocks pared some of their early losses after the European open, but still ended mostly down. Japan's Nikkei 225 stock average extended losses to decline 0.9 percent to 9,889.72 after being closed for a national holiday Monday. Hong Kong's Hang Seng rebounded to gain 0.5 percent to 21,902.40 while mainland China's Shanghai Composite Index fell 0.7 percent to 2,796.98.

Oil prices soared about $98 a barrel amid expectations U.S. crude supplies dropped last week. Benchmark oil for August delivery was up $2.10 cents to $98.03 a barrel in electronic trading on the New York Mercantile Exchange.

of 5 stories this month > Get unlimited stories
You've read 5 of 5 free stories

Only $1 for your first month.

Get unlimited Monitor journalism.