Growth, euro zone woes fuel demand for safe havens
Concerns over Europe's sluggish response to the ongoing debt crisis sent 10-year German bond yields to fresh lows on Wednesday while demand for stocks less exposed to the looming global growth slowdown lifted equity markets.
U.S. stocks were also poised to open higher with attention focused on the release of minutes from the last Federal Reserve rate setting meeting, which will be scoured for signs the central bank could take steps to boost growth.
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Germany sold just over 4 billion euros of 10-year government bonds at auction for an average yield of just 1.31 percent - the lowest ever recorded for this maturity.
"The German auction shows there is still strong demand for safe haven assets," said Elisabeth Afseth, fixed income analyst for Investec in London.
"We're very far from a lasting solution to the euro debt crisis so I don't see why (German yields) should not test new lows again."
The euro wallowed around two-year lows against the dollar at $1.2275 after the auction but at one point fell to a 3-1/2 year low against the British pound of 78.87 pence, as investors sought safety from the crisis.
Germany's debt sale underlined the growing lack of faith by some investors in measures agreed by European policymakers last month to combat the crisis, including help for Spain's banks and
allowing the region's new rescue fund to buy government debt.
These concerns were heightened by lack of clarity from euro zone finance ministers on implementing the measures and questions about when Germany's Constitutional Court would give its verdict on the new regional bailout fund, known as the European Stability Mechanism (ESM).
Italian Prime Minister Mario Monti also said on Tuesday Italy could be interested in tapping the new ESM to ease its borrowing costs, underscoring the threat of the crisis spreading to the euro area's third largest economy.
However, Spanish Prime Minister Mariano Rajoy eased some concerns by announcing a swathe of new taxes and spending cuts designed to slash 65 billion euros from Spain's budget shortfall.
Rajoy, of the centre-right People's Party, proposed a 3-point hike in the main rate of Value Added Tax on goods and services to 21 percent, outlined cuts in unemployment benefits, and reduction in civil service pay and perks.
Domestic investors in Spain and Italy, now by far the biggest holders of their country's debt, welcomed the moves and yields fell alongside the drop in German bonds.
Benchmark 10-year Spanish bonds were down 13 basis points at 6.7 percent, while Italian 10-year yields were down 9 basis points at 5.86 percent.
Yields on 10-year German debt in the secondary market were steady at 1.32 percent, in line with the auction result.
Equity markets initially suffered from warnings by U.S. companies, which this week began their second quarter reporting season, about the impact that slower growth around the world is having on earnings.
U.S. stocks fell for a fourth straight day on Tuesday on the growing pessimism while in Asia, MSCI's index of Asia-Pacific shares outside Japan touched a one-month low on Wednesday as its big exporting firms reported similar headwinds.
Samsung Electronics <005930.KS, the world's largest memory chip maker was down 0.2 percent, and SK Hynix, the second largest < 000660.KS> slumped 3.2 percent following the weak forecasts from U.S. chipmakers Applied Materials Inc
The FTSEurofirst 300 index of top European companies, which fell as much 0.6 percent at one point, recovered to be up 0.1 percent at 1,041.02 points as investors bought defensive sectors like telecoms and utilities.
"The problem in the equity markets at the moment is confidence - there is very little of it," said Jiban Nath, equity derivatives strategist at Solo Capital.
MSCI's world equity index ended five days of losses to be up 0.15 percent at 308.69 points.
In commodities markets prices were recovering after a sharp selloff on Tuesday with worries about the scale of the global slowdown partly offset by hopes for more policy action from world central banks.
Brent crude oil, which fell more than two percent on Tuesday, was back above $99 a barrel after the Organisation of the Petroleum Exporting Countries (OPEC), which produces a third of global oil, left its 2012 world oil demand growth forecast unchanged at 0.9 million barrels per day.
Traders were awaiting the release of U.S. inventory data that is expected to show crude stocks shrinking for a third week in the world's largest oil consumer.
Gold edged up after posting its biggest one-day decline since late June on Tuesday, but gains are expected to be limited as the dollar continues to outstrip bullion as the preferred safe haven for investors.
Spot gold was up 0.5 percent on the day at $1,574.84 an ounce, after losing 1.4 percent on Tuesday when it touched $1,563.89, its lowest level since June 29.
Three-month copper on the London Metal Exchange inched up 0.35 percent to $7,530.50 per tonne but the metal's price is expected to stay in a tight range ahead of this week's GDP data from top consumer China, which is expected to show the slowest growth in at least three years.