Market optimism tempered by European bank worries

January 4, 2012 - 1:20 PM
Japan World Markets New Year

Kimono-clad workers clap their hands during the traditional New Year's opening ceremony of Tokyo Stock Exchange in Tokyo, Wednesday, Jan. 4, 2012. Asian stock markets were mostly higher Wednesday after Wall Street opened the year with a bang following the release of positive U.S. economic data. Japan's Nikkei 225 index gained 1.1 percent to 8,551.77. (AP Photo/Shizuo Kambayashi)

LONDON (AP) — Stock markets retreated Wednesday as the early year optimism over the U.S. economy was tempered by renewed worries over Europe's banking sector.

Europe's banks led the retreat after Italy's biggest bank UniCredit offered a much bigger than expected discount to entice investors to part with their cash as it tries to raise money to shore up its capital buffers.

UniCredit saw its share price tumble by over 10 percent on the news it was selling new shares at a large 69 percent discount to Tuesday's closing price. UniCredit is trying to raise euro7.5 billion ($9.8 billion).

Joshua Raymond, chief market strategist at City Index, said the size of the discount indicates either that shareholders lack confidence in the bank or that it's an act of "desperation" by the bank itself.

The discount was bigger than those that have been offered by UniCredit's peers recently and knocked sentiment in Europe's banking sector as a whole, notably of Germany's Commerzbank AG, which has been asked to raise euro5.3 billion ($6.9 billion) by the European Banking Authority. Its share price fell around 5 percent.

Last month, the EBA said European banks have to raise about euro115 billion ($150 billion) to meet a new standard meant to inoculate the lenders against market turmoil, including bad government debt.

European banks have billions of euros of risky government bonds on their books and, as the continent's crisis has deepened, investors have become increasingly concerned the lenders won't be able weather all of the expected losses on those loans.

However, there was some welcome news on the European debt crisis front as Germany and Portugal managed to tap investors for money in a relatively trouble-free fashion. A big auction on Thursday in France will be closely-monitored.

If the French auction goes smoothly as well, the attention in the markets will likely remain on the U.S. economy through Friday's key jobs report for December. A strong U.S. manufacturing survey, which showed the sector growing at its fastest rate in six months, has fueled hopes that the figures will be strong. The consensus in the markets is that the U.S. economy generated another 150,000 or so jobs during the month — a solid, if unspectacular, jobs creation.

"Such a figure would be very welcome news, as it would signal yet more growth in the long-moribund U.S. jobs market," said Chris Beauchamp, market analyst at IG Index.

So far this week, a positive outlook for the U.S. economy helped stocks post sizable gains. Germany's DAX was up around 5 percent in the first two trading days of the year, while the Dow Jones index in the U.S. closed Tuesday at its highest point in five months.

Wednesday saw a retreat following those sizable gains.

"Markets look to be getting a little reality check after an optimistic start to the week," said Carl Campus, an analyst at BMO Capital Markets.

In Europe, the DAX ended down 0.9 percent Wednesday at 6,111.55, while the CAC-40 in France fell 1.6 percent to 3,193.65. The FTSE 100 index of leading British shares ended 0.6 percent lower at 5,668.45.

The euro was also down after solid gains Tuesday — 0.9 percent at $1.2932, but still up from last week's 15-month low of $1.2857.

In the U.S., the Dow Jones index was down 0.1 percent at 12,387, while the broader Standard & Poor's 500 index fell 0.2 percent to 1,275.

Earlier, Asian stocks ended the day with gains, following a strong session on Wall Street.

Japan's Nikkei 225 showed renewed life as it posted a 1.2 percent rise to 8,560.11. The battered benchmark lost nearly 20 percent of its value in 2011 — a year marred by a tsunami and nuclear plant disaster, made all the more difficult by record-high levels for the yen.

Hong Kong's Hang Seng Index and South Korea's Kospi slipped after strong gains a day earlier. The Hang Seng fell 0.8 percent to 18,727.31, while the Kospi was down 0.5 percent at 1,866.22.

Oil prices gave up some of Tuesday's gains when they surged through the $100-a-barrel mark as equities advanced and tensions over the Persian Gulf between the U.S. and Iran escalated. Benchmark crude for February delivery fell 46 cents to $102.50 per barrel in electronic trading on the New York Mercantile Exchange.

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Pamela Sampson in Bangkok contributed to this report.