Euro Weakens, Stocks Decline as European Governments Prepare to Sell Bonds

By Shiyin Chen and Ron Harui - Jan 10, 2011 4:42 PM GMT+0800

The euro weakened against 13 of its 16 most-active peers and fell to 107.23 yen as of 11:09 a.m. in Tokyo from 107.32 on Jan. 7. Photographer: Chris Ratcliffe/Bloomberg

The euro traded near a three-month low against the yen and bond risk rose amid concern European nations will struggle to raise money in debt sales this week. Asian shares fell on speculation central banks from China to Indonesia will raise interest rates to curb inflation.

The euro weakened to 107.23 yen at 4:40 p.m. in Hong Kongfrom 107.32 on Jan. 7. The Markit iTraxx Asia index of credit- default swaps on 50 investment-grade borrowers rose for a fourth day. The MSCI Asia Pacific excluding Japan Index dropped 0.8 percent to 473.46, while the Jakarta Composite Index sank 4.3 percent. The Stoxx Europe 600 Index slid 0.4 percent and futures on the Standard & Poor’s 500 Index lost 0.5 percent. Oil rose as much as 2.2 percent after the closure of an Alaskan pipeline.

Portugal, Spain and Italy are scheduled to sell debt following a slump in euro-area government bonds last week, triggered by concern over the European Union’s ability to stem the crisis. Increasing raw-material prices added to speculation inflation will accelerate in Asia, with a Bank of Korea report today showing that producer-price inflation accelerated.

“It looks as though the market is pricing in some further deterioration in the sovereign debt story,” said Sean Callow, a senior currency strategist at Westpac Banking Corp. in Sydney. “The Portugal auction on Wednesday will be closely watched. I see euro weakness continuing.”

The euro touched 106.95 yen on Jan. 7, the lowest since Sept. 14. The single currency traded at $1.2895 from $1.2907, after earlier dropping to $1.2867, the weakest since Sept. 14.

Portugal, Spain Sales

Portugal will sell 2014 and 2020 bonds on Jan. 12. Italy will offer 2015 bonds and Spain will auction 2016 debt on Jan. 13, according to data compiled by Bloomberg. The yield on Portuguese 10-year bonds climbed as high as 7.19 percent on Jan. 7, the most since Nov. 11. The yield on Spain’s 10-year bonds reached 5.54 percent last week, the highest since Dec. 21.

Amid the slump in bonds of Europe’s most indebted nations, Germany may be softening its opposition to expanding the continent’s 750 billion-euro ($966 billion) rescue facility. EU leaders may discuss expanding the fund at their next summit in February, the Handelsblatt newspaper said, citing German officials it didn’t identify. Der Spiegel said the EU could time such a pledge to coincide with granting aid to Portugal.

The Markit iTraxx Asia index climbed 2 basis points to 111 basis points, heading for its highest close since Nov. 30, according to Credit Agricole CIB and data provider CMA. Default risk also increased in Australia, with the Markit iTraxx Australia index rising 3 basis points to 112, Credit Agricole prices show.

China, Indonesia

More than two stocks declined for each that gained on the MSCI Asian index. Financial markets in Japan are closed today for a public holiday. The Shanghai Composite Index lost 1.7 percent after Liu Yuhui, a researcher with the Chinese Academy of Social Science wrote in a commentary in the China Securities Journal today that the People’s Bank of China should consider a series of interest rate increases of 50 basis points if the country’s consumer prices remain high in the first half.

PT Astra International, Indonesia’s largest automotive retailer, sank 2.7 percent. The Indonesian central bank may raise its benchmark interest rate by a “cumulative” 100 basis points starting in February, Morgan Stanley said in a note today. The Bombay Stock Exchange’s Sensitive Index slid 1.7 percent on concern the Reserve Bank of India will raise interest rates at its next meeting on Jan. 25.

Inflation Risks

South Korea’s Kospi index retreated 0.3 percent while the won rose 0.2 percent to 1,124.38 per dollar from 1,115.95. Producer prices rose 5.3 percent from a year earlier, the biggest gain since December 2008, compared with a 4.9 percent increase in November, the Bank of Korea said inSeoul today. Four out of nine economists surveyed by Bloomberg News expect a 0.25 percentage point increase to 2.75 percent at a monetary policy meeting Jan. 13.

“If you have the U.S. Federal Reserve staying on the sidelines and the economy doing reasonably well, at least in the near term, commodity prices will keep spiraling up,” Venkatraman Anantha-Nageswaran, global chief investment officer at Bank Julius Baer & Co., said in a Bloomberg Television interview in Singapore. “Inflation risks are going to be much larger.”

The S&P 500 declined 0.2 percent on Jan. 7 after a government report said U.S. payrolls increased by 103,000, about two-thirds of the median estimate in a Bloomberg survey of economists.

Bernanke’s Testimony

After the release of the data, Fed Chairman Ben S. Bernanke said in testimony to the Senate Banking Committee that the labor market may take five years to normalize. Vice Chairman Janet Yellen said yesterday that central bank asset purchases prevented the country from slipping into deflation and will add 3 million jobs to private payrolls.

Crude for February delivery climbed 0.8 percent to $88.70 a barrel on the New York Mercantile Exchange, after earlier climbing to as much as $89.98 a barrel, after the Trans-Alaska Pipeline System, which carries about 15 percent of U.S. crude output, was closed Jan. 8. The shutdown of the pipeline, an 800- mile network crossing the northernmost U.S. state, forced companies including BP Plc to suspend 95 percent of production in the North Slope area.

Gold for immediate delivery rose 0.2 percent to $1,372.70 an ounce, rallying from the biggest weekly drop since May, as concerns over Europe’s sovereign-debt crisis spurred demand for a haven. Silver climbed by the most in a week.

To contact the reporters on this story: Shiyin Chen in Singapore at schen37@bloomberg.net; Ron Harui in Singapore at rharui@bloomberg.net

To contact the editor responsible for this story: Will McSheehy at wmcsheehy@bloomberg.net.