Uncertainty over Europe hits euro, shares slip

LONDON - Investors sold European shares and the euro on Tuesday, unnerved by the political stalemate in Greece and the threat of a Franco-German split over policies to tackle the region’s debt crisis.

The uncertainty in Europe added to worries about global growth after weak American jobs data, sending industrial commodities like oil and copper lower. U.S. shares were also expected to open down on Wall Street.

While markets were in a risk averse mood, activity was less volatile than on Monday when European shares initially fell sharply in reaction to the weekend’s election results before firming after Spain said it was prepared to use public funds to help its troubled banks.

Spain is the euro zone’s fourth largest economy and investors have focused on its troubles because it would be expensive to provide a bailout similar to the one supporting the much smaller Greek economy.

“You have a little bit of negativity coming out of the U.S. and a lot of negativity out of Greece and Spain, and I think that’s the main problem,” said Nic Brown, head of commodities research at French investment bank Natixis.

Greek voters punished the two mainstream parties in Sunday’s vote for supporting the austerity conditions of the financial package and now the parties opposed to the bailout must try and form a government.

Financial markets are worried the election results in Greece and France, where president-elect Francois Hollande has also opposed drastic spending cuts, and the problems in Spain, could lead to a new phase of the crisis.

“The overall picture of policy uncertainty at the heart of the euro zone, and the heightened uncertainty over Greece as well are likely to keep the euro under pressure,” said Ian Stannard, head of European FX Strategy at Morgan Stanley.

The euro was down 0.25 percent at $1.3030, off the previous day’s three-month low of $1.2955, and hovering just above the bottom of a $1.30 to $1.35 range that it has traded within for most of the year.

The dollar was up 0.1 percent at 79.70 against a basket of major currencies.

Greek limbo

In Athens, the Left Coalition party was trying to form a government on Tuesday but the odds are stacked against it and the country may be forced to hold new elections.

The biggest risk for the markets is that political limbo causes Greece to miss the targets set in the bailout deal, meaning it could run out of cash possibly as early as June, setting the stage for its exit from the euro.

Investors are also worried about how French Socialist Hollande, who wants a more growth-centered approach to tackling the debt crisis, can reconcile his policies with Germany’s insistence on fiscal austerity across the region.

He will meet German Chancellor Angela Merkel on May 16.

“The market will be in a wait-and-see mode and consolidating around $1.30 until we get new indications as to what direction Europe goes from here,” said Audrey Childe-Freeman, global head of currency strategy at JP Morgan Private Bank.

SAFETY SOUGHT

The uncertainty favoured safe-haven assets including German government bonds, where the ten-year yield fell 3.2 basis points to 1.57 percent - not too far from a record low of 1.549 percent.

The most actively traded Bund futures contract was 41 ticks higher in early trade at 142.230 having hit a record high of 142.44 in the previous session.

The economic outlook for Germany, Europe’s largest economy, got a lift when factory output rose more than expected in March, helped by orders from outside the ailing euro zone.

In the equity markets, worries about European politics and the global economy hurt mining and smoe industrial stocks.

“The economically-sensitive stocks, such as the miners, have been hit by the worries over the economy caused by Greece and France,” said Charlotte Square fund manager Amanda Forsyth.

The pan-European FTSEurofirst 300 was down 0.05 percent to 1,034.01 points, while the blue chip Euro STOXX 50 index shed 0.18 percent to 2,2678.91 points.

The Athens General Index was down 2.8 percent after falling 7 percent on Monday.

Spanish banking stocks recovered to buck the weaker trend in European markets adding to strong gains made on Monday when Prime Minister Mariano Rajoy said public money could be used as a last resort to aid domestic lenders.

Shares in Santander, the euro zone’s biggest bank were up 0.1 percent at 4.90 euros after gaining 4.7 percent in the previous session.

Shares in Dutch telecom firm KPN KPN.AS rose by about 20 percent after America Movil, the telecommunication group controlled by Mexican tycoon Carlos Slim, offered to buy a stake worth up to 3.2 billion euros ($4.2 billion) as a base for potential expansion in Europe.

America Movil, which is seeking up to 28 percent of KPN, said it sees the move as a long-term investment that would give it a presence in Europe at a time when the Mexican group has run out of opportunities to expand at home.

Oil prices fell for a fifth straight session on the prospect of weaker growth on both sides of the Atlantic at a time of ample supply from major oil producers.

Brent crude fell 50 cents to $112.66 a barrel, down more than 5.5 percent so far in May, and U.S. crude lost $1.14 per barrel to touch a low of $96.80.

Three-month copper on the London Metal Exchange was down 0.25 percent at $8,155.50 with investors in this market cautious ahead of Chinese economic data due later this week.