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Global markets cautious over economic gloom

By Carlo Piovano
AP Business Writer / December 15, 2011
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LONDON—Signs of a global economic slowdown and stresses in Europe's financial system kept investors cautious on Thursday, causing losses in Asian markets, limiting gains in Europe and keeping the euro near 11-month lows.

Surveys showed Japanese business confidence and Chinese manufacturing had both slipped, while European industrial and services sectors continued to contract, though less than expected.

Concerns over Europe's debt crisis are squeezing credit conditions for banks in the region. The fear that a bank might not be able to withstand losses on its holding of shaky government bonds makes the banks less inclined to lend to each other, as they normally do to fund their hugely expensive daily operations.

Many banks are relying on cheap credit from the European Central Bank for that money, but in the meantime they are cutting down on lending to businesses and households.

As a result, the real economy in Europe is sliding toward recession.

The purchasing managers' index published by financial data company Markit showed eurozone manufacturing and services output contracting for a fourth month in December, although not as much as economists were expecting. The combined index for the two sectors stood at 47.9 in December, up from 47.0 in November. A figure below 50 indicates contraction.

"The likelihood remains that eurozone GDP will contract in the fourth quarter, even if the decline may not be as has been feared," said Howard Archer of IHS Global Insight in a report.

A day after suffering sharp losses, European stocks rose slightly. Britain's FTSE 100 rose 0.5 percent to 5,395.37. Germany's DAX gained 0.9 percent to 5,727.67 and France's CAC-40 added 0.6 percent to 2,993.30.

Wall Street was likewise headed for modest gains, with Dow Jones industrial futures up 0.2 percent to 11,784 and S&P 500 futures gaining 0.5 percent to 1,211.80.

The euro was steady at 1.2993, near its lowest levels so far this year.

Since European leaders reached an agreement to rein in future government budget deficits last week, investors and credit rating agencies have criticized the deal for failing to address current problems.

Italy had to pay higher interest rates in its last bond auction of the year on Wednesday. The longer the country's borrowing rates remain high, the bigger the financial burden will be. The higher rates reflect rising doubts that the country will be able to repay its debts.

The Italian government will hold a confidence vote on its euro30 billion ($39 billion) package of tax hikes and spending cuts that have been hotly contested by lawmakers and unions.

Stocks faced stronger headwinds earlier in Asia. Japan's Nikkei 225 index shed 1.7 percent to close at 8,377.37, a three-week low. South Korea's Kospi lost 2.1 percent to 1,819.11 and Hong Kong's Hang Seng tumbled 1.8 percent to 18,026.84.

Mainland Chinese shares lost ground for a sixth straight trading day, with the benchmark Shanghai Composite Index falling 2.1 percent to 2,180.90, while the Shenzhen Composite Index lost 2.3 percent to 886.01.

In Japan, confidence at major manufacturers fell over the last quarter. The Bank of Japan's "tankan" survey of business sentiment fell to minus 4.

The figure represents the percentage of companies saying business conditions are good minus those saying conditions are unfavorable, with 100 representing the best mood and minus 100 the worst.

Japan's strong yen has hit multiple historic highs this year against the dollar, making business conditions difficult for Japan's export-reliant economy.

Meanwhile, preliminary manufacturing figures showed that Chinese factory output contracted, but at a slower rate, in December. HSBC's purchasing manager's index for December stood at 49.0, up from 47.7 in November. Any number below 50 indicates a contraction in manufacturing activity.

But the figure didn't raise hopes that China might ease its monetary policy anytime soon.

"I don't think there will be an interest rate cut in the short-term," said Dickie Wong, executive director of research at Kingston Securities Ltd. in Hong Kong. "Sentiment is really bad in China."

The dollar slipped to 77.91 yen from 78.07 yen late Wednesday in New York.

Oil prices, which plunged more than $5 on Wednesday, drove down energy-related shares and steadied on Thursday.

Benchmark oil for January delivery was up 81 cents at $95.72 a barrel in electronic trading on the New York Mercantile Exchange. The contract declined $5.19 to finish at $94.95 per barrel on the Nymex.

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Pamela Sampson in Bangkok contributed to this report.

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