Optimism on Euro Zone Buoys Stocks and Bonds

By REUTERS

Published: December 5, 2011

Stocks and the euro lost some of their gains Monday after a media report said Standard & Poor's Corp. was about to warn Germany and other euro zone nations that their credit ratings were being assessed for a possible downgrade.
The markets were generally higher earlier in the day when an agreement between leaders of France and Germany boosted optimism that European leaders would reach a credible solution to their debt crisis.
French President Nicolas Sarkozy and German Chancellor Angela Merkel agreed on a master plan for imposing budget discipline across the region, saying the European Union treaty needs to be changed. The leaders said their proposal included automatic penalties for governments that fail to keep their deficits under control and an early launch of a permanent bailout fund for euro states in distress.
The proposal will be sent to E.U. officials on Wednesday, ahead of a key summit on Friday.
Wall Street rose about 1 percent in late trading after the unconfirmed S.&P. report, while gains on European stocks ranged from 0.3 percent to 2.9 percent.
Even so, analysts were wary that the optimism would prove overdone.
"We are far from an easy consensus that it's a done deal," said Marc Pado, United States market strategist at Cantor Fitzgerald & Co. in San Francisco. "But we are further along in the negotiations than we've been and we are focused on the right things now."
An agreement could pave the way for an accelerated implementation of the euro zone's rescue plan to help ensure debt-ridden countries have a vehicle to tap for funds, while encouraging bondholders to buy euro zone bonds.

The euro was up versus the dollar at $1.3399, holding above last week's low of around $1.3230.
European stocks rose, with the FTSE 100 up 0.3 percent, building on last week's biggest weekly gain since late 2008. Euro zone stocks as measured by the Euro Stoxx 50 were up 1.2 percent.
Market sentiment also got an early boost after Italy unveiled a 30-billion-euro package of austerity steps and the Irish government said it would do something similar in a new budget to be announced later in the day.
The positive mood drove Italian bond yields further below the worrying 7 percent level at which they are seen as unsustainable, and the cost of insuring Italian debt against default also fell.
But global data highlighted the precarious economic situation. Purchasing manager surveys for November showed the euro zone's economy may be shrinking more quickly than previously thought, while growth in China's services sector sagged to a 3-month low.
While the United States economy is expected to avoid another recession, growth in the services sector slowed in November, and new orders declined in October for a second straight month.
"This is the first disappointing indicator we've seen in the last couple of weeks," said Cary Leahey, managing director at Decision Economics in New York. "The economy has improved — it is still not growing very quickly."
The week ahead features a series of high-profile meetings among European leaders seen as crucial to the future of the 17-nation euro zone.
On Tuesday, Treasury Secretary Timothy Geithner kicks off a visit to the region in Germany, where he will meet European Central Bank President Mario Draghi and government officials.