Investors poke holes in EU plan, markets mixed

By Daniel Bases

NEW YORK (BestGrowthStock) – A wave of investor skepticism over Europe’s $1 trillion rescue plan kept financial markets on edge on Tuesday, with U.S. stocks (Read more about the stock market today. ) managing to rise but European shares lost ground and the euro resumed its fall.

Investors are concerned the efforts to backstop the euro zone currency is only a short-term fix rather than a long-term solution. Gold reached a five month high on safe-haven buying.

“Markets aren’t buying the story. It’s clear that the markets remain very concerned about the fiscal outlook for Europe,” said Mike Moran, senior currency strategist at Standard Chartered Bank in New York. “Clearly, the near-term outlook is one of skepticism for the euro.”

Gains in U.S. benchmark stock indexes were modest, adding to Monday’s gains, but banking shares stalled after surging on Monday. The S&P financial index (.GSPF: ) shed 0.2 percent.

Biotechnology shares led the U.S. rally after Gilead Sciences (GILD.O: ) unveiled a large stock-buyback program. Its shares rose 3.23 percent to $39.62.

In midday New York trade, the Dow Jones industrial average (.DJI: ) rose 31.74 points, or 0.29 percent, at 10,816.88. The Standard & Poor’s 500 Index (.SPX: ) gained 4.51 points, or 0.39 percent, at 1,164.24. The Nasdaq Composite Index (.IXIC: ) climbed 17.03 points, or 0.72 percent, at 2,391.70.

Stocks scored their biggest one-day gain in more than a year on Monday.

“Investors are still waiting to form an opinion on the package, and until they do, things are going to stay very volatile,” said Subodh Kumar, chief investment strategist at Subodh Kumar & Associates in Toronto.

German Chancellor Angela Merkel’s cabinet on Tuesday backed plans to contribute 123 billion euros in loan guarantees to support the euro currency. However, opposition lawmakers warned it had yet to decide if it backed the rescue plan.

After Monday’s initial euphoria that pushed the euro to $1.31, it fell 0.43 percent to $1.2726.

“We realize now that this is just another way of delaying perhaps the inevitable,” said Shaun Osborne, chief FX strategist at TD Securities in Toronto. “It pushes the debt problems further down the road.”

The FTSEurofirst 300 (.FTEU3: ) index of top European shares closed down 0.38 percent at 1,035.00 points, after Monday’s 7.39 percent advance. Bank stocks, which had led on Monday, fell, with the STOXX Europe 600 banking index (.SX7P: ) down 1.8 percent.

In Asia, Chinese stocks (.SSEC: ) fell 1.9 percent to their lowest level in a year on a worsening inflation outlook. Chinese inflation rose to an 18-month high in April, increasing concerns the government still has its work cut out to keep the world’s third-largest economy from boiling over.

MSCI’s all-country world index (.MIWD00000PUS: ) cut its losses, losing 0.2 percent. Emerging stocks (.MSCIEF: ) dipped 0.37 percent.

The greenback rose 0.15 percent against a basket of major trading partner currencies (.DXY: ).

But even with the U.S. dollar’s strength making precious metals more expensive, investors pushed spot gold up $17.15, or 1.43 percent, to $1,219.00. Earlier it rose to $1,223.90 an ounce, its best level since early December.

“Investors are trying to search out safe havens, and clearly gold is one of those,” said RBS Global Banking & Markets analyst Daniel Major. “While the current environment of acute investor risk aversion remains, gold is bound to benefit.”

DEBT FLAT

In a sobering note, the International Monetary Fund said that even though Greece’s public debt was sustainable over the medium term, the nation faced plenty of risks.

Moody’s credit ratings agency also warned on Monday that it might downgrade Portugal’s debt rating and further cut Greece’s to junk status, noting the contagion effect of Greece’s crisis on other euro zone members.

The unsettled German political scene left Bunds to languish. They recouped less than half of Monday’s drop, when they suffered amid euphoria for riskier debt issuers following the announcement of the European rescue package.

The June Bund future was up 14 ticks on the day at 125.63 but off its session high at 126.29.

Ten-year Greek bond yields fell by around 50 basis points to 7.7 percent, squeezing the spread against German bond yields slightly tighter on the day to 477 bps as investors opted to hold rather than sell the bonds.

Volatile trade left U.S. Treasuries little changed. A raft of new issues may have also dampened demand.

Benchmark 10-year U.S. Treasuries were off 7/32 of a point in price, pushing the yield up to 3.56 percent.

U.S. light sweet crude oil rose 40 cents, or 0.52 percent, to $77.20 per barrel.

Investing Analysis

(Additional reporting by Ryan Vlastelica, Wanfeng Zhou in New York, Blaise Robinson in Paris, Rebekah Curtis, Harpreet Bhal, Jan Harvey, and George Matlock in London; Editing by Leslie Adler)

Investors poke holes in EU plan, markets mixed