* Euro slips to two-month low as ECB leaves rates unchanged
* World shares weaker as U.S. fiscal problems weigh
* European stocks see small recovery after sharp selloff
* Commodity markets watch leadership transition in China
By Richard Hubbard
LONDON, Nov 8 (Reuters) – The euro hit a two-month low on
Thursday after the European Central Bank kept its interest rates
unchanged, despite growing evidence of a widespread economic
slowdown.
Equity markets, however, recovered slightly after
Wednesday’s sharp selloff caused by concerns about a looming
U.S. fiscal crisis, with stock index futures pointing to a
modestly firmer start on Wall Street.
The ECB had been widely expected to leave its main rate at
0.75 percent but recent comments by President Mario Draghi on
the weak economic outlook and gloomy European Commission GDP
estimates had increased speculation it may consider a move.
The lack of action left the common currency down 0.25
percent at $1.2735 with many analysts expecting the slowdown
across the euro zone, and especially in Germany, to prompt a cut
before the year-end.
“The general theme here is that weak growth is weighing on
the euro,” said Steven Saywell, global head of FX strategy at
BNP Paribas.
At a news conference, Draghi cited above-target inflation
and improved financial market conditions as reasons for the
decision to hold rates.
Earlier the Bank of England also opted against easing
monetary conditions any further, with policymakers hoping a new
lending scheme will boost activity while some worried about
inflation.
The euro had been under pressure before the ECB decision
even though the Greek parliament approved in the early hours of
Thursday an austerity package needed to unlock international aid
and avert bankruptcy, defying political rifts and violent
protests.
CLIFF EDGE LOOMS
The dollar was up 0.15 percent to near its two-month high
against a basket of major currencies of 80.924, as
concerns about the U.S. fiscal problems raise its safe-haven
appeal.
Investors fear the preservation of the status quo in
Washington after Tuesday’s elections may make it hard to reach a
deal on about $600 billion in spending cuts and tax increases
due to start early next year, and that this could derail the U.S
economic recovery.
The “fiscal cliff”, which can be avoided only if Democrats
and Republicans settle their differences in Congress, provoked a
selloff on Wall Street on Wednesday. Asian markets followed
suit, pushing the MSCI world equity index down
0.25 percent at 326.04 points.
“The fiscal cliff is here and it will reveal itself to be
very real,” said Jeffrey Sica, president of Sica Wealth
Management.
Sica said higher capital gains taxes could form part of a
Congressional deal to tackle the deficit, and may encourage
investors to sell equities. “The strong likelihood that capital
gains (could) double will force investors to take profits now to
avoid paying higher capital gains taxes later,” he said.
In Europe the FTSEurofirst 300 index, which lost
1.4 percent in Wednesday’s selloff, recovered slightly on
Thursday to be up 0.4 percent at 1,104.16 points. London’s FTSE
100, Paris’s CAC-40 and Frankfurt’s DAX
all traded around 0.2 to 0.6 percent higher.
SPAIN PASSES BOND TEST
In the fixed income market most attention was on a Spanish
sale of 4.8 billion euros ($6 billion) of new debt, which
included a 20-year bond – the longest dated issue to be
auctioned since mid-2011.
The sale, which completes the government’s funding needs for
this year, means it can hold out longer before asking for
international aid.
However, yields on existing Spanish debt rose after the
auction as traders viewed some of the bids accepted by the
government to complete the sale as quite low.
Spanish 10-year bond yields rose to 5.86
percent, up 14 basis points to their highest since mid-October.
However, German 10-year government bonds, often an indicator of
any change of sentiment in the euro zone, were largely unchanged
at 1.38 percent.
CHINA CHANGE
In commodity markets concerns about weak demand from top
consumer China added to the concerns about the impact of the
fiscal cliff and weak euro zone growth.
In China the government has begun a once-in-a-decade
leadership change against a backdrop of growing social unrest
and public anger at corruption and a gap between rich and poor.
Traders are looking for hints from the Communist Party
Congress on future policy direction that may affect demand from
the world’s biggest consumer of many industrial commodities.
“So far, contents of speeches from the 18th Party Congress
have been within expectations. There hasn’t been anything
particularly encouraging to investors,” said Orient Futures
derivatives director Andy Du.
Oil rose after tumbling more than $4 on Wednesday amid
concerns about weak demand for fuel as the U.S. and European
economies face the risk of a prolonged slowdown.
Brent crude traded 91 cents higher at $107.73 per
barrel having fallen nearly 4 percent on Wednesday, its steepest
drop since December 2011.
U.S. crude rose $1.02 to $85.46 a barrel, after
losing nearly 5 percent in the previous session, also its
biggest slump since December 2011.
