Growth, U.S. fiscal worries hit shares, but Nikkei gains

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By Richard Hubbard | November 16, 2012 10:28 PM EST

European shares fell for a third day on Friday as the weak economic outlook, uncertainty over U.S. budget talks and an upsurge of violence in the Middle East weighed on investors.

Stock index futures also pointed to a lower open on Wall Street when it resumes trading as investors worry about the outcome of negotiations between U.S. President Barack Obama and Congressional leaders due to begin later in the day.

The FTSEurofirst 300 index <.FTEU3> of top European shares was down 0.2 percent at 1,076.50 points in morning trade, on course for its worst week since late September with a loss of over two percent in the last five days.

The euro was down 0.4 percent against the dollar on Friday to $1.2730 though still above Tuesday's two-month low of $1.2661.

"I think things are deteriorating steadily in Europe," said Neil Mellor, currency strategist at BNY Mellon, who expects ongoing weak economic data to keep pressure on the euro.

GREEK MOUNTAIN

Adding to pressure on the single currency are concerns about a row between euro zone governments and the International Monetary Fund over how to cut Greece's giant debt pile.

The head of the IMF, Christine Lagarde, has cut short a tour of Asia to attend a Eurogroup meeting in Brussels on November 20, which will try to resolve the dispute in order to release a 31 billion euro ($39.66 billion) aid payment needed to keep the country afloat.

Anxiety over the outcome of those talks saw German government bond futures edge up to near two-month highs, with the December contract rising 11 ticks to 143.24.

Elsewhere in the currency markets, the Japanese yen steadied at around 81 to the dollar having fallen sharply this week as investors adjusted to the likelihood of a change in government and the possibility of an easing in monetary policy.

Japanese Prime Minister Yoshihiko Noda paved the way for a snap election on December 16 by dissolving the lower house of parliament on Friday. Shinzo Abe, leader of the main opposition Liberal Democratic Party, is widely expected to win the vote and has already called for the Bank of Japan to adopt interest rates of zero or below to spur lending.

"Only if the BOJ were to ease more aggressively will we see some weakness in the yen but it is not yet clear when this will happen," said Marcus Hettinger, global FX strategist at Credit Suisse in Zurich.

Earlier Japan's Nikkei stock index <.N225> bucked the global trend and rallied 2.2 percent to a two-week high. The index has risen 3 percent this week, helped by a 4.2 percent jump in the past two days.

CLIFF FACE

However, most of the market's attention is on Washington and the progress in efforts to resolve the so called 'fiscal cliff' facing the government at the end of the year.

Since last week's U.S. election, investors have become worried the giant economy could be tipped back into recession if no deal is reached to avoid the $600 billion in spending cuts and tax hikes due to take effect early next year.

Some in the markets are worried that efforts to reach a deal could result in tax hikes on wealthy investors, and have looked to lock in profits made from strong gains in U.S. share prices made this year.

"It's going to be a tough market in the next few weeks because we're going to get a lot of rumors coming out about whether there is a deal or not," Markus Huber, a senior trader at ETX Capital, said.

The broad S&P 500 index <.SPX> is still showing gains of around 7.5 percent for this year, but has lost nearly five percent this month with the falls all coming since election day.

Uncertainty about the fiscal cliff prompted analysts polled by Reuters to cut early 2013 U.S. growth expectations and has boosted demand for the perceived safety of U.S. Treasuries.

The yield on benchmark 10-year Treasuries fell to 1.58 percent on Friday, not far from a two-month low near 1.57 percent set earlier in the week.

Worries about the growth and the fiscal cliff also dominated commodity markets though oil traders were becoming concerned that a flare up fighting between Israel and the Palestinians may draw in Arab producers and impact supply lines.

Brent crude gained 18 cents to $108.19 a barrel but U.S. oil slipped 8 cents to $85.37.

Both oil benchmarks were on course for a losing week, as global growth concerns outweigh the upward pressure on prices from rising tension in the Middle East following Israel's strikes against Palestinian militants in Gaza.

Gold, which has tended to track riskier commodities in recent months as safe-haven seekers favor the dollar and U.S. treasuries, inched down to about $1,710 an ounce, on course for a weekly loss of around 1 percent. ($1 = 0.7817 euros)

(Additional reporting by Anooja Debnath and Francesco Canepa; editing by Philippa Fletcher)

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