Unease on EU summit weighs on stocks, euro

NEW YORK: Investors were skittish ahead of a European Union summit on Wednesday, with conflicting prospects for a resolution of the euro zone's sovereign debt crisis keeping global stocks in a virtual holding pattern while the euro retreated.

Investor optimism was boosted after Germany's lower house of parliament approved a motion to strengthen the euro zone rescue fund, providing Chancellor Angela Merkel with the mandate she needs to negotiate when the EU summit convenes.

Optimism also gained after the incoming head of the European Central Bank threw the euro zone a lifeline hours before the summit by signaling the bank would go on buying the bonds of troubled countries to combat market turmoil.

But murky prospects for the emergence of a comprehensive deal from Wednesday's summit kept investors on edge.

EU governments will signal readiness to back banks with guarantees to avert a credit freeze, but give no overall figure for recapitalizing lenders, according to a draft statement from the summit in.

The dollar touched a record low against the yen, heightening a risk that Japanese authorities might intervene. The euro was down 0.5 percent at $1.3838.

Stocks in Europe eked out gains, but closed well off earlier highs as the worries over the EU summit weighed. The pan-European FTSEurofirst 300 index of top shares provisionally closed up 0.1 percent at 983.16 points.

MSCI's all-country world equity index fell 0.1 percent.

US stocks were mixed as optimism ahead of the EU summit contributed to early gains, but the outlook for a comprehensive deal to resolve the two-year-old crisis was unclear.

"There are some questions about whether they will come up with something, and that lack of resolution is the main dampener for stocks," said John Carey, portfolio manager at Pioneer Investment Management in Boston.

The Dow Jones industrial average was up 56.95 points, or 0.49 percent, at 11,763.57. The Standard & Poor's 500 Index was up 1.75 points, or 0.14 percent, at 1,230.80. The Nasdaq Composite Index was down 10.35 points, or 0.39 percent, at 2,628.07.

A 5 percent rise in shares of Boeing, to $66.89. after the plane maker posted forecast-beating results and raised its full-year earnings outlook helped drive up the Dow.

US Treasury debt fell as bond investors clung to the view that European leaders will resolve the debt crisis.

Bund futures settled up 40 ticks at 135.62, while US Treasury debt pared losses.

The benchmark 10-year US Treasury note was down 12/32 in price to yield 2.16 percent.

Oil futures also gave up early gains on investor jitters that the summit may fail to deliver a decisive resolution and as weekly US inventory data showed an increase in crude stockpiles.

"European economic uncertainty is keeping a lid on prices, but the resurgence in Chinese demand stops markets falling too far," said Christopher Bellew, an oil broker with Jefferies Bache.

Brent crude futures, which have lagged the 6.5 percent rally of US crude in the last three sessions, were down $1.46 at $109.46 a barrel.

US crude fell by $1.80 to $91.37 a barrel.

Investors shrugged off US economic news.

Demand for a range of long-lasting US manufactured goods rose in September at the fastest pace in six months, suggesting the economy was heading into the fourth quarter with solid momentum.

Other data also pointed to a strengthening in economic activity, with new homes sales in September the strongest in five months and mortgage applications rising last week.

Copyright Reuters, 2011