GE focus for Wall Street, Spanish, Italian bond yields fall

LONDON (Reuters) - Spanish and Italian bond yields hit their lowest levels in over half a year on Friday after euro zone leaders firmed up plans for a common bank watchdog, while world shares and the euro remained on course for strong weekly gains despite a dip.

Wall Street is expected open mixed when trading resumes, after solid results from manufacturing bellwether GE Electric helped offset Thursday's surprisingly weak earnings from tech giants Google and Microsoft.

Europe saw profit taking in both equity <.fteu3> and currency markets following sharp gains earlier in the week, while oil and gold prices were steady.

European leaders at a summit in Brussels said a new supervisor would be in place next year, paving the way for the bloc's rescue fund to inject capital directly into ailing banks.

With that and the prospect of European Central Bank support looming, benchmark Spanish bond yields have come down around half a percentage point this week and both Spain and Italy have seen dramatically stronger bond sales.

Spanish 10-year yields fell to their lowest in 6-1/2 months as markets digested news from the EU summit. Italian yields also fell to levels not seen in over seven months, helped by a jumbo sale of 4-year bonds on Thursday.

"There is more of a general understanding that the ECB backstop is actually effective," UniCredit chief euro zone economist Marco Valli said of the central bank pledge to buy sovereign bonds on the secondary market.

"The market has brought yields in Italy and Spain down to levels which, for the time being, seem to be much more consistent with debt sustainability," he added.

"The big question now remains will Spain go for support? And if so, when?"

HIGHS REACHED?

Global economic data in recent days and signs of progress in defusing the euro zone debt crisis has left the MSCI index of world shares <.miwd00000pus> up almost 3 percent for the week, near a 15-month high, and the euro up about 1.5 percent against the dollar.

With equity investors in a mood to book profits after four sessions of gains, world shares were down 0.3 percent on Friday ahead of the start of U.S. trading.

Stock futures also pointed to falls for the S&P 500 and the Dow Jones after General Electric met forecasts with a 8.3 percent rise in quarterly profits.

The pan-European Euro STOXX 50 was down almost 1 percent at 1150 GMT but was still on course for one of its best weeks of 2012, up over 3 percent since Monday.

"It is possible that the highs for the year are in," said Lex van Dam, hedge fund manager at Hampstead Capital. "Company earnings remain under pressure.

"Today feels very much like a risk-off environment."

In currency markets, the euro, at $1.3056, hovered below its one-month high against the dollar as the EU summit reconvened on Friday, while the yen was near a two-month low against the dollar as speculation mounted over the possibility that the Bank of Japan will take fresh stimulus measures.

The Australian dollar was steady at $1.0365, off a three-week high of $1.0415 hit on Thursday. Gold, which has been slowly slipping this month as the dollar has strengthened, fell to $1,733.90, heading for its second successive weekly decline.

THREE FACTORS

The euro zone's troubles, the upcoming U.S. election and growth in China are the three principle factors dominating global financial markets.

Over the weekend, Spain's Basque and Galicia regions hold elections in what is been seen as an effective referendum on the country's spending-cut program.

Investors had speculated that Spain might check itself in to a fiscal rehabilitation program once these votes were out the way, but the recent fall in its borrowing costs have left many struggling to put a timeframe on any such move.

"If the market is open, as it is at the moment, signing your name on a MOU signs away some sovereignty over economic policy and that is politically costly," said Deutsche Bank economist Mark Wall. "So we need some kind of event to push us into the end-game."

Copper and other metals attuned to the economic cycle fell on Friday but remained on track for weekly gains, boosted by signs that world powerhouse economies China and the United States are stabilizing.

Oil prices held above $112 a barrel, but were set for their third weekly fall in five weeks, as the restart of Britain's largest oilfield is imminent.

"We have enough supply," said Jeremy Friesen, a commodities strategist at Societe Generale, adding that Brent prices would probably trade between $110 and $115 a barrel this quarter.

"Short of any geopolitical or economic shocks," he said, "The market will probably grind lower this month."

(Additional reporting by Tricia Wright and Florence Tan; Editing by Alastair Macdonald)

Source: http://news.yahoo.com/asian-shares-ease-eu-strikes-bank-reform-deal-035041748--finance.html

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