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Greek debt default fears weigh on stocks despite confirmation of talks between China, Italy
LONDON (AP) ' Investors fretted about a chaotic Greek debt default Tuesday even though German Chancellor Angela Merkel indicated the debt-ridden country was making progress in meeting the demands of international creditors.
Confirmation that Italy's finance minister had discussions with China's sovereign wealth fund last week amid speculation that Rome is looking to persuade Beijing to buy its bonds helped support U.S. stocks late Monday. That positive momentum held for much of the Asian session, but faded in European trading.
Fear that Greece will soon run out of cash remains the driver in the markets, weighing on stocks in Europe and driving down the yield on German ten-year bonds to record lows. The fall in the German yield to 1.69 percent is another indication that investors are reluctant to pile in to supposedly risky assets.
"Markets are tired of talk and rumour on how to get Europe back on its feet and are still waiting for concrete results," said Ben Critchley, a sales trader at IG Index.
In Europe, the FTSE 100 index of leading British shares was down 1 percent at 5,078 while Germany's DAX fell 0.7 percent to 5,035. France's CAC-40 bore the brunt of the selling as investors continued to fret about the financial health of its banks ' it was down 2.2 percent at 2,791. BNP Paribas was in the spotlight of investor concerns trading 7 percent lower.
Wall Street was poised for a retreat at the open ' Dow futures were down 1 percent at 10,882 while the broader Standard & Poor's futures fell 1.2 percent to 1,144.
Investors are particularly nervous that financial aid will be pulled from Greece, which is trying to get a grip on its debts, now standing at over 150 percent of national income.
Merkel sounded a note of optimism regarding Greece's chances of getting the next batch of bailout cash from the so-called troika ' the European Commission, the European Central Bank and the International Monetary Fund. Representatives from the three organizations are due back in Athens this week.
"Everything that I hear from Greece is that the Greek government has hopefully understood the signs of the time and is now doing the things that are on the daily agenda," Merkel said on rbb-Inforadio. "The fact that the troika is returning means that Greece has started doing some things that need to be done."
Merkel also warned of the perils of an "uncontrolled" Greek bankruptcy.
Even if Greece gets its next installment of euro8 billion ($11 billion), the markets think that the country will have to concede defeat some time over the next year.
"Should Athens meet all its payment obligations over the coming six months, markets once again price in an almost 70 percent likelihood of the country defaulting over the following six months," said Lutz Karpowitz, an analyst at Commerzbank.
"The possibility of Greece not defaulting over the coming 12 months is therefore as low as 10 percent," he added.
Those fears are starting to impact on the euro, which has been resilient over the last few months on signs the European Central Bank was raising rates. Last week's indication from the bank that rate hikes are off the agenda has prompted a reassessment, and allowed the Greek default fears to start driving the currency lower. On Monday, it struck a seven-month low below $1.35.
It was trading steadily Tuesday, down only 0.1 percent at $1.3637.
Earlier in Asia, stocks remained relatively buoyant following the late flourish on Wall Street the day before.
Japan's benchmark Nikkei 225 index gained nearly 1 percent to close at 8,616.55 while Australia's S&P/ASX200 index rose 0.9 percent to 4,072.70.
Mainland Chinese investors were preoccupied Tuesday with domestic concerns, fretting over further credit tightening to counter inflation, which is hovering near three-year highs. The benchmark Shanghai Composite Index lost 1.1 percent to 2,471.31. The smaller Shenzhen Component Index dropped 1.6 percent to 1,077.13.
Meanwhile, oil prices recovered some ground. Benchmark oil for October delivery was up 44 cents to $88.63 in electronic trading on the New York Mercantile Exchange.
Elaine Kurtenbach in Shanghai contributed to this report.