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Stocks buffeted by Italy's rising borrowing rate
Investor sentiment at mercy of Italy's key borrowing rate as it hovers around 7 percent again
By The Associated Press

PARIS (AP) ' Rising borrowing costs for many of the eurozone's more indebted countries sent investors scurrying out of most stock markets Tuesday, as Italy's premier-designate struggled to convince the world that he had the backing of the country's political parties to institute reforms.

But U.S. markets found some comfort by the news that retail sales there increased 0.5 percent, raising hopes that the world's largest economy was not in as bad a shape as many were predicting just a month or two back.

Europe, though, appeared to be souring on the chances of success of respected economist Mario Monti, who was tapped to replace Silvio Berlusconi. Given the sheer size of the task facing Rome, markets are now viewing developments there with skepticism and the country's key borrowing rate is spiking again.

The yield on the country's 10-year bond was up 0.36 percentage point Tuesday to 6.94 percent, hovering around the 7 percent threshold that stoked panic last week that Italy's finances were spiraling out of control. It was that sort of rate that eventually forced Greece, Ireland and Portugal to seek multibillion-euro bailouts; the problem this time is that Italy is the eurozone's third-biggest economy and widely thought to be too big to save.

It's not just Italy that's facing rising bond market pressures. Spain's equivalent rate is getting uncomfortably high, too, rising a further 0.18 percentage point to 6.25 percent.

And France has seen its 10-year yield rise another 0.18 percentage point to 3.66 percent. That the eurozone's second-largest economy ' one considered part of the bloc's bedrock ' is now feeling the pinch is stoking fears that the crisis has yet to swallow its last victim.

A report released Tuesday that rated the economies of the 17 countries that use the euro had harsh words for France, which it placed near the bottom of an assessment of overall health, in between Spain and Italy.

"Alarm bells should be ringing for France," the report from the Lisbon Council think tank warned. "The results are too mediocre for a country that wants to safeguard its place in the top league."

All this is proving an uncomfortable backdrop for stock markets, which have suffered a sharp reverse.

"This is an extremely worrying time for Europe as contagion is starting to become a very real possibility," said Simon Furlong, a trader with Spreadex. "The stark reality (is) that there could very possibly be a Domino effect in Europe."

In Europe, Germany's DAX was down 0.7 percent at 5,943 while France's CAC-40 fell 1.8 percent to 3,054. Meanwhile, the FTSE 100 index of leading British shares was down only 0.1 percent at 5,514.

The Wall Street indexes were volatile. After opening higher, they were trading slightly lower; the Dow Jones industrial average was down 0.2 percent at 12,056 while the broader S&P 500 fell by the same rate to 1,249.

Energy prices also seemed to ride the pick-up in consumer sentiment in the U.S., with benchmark crude for December delivery rising 80 cents to $98.94 a barrel in electronic trading on the New York Mercantile Exchange.

But Michael J. Woolfolk of Bank of New York Mellon Global Markets cautioned that the good news could be short-lived.

"With the 'double dip' scenario now off the table, market sentiment has recovered as the U.S. economic outlook has improved," he said. "That said, nothing fundamentally has changed. The U.S. and European debt crises remain, and are guaranteed to keep uncertainty high into the new year."

Tuesday's declines in European markets came despite figures showing that the eurozone managed to avoid contracting in the third quarter of the year. Instead, solid German and French growth figures allowed the eurozone to eke out growth of 0.2 percent.

However, there's a growing worry that the eurozone will soon fall back into recession as the debt crisis spreads and that's weighing on the euro, too, which was down 0.5 percent at $1.3536.

Italy's Monti was also working to build consensus in parliament on Tuesday. Two major parties, including Berlusconi's, agreed to back Monti, but investors are still worried that they might pull their support in the future if austerity measures prove unpalatable.

Those reforms are needed to help drive Italy's borrowing rates down so that it avoids a big increase in its interest costs as some euro200 billion ($273 billion) in public debt comes due through the end of April.

Earlier in the day, Asian stock markets were mostly lower. Japan's Nikkei 225 index lost 0.7 percent to close at 8,541.93. South Korea's Kospi index dropped 0.9 percent to 1,886.12 and Hong Kong's Hang Seng fell 0.8 percent to 19,348.44. Benchmarks in Australia, Taiwan and Singapore also retreated.

Only mainland China's Shanghai Composite Index closed marginally higher at 2,529.76.


Pamela Sampson contributed to this report from Bangkok.

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