Despite progress in Europe, markets still nervous

By Sarah Dilorenzo

Associated Press

Published: Monday, Nov. 14 2011 8:52 a.m. MST

PARIS — European markets fell on Monday as initial relief over new governments in Greece and Italy gave way to the reality that those countries still face tremendous obstacles.

Technocrats have taken over in both Athens and Rome and have promised to institute the reforms required to keep their economies afloat. In Greece, Lucas Papademos must persuade his country's creditors to hand over the next €8 billion installment of the bailout that will keep it from defaulting. Many Greeks have fought the reforms demanded by creditors, protesting in the streets and making the country nearly ungovernable at times.

In Italy, Mario Monti needs to convince investors that a well-managed country can slash its debts and restart growth. Monti seemed off to a good start Monday — the morning after he was installed and before he had a chance to do anything — when Italy's bond yields dropped significantly in early trading.

They soon edged higher, however, as investors remained cautious about the country's huge challenges ahead. The key 10-year borrowing rate was at 6.60 percent, up from Friday but still below last week's worrying highs above 7 percent.

That caution extended to stock markets, where European indexes lost early gains to trade lower by late afternoon. In France, the CAC-40 fell 1.4 percent to 3,104.92, while Germany's DAX was down 1.5 percent at 5,964.11. The FTSE index of leading British shares fell 0.6 percent to 5,512.06. The euro, meanwhile, was down 1 percent at $1.3625.

Wall Street fell on the open as well — the Dow dropped 0.3 percent to 12,120.57 and the S&P 500 shed 0.6 percent to 1,256.75.

While investors are clearly relieved that experienced economists are in charge in two of Europe's most fragile countries, reliable leadership is only the beginning: Reducing Italy's €1.9 trillion ($2.6 billion) mountain of debt in an era of stagnant growth is still a monumental task.

"Italy and the eurozone are still faced with an uphill battle to win back credibility," said Jane Foley, an analyst with Rabobank. "Most worrying is that some of those battle lines have crossed over into France signifying that contagion is rattling the very core of EMU (European Monetary Union)."

Corporate news was also worrying. Unicredit, Italy's largest bank, reported a huge €10.6 billion loss in the third quarter after writing off the value of units in Ukrain and Kazakhstan as well as the value of Greek bonds. It promised to cut thousands of jobs and to raise new cash to strengthen its finances. Shares in the company dropped 6.2 percent after being halted temporarily for excessive losses.

In the U.S., shares in retailer J.C. Penney Co. fell 1 percent after the company reported a quarterly loss.

In Asia, markets enjoyed gains on early enthusiasm over the new governments in Italy and Greece. Economic data there was also upbeat — Japan's economy grew for the first time in four quarters, at an annualized rate of 6 percent.

Japan's Nikkei 225 index added 1.1 percent to close at 8,603.70. Hong Kong's Hang Seng surged 2 percent to 19,508.18 and South Korea's Kospi climbed 2.1 percent to 1,902.81

On mainland China, the benchmark Shanghai Composite Index gained 1.9 percent to 2,528.71 while the smaller Shenzhen Composite Index jumped 2.5 percent to 1,083.04. Benchmarks in Singapore, Australia, and Indonesia were also higher.

The good news about Japan's economy had buoyed energy prices earlier in the day since growth means an increase in demand for oil. But once the focus turned back to Europe's problems, oil fell $1.18 to $97.81.

Pamela Sampson contributed to this report from Bangkok.

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