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Stocks rise, eurozone crisis stalks bond auctions

By David Mchugh

Associated Press

Published: Tuesday, April 24 2012 5:20 a.m. MDT

Socialist Party candidate for the presidential election Francois Hollande delivers his speech during a campaign rally in Lorient, western France, Monday, April 23, 2012. Official partial results show socialist Francois Hollande and conservative President Nicolas Sarkozy are advancing to the runoff of France's presidential elections.

David Vincent, Associated Press

FRANKFURT, Germany — Stocks in Europe and Asia rebounded modestly Tuesday after sharp losses the day before on fears about Europe's debt crisis, helped by a late rebound on Wall Street. But rising borrowing costs at bond auctions for Spain and Italy showed that debt fears still stalk the eurozone.

The Stoxx 50 index of European blue chips traded up 0.41 percent at 2387.40, while Germany's DAX added 0.8 percent to 6573.92, France's CAC-40 rose 1.1 percent to 3131.89 and the London FTSE climbed 0.4 percent to 5691.26. The euro was little changed, up 0.01 percent at $1.3155.

The gains followed drops Monday across Europe and Asia as investors absorbed weekend political developments including the collapse of Prime Minister Mark Rutte's government in the Netherlands when it could not agree with a key allied party on budget cuts to bring the deficit below the EU-mandated 3 percent. In France, Socialist Francois Hollande led the first round of presidential elections; he has vowed to renegotiate a European treaty tightening rules on debt.

Commerzbank analyst Achim Matzke said a late rebound on Wall Street after the European close was helping shares in midday trading in Europe. "Yesterday, things might have been exaggerated to the downside, and the second point is, Wall Street was 140 points down when European markets closed but improved a bit by the close."

"Those two things have been absorbed by the markets and that means we're seeing a partial adjustment."

In the U.S. on Monday, the Dow Jones industrial average lost 102.09 points to close at 12,927.17. The Dow had dropped by as many as 183 points then spent the rest of the day climbing back.

Headwinds from the debt crisis have not lessened and made themselves felt Tuesday at Spanish and Italian bond auctions. Yields on Italian two-year bonds jumped a full percentage point to 3.36 percent from 2.35 percent a month earlier. Yields also spiked at a Spanish auction of short-term debt, rising to 0.634 percent on three-month bills from 0.381 percent and to 1.580 on six-month bills from 0.836 a month ago.

Rising borrowing costs are a key driver of the debt crisis. Bond investors demand higher yields to compensate for what they perceive as increased risk of losses on a country's debt. Both Italy and Spain are struggling to convince markets they can pay their debts despite shrinking economies. Prime ministers Mariano Rajoy in Madrid and Mario Monti in Rome are trying to cut deficits and push through reforms to their countries rules on hiring and firing people to make them more business friendly. Those reforms take time, and meanwhile countries must borrow to pay debt as it comes due.

High borrowing costs have already pushed Greece, Ireland and Portugal to take bailouts, but Spain and Italy are much bigger — the No. 3 and No. 4 eurozone economies — and could easily overwhelm the eurozone's rescue fund.

Wall Street was headed for a higher open, with Dow Jones industrial futures gaining 0.3 percent to 12,904. S&P 500 futures were up 0.3 percent to 1,366.20.

Asian stocks slumped early Tuesday amid all the distraction from Europe, but some key benchmarks found their footing by the close.

Linus Yip, strategist at First Shanghai Securities in Hong Kong, said investors are looking to a meeting of U.S. Federal Reserve policymakers on Tuesday and Wednesday to discuss the economy and monetary policy.

Traders are hoping there might be some show of support for a third round of bond purchases, dubbed quantitative easing III or QE3, to support the U.S. economy.

The Fed has already carried out two rounds of bond-buying to drive down long-term interest rates. But the Fed gave no hint of more bond buying at its meeting in March, and Yip said it was "very hard to tell" which way the Fed may be leaning this time.

Japan's Nikkei 225 index closed down 0.8 percent at 9,468.04 and South Korea's Kospi lost 0.5 percent to 1,963.42. Australia's S&P/ASX 200 added 0.2 percent to 4,360.40, with lower-than-expected inflation encouraging traders to wade into stocks. Hong Kong's Hang Seng rose 0.3 percent at 20,677.16 and benchmarks in Singapore, Taiwan, Thailand and Indonesia also finished higher.

In mainland China, the benchmark Shanghai Composite Index was virtually unchanged at 2,388.83 while the smaller Shenzhen Composite Index lost 0.9 percent to 936.51.

Associated Press Writer Pamela Sampson in Bangkok contributed to this report.

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