(Reuters) – The euro edged higher on Monday as an election victory for Spanish Prime Minister Mariano Rajoy in his home region was seen as clearing one obstacle to Madrid seeking international aid.
But slow progress towards a banking union across the 17-member euro area and worries about agreement over a common budget for the whole European Union limited the gains.
“Now (Rajoy) has the support of his region perhaps he’ll feel confident to actually press forward and ask for a bailout, said Fiona Cincotta, City Index market strategist.
Cincotta said markets had been patient in the run up to the weekend election in Galicia, which had been seen as a referendum on the Spanish government’s handling of the euro zone crisis, and will want to see action on a bailout request soon.
Spanish 10-year bond yields crept up 2.4 basis points in the wake of the election result to be at 5.41 percent, having fallen around half a point last week after the country retained its investment grade rating.
German 10-year bond yields, which would be expected to fall if tensions in the euro area had eased, were stable at 1.60 percent.
A bailout request from Spain is needed to trigger the European Central Bank’s new bond buying program which the markets see as being able to draw a line under the threat facing the euro zone’s fourth-largest economy.
The euro was up 0.1 percent at $1.3032 from a low of $1.3013 hit on Friday, but the range of problems still facing the single currency area kept the gains in check.
European Union leaders face at least two months of tough bargaining on money, power and the future governance of the euro zone before they can convince investors that the threat to the single currency has faded.
DOLLAR HIGH
The dollar touched a three-month high against the yen of 79.680 yen on Monday as speculation grew of fresh moves by the Bank of Japan to boost the economy following a more than 10 percent drop in exports in September.
The bigger-than-expected fall in Japanese exports of 10.3 percent in year-on-year terms, reflected both the global economic slowdown which worsened in the third quarter, and the impact of anti-Japan protests in China, a major trading partner.
Japan’s Prime Minister Yoshihiko Noda told his cabinet last week to prepare a fresh stimulus package by next month, but the plan’s limited scope and lack of detail failed to impress markets, increasing pressure on the central bank to act.
“There is a lot of hope there that they (the BOJ) will do something big. History is sadly a poor lead and it would be prudent to pare down these long (dollar vs yen) positions early and maintain a strategy of buying on dips,” said Sebastien Galy, strategist at Societe Generale.
The fragile economic outlook and its impact on corporate earnings weighed on European share markets in early trade.
The FTSEurofirst 300 index .FTEU3 of top European shares was down 0.1 percent at 1,110.78 points, while London’s FTSE 100 .FTSE, Paris’s CAC-40 .FCHI and Frankfurt’s DAX .GDAXI all traded around 0.2 percent lower. .L .EU .N
U.S. stock index futures, however, pointed to a slight recovery on Wall Street, which had its worst day since late June on Friday when international corporate giants General Electric (GE.N) and McDonald’s (MCD.N) both disappointed investors with their results.
The prospects of weaker oil demand also capped gains in Brent crude, which was edging up towards $111 a barrel as fighting in Beirut and Gaza raised fears for the security of fuel supplies from the Middle East. <O/R>
Having posted four days of declines last week, Brent crude for December delivery rose 0.5 percent to $110.61 per barrel. U.S. oil was up 0.4 percent at $90.47 a barrel.
Gold was standing at $1,724.46 an ounce, up $4.47, but is below an 11-month peak of $1,795.69 touched in early October.
Traders said some investors were selling the precious metal on worries that the poor health of the global economy could curb demand.
(Additional reporting by Jessica Mortimer; editing by Anna Willard)