The sell-off in European stocks and the single currency paused for breath today as a good Spanish debt auction eased market nerves over the euro zone debt crisis and the bleak global economic outlook.
Data showing euro zone annual inflation steady at 3 per cent for November also suggested the European Central Bank had ample room for another rate cut.
"The imminent recession, plus sharply lower commodity price inflation, should push inflation below 2 per cent in the course of next year," said Martin Van Vliet, economist at ING.
"The prospect of markedly slower inflation gives the European Central Bank room to ease monetary policy further."
The euro rose about 0.2 per cent at around $1.30 after having fallen to as low as $1.2945 yesterday, its lowest level since January 11th. The next major support for the currency will come at $1.2860, which is its lowest price this year.
The safe-haven Swiss franc got a boost after the central bank kept its cap on the currency at 1.20 per euro, knocking back speculation it would move to weaken the currency further.
Meanwhile another traditional safety play, gold, saw its price recover from the hammering it has taken in recent days as fund managers liquidated their holdings to be virtually unchanged in London at $$1,590 an ounce.
Gold dropped by 3.5 per cent yesterday to its lowest levels since September and has lost 9 per cent of its value this month. Gold has increasingly become prone to pressure from the wider financial market, moving in tandem with other assets as investor sentiment remains fragile.
US stock markets were also poised to open higher on Wall Street after falling to their lowest level in two weeks yesterday.
The sense of relief in European markets was boosted when the risk premium on benchmark Spanish government bonds eased after a well received bond auction, which raised more than the government had targeted.
The Treasury sold just over €6 billion of bonds, well above the top end of the €2.5-3.5 billion range targeted, sending the 10-year Spanish benchmark yield to a session low of 5.59 per cent, down 15 basis points on the day.
Spain's performance contrasted with Italy yesterday which saw its yields rise sharply on its five-year bonds.
"These are still high levels of rates but they are a lot better than Italy's," said Marc Ostwald, a strategist at Monument Securities.
Worries about Spain's ability to fund itself are less acute than for Italy, which faces redemption and coupon payments of around €100 billion between January and April, Reuters data shows. Spain has no major redemptions until April.
Reuters
