Europe’s economic gloom hits shares, euro

European shares snapped a four-day rally and the single currency was under pressure on Monday as signs of a deepening eurozone recession raised suggestion that the region’s governments could soften their approach to tackling budget deficits.

US shares were also set for a weaker start on the renewed eurozone concerns but investors were also focused on the weaker-than-expected reading on domestic economic growth.

In the euro area trading was light ahead of May Day holidays on Tuesday, elections in France and Greece at the weekend and a European Central Bank meeting on Thursday where policymakers will have to consider the region’s worsening economic health.

“Market stresses have re-emerged in the euro area on concerns that deficit reduction targets may be sabotaged by a return to recession,» said Sarah Hewin, senior economist for Europe at Standard Chartered Bank.

Spain, the eurozone’s fourth largest economy, added to growing evidence of the region’s woes by reporting its economy had slipped into recession, joining a list of countries that includes Italy, Portugal, Ireland, Greece, Belgium and Holland.

In the foreign exchange markets the dollar was the big factor, coming under pressure from talk the Federal Reserve would consider more policy easing measures in the wake of the disappointing 2.2 percent first quarter growth (GDP) data.

“The weaker-than-expected US GDP report has re-heightened speculation over the prospect of further monetary stimulus from the Fed, weighing upon the dollar,» said Lee Hardman, currency economist at Bank of Tokyo-Mitsubishi, Ltd.

The greenback briefly touched a two-month low against a basket of currencies of 78.638, its lowest since March 1, before recovering to 78.855, up 0.2 percent on the day.

The euro also fell 0.3 percent against the dollar to $1.3215, off a near one-month high of $1.3270 hit on Friday.

Growing opposition to austerity measures is expected to be a large factor in weekend elections in France and Greece which could add to pressure to find ways to stimulate growth across the region.

On Sunday, thousands of Spaniards angered by government cuts that have helped send unemployment up to nearly 25 percent took part in protests across country.

Disputes about austerity brought down center-right coalition governments in the Netherlands and Romania last week.

Nicolas Sarkozy is on course to become the first French president voted out of office in more than 30 years, and the parties that ruled Greece for decades are fighting for survival against a wave of anti-austerity wrath.

The economic problems are not confined to a single country, with fresh European Central Bank data on Monday showing loans to eurozone households and firms grew more slowly than expected in March, as banks continued to reduce lending.

Germany reported retail sales had risen less than expected in March, indicating that private consumption in Europe’s biggest economy may be flagging.

The reaction in debt markets has been fairly subdued so far with Germany’s June Bund future contract up 36 ticks to 141.06 but still below a high of 141.38 reached on Friday after a two notch ratings downgrade for Spain prompted a flight to safety.

Spanish 10-year yields on Monday were at 5.88 percent, slightly short of the key 6.0 percent level, beyond which alarm bells sound about the sustainability of the cost of servicing debt.

“In our view it (the Spanish GDP data) doesn’t make a huge difference…The economic performance will be a function of whether credit will be able to flow again in the economy so the banking issues remain at the core,» UBS strategist Gianluca Ziglio said.

Spain will test-market sentiment for its debt on Thursday when it sells three- and five-year bonds, the first sale since the downgrade by Standard and Poor’s.

The ongoing concerns over Spain and the health of the region’s economy undermined confidence in the region’s share markets, dragging the FTSEurofirst 300 index of top European shares down 0.2 percent to 1,049.27.

“Coming on top of (Spain’s) record unemployment data last week as well as massive demonstrations against austerity on the streets yesterday, the problems for European leaders continue to mount up,» said Michael Hewson, senior market analyst at CMC Markets.

Spain’s benchmark share index, the IBEX, lost 0.7 percent and is now down 17 percent so far in 2012, strongly underperforming the eurozone’s blue chip Euro STOXX 50 index, which is up about 1.2 percent year-to-date, and Germany’s DAX, up 15.9 percent.

The MSCI world equity index, was barely changed at 329.54 and holding onto gains of just over 10 percent for the year to date.

In commodity markets, gold prices steadied above $1,660 an ounce after four straight days of gains with the speculation of a third round of liquidity stimulus by the US and a weaker dollar supporting prices.

In the oil market there was also the prospect of rising supply capping any strong move up on the weaker dollar.

“There is an armada of tankers heading towards Asia from the Middle East so there’s a general feeling of over-supply in the market,» said Filip Petersson, commodity strategist at SEB.

Brent June crude futures were down 48 cents to $119.35 a barrel and on track to close down for the second consecutive month. US crude was down 35 cents at $104.58 a barrel. [Reuters]