EU watchdog warns banks still face major challenges

The European Banking Authority said there remained significant challenges ahead for Europe's banks having just cleared the first hurdle to bolster their capital buffers.

The EBA said that 27 banks had hiked their combined capital by 94.4 billion euros ($115.7 billion) to meet the expectations of the watchdog and fill a 76 billion euro shortfall to help make them strong enough to withstand the euro zone debt crisis.

Europe's banking watchdog had given banks until the end of June to hold core Tier 1 capital of 9 percent of risk weighted assets as part of efforts to restore confidence in the sector.

EBA Chairman Andrea Enria said the recapitalization had been a "necessary and important step" but cautioned that banks had a long way to go to recover from the financial crisis and comply with new global regulations.

"A lot still needs to be done," Enria told Reuters in an interview on Wednesday. "I'm very much aware this is not a silver bullet to resolve the difficult situation of the European banks. It's a very complex crisis we are in and we don't want to sound too upbeat on this"

The EBA's recapitalization plan was part of a three-pronged approach that also deals with sovereign debt exposures and improving access to funding.

"We have always said this is one component of a more comprehensive package of measures that needs to be put in place to bring stability to the European banking sector," he added.

Those measures include attempts by the EU to break the mutual dependency between weak banks and over indebted sovereigns.

"We know very well that having strengthened the capital position of the banks this does not solve the problem of the interconnection of the banks and the sovereigns and does not re-open access to funding markets," Enria said.

Euro zone leaders have also agreed to create a single banking supervisor for the area's banks, seen by some observers as the first step towards a European banking union.

"The banking union in the euro area is an important component of the overall strategy to restore confidence in the European financial sector," Enria said.

STRESS TESTS

The EBA conducted a stress test of banks in July 2011, following up with a review later in the year when additional requirements were imposed on some banks.

That test had a pass mark of 5 percent core tier 1 capital, the main benchmark of a bank's health. As the euro zone debt crisis worsened last year, a recapitalization exercise was later carried out with a tougher threshold set for lenders.

Enria said banks had come up with around 230 billion euros of capital strengthening in the past 18 months, including capital raised for last year's stress test, the latest recapitalization and additional packages being deployed in Greece and Spain.

Regulators and governments are concerned that aggressive deleveraging by banks is squeezing credit and hurting economic growth. Bank of England Policymaker Adam Posen said on Wednesday British banks were being excessively cautious in their lending practices.

The EBA said banks had complied with its latest recommendation without having to reduce lending to households and companies or resort to a fire sales of assets.

Banks had achieved 76 percent of the total capitalization through measures such as retaining more of their earnings, issuing new equity and managing liabilities, the EBA said. Deleveraging measures had accounted for a reduction in banks' risk-weighted assets of only 0.6 percent compared with September last year, it said.

Seven banks needed government help to meet the new threshold. Those banks were Portugal's Caixa Geral de Depositos, Banco Comercial Portugues (BCP.LS) and Banco BPI (BBPI.LS), Slovenia's Nova Ljubljanska Banka, Italy's Banca Monte dei Paschi di Siena (BMPS.MI) and Bank of Cyprus BOC.CY and Cyprus Popular CPBC.CY.

The EBA did not include Spain's Bankia in the review following its bailout by the Spanish government. It had said in February that Dexia (DEXI.BR), WestLB and Austria's Volksbank would be excluded because they were in the midst of restructuring. Greece's banks, which are receiving capital as part of a bailout, were also excluded.

($1=0.8160 euros)

ILO warns eurozone risks losing 4.5 million more jobs

The eurozone could lose 4.5 million more jobs in the next four years unless the region shifts away from austerity, the International Labour Organisation (ILO) has warned.

That rise would take unemployment in the 17-nation bloc to 22 million.

The ILO said a concerted policy shift away from austerity towards job creation was needed.

"It's not only the eurozone that's in trouble, the entire global economy is at risk of contagion," it said.

The report said that all 17 countries in the eurozone would suffer, both those currently under stress and their healthier counterparts.

"Unless targeted measures are taken to increase real economy investments, the economic crisis will deepen and the employment recovery will never take off," said ILO director-general Juan Somavia.

The report added that the consequences of a longer period of austerity would be particularly severe for young people.

It said that unemployment had not been as bad so far in the downturn as it might have been because some companies were hanging onto staff in the hope of an imminent recovery.

"If their expectations don't come true, worker retention may become unsustainable, leading to significant jobs losses," it warned.

The ILO recommends:

Making support for the financial system conditional on the resumption of lending to small businesses
Making shareholders pay for the bailouts of banks
Guaranteeing unemployed young people training, education or work placements
Changing pay levels in different eurozone countries to address differences in productivity.

The unemployment rate in the eurozone hit 11.1% in May, according to official figures from Eurostat.

It took the total number of people out of work to 17.56 million, the highest level since records began in 1995.

In Spain, which has the highest unemployment rate in the eurozone, one in four people is now out of work, .

The youth unemployment rate in the eurozone stood at 22.6% in May, meaning 3.4 million people under the age of 25 were jobless.

Trade Deficit in U.S. Probably Narrowed on Cheaper Oil Imports

The trade deficit in the U.S. probably narrowed in May as falling crude oil prices and weakening demand helped trim the import bill, economists said before a report today.

The gap narrowed to $48.6 billion from $50.1 billion in April, according to the median of 70 estimates in a Bloomberg News survey. Separately, minutes of the Federal Reserve’s June meeting may shed more light on its decision to extend the maturities of assets on its balance sheet.

A lack of hiring in the U.S. that helped prompt the Fed to ease monetary policy may temper consumer spending, also translating into less demand for imports other than oil. At the same time, slowing global growth, which led central banks from Europe to China to cut interest rates this month and announce more stimulus, may trim purchases of American-made goods.

“The trade deficit should narrow a bit, reflecting a general slowing in global growth,” said Kevin Cummins, an economist at UBS Securities LLC in Stamford, Connecticut. “There is pressure on exports, particularly as areas in Europe weaken. Energy prices have come off and consumers are losing momentum, so that’ll tend to slow imports.”

The Commerce Department’s trade figures are due at 8:30 a.m. in Washington. Estimates in the Bloomberg survey ranged from deficits of $51 billion to $42.5 billion.

At 10 a.m., another report from the Commerce Department may show wholesale inventories rose in May at a slower pace than the prior month as businesses kept stockpiles lean while waiting for a pickup in sales, economists in the Bloomberg survey predicted. Stockpiles climbed 0.3 percent after a 0.6 percent April gain.
Fed Minutes

At 2 p.m. in Washington, the Fed will release minutes of its June 19-20 meeting, at which it took additional steps aimed at spurring growth. The central bank also said it stood ready to take further action to put unemployed Americans back to work.

American employers added fewer workers to payrolls than forecast in June and the jobless rate stayed at 8.2 percent as the economic outlook dimmed, Labor Department figures showed July 6. The struggling job market may subdue demand.

Retreating oil prices also may have kept a lid on the value of imports. Brent crude traded on the ICE Futures Europe exchange in London declined to $101.87 a barrel at the end of May, down from a high this year of $128.40 on March 1. It’s since fallen further.

The outlook for exports remains dim. The Bank of England, which announced July 5 that it would restart buying bonds two months after stopping, said output will likely remain sluggish after contracting in the past two quarters. The European Central Bank the same day cut its main rate to a record low as sovereign debt turmoil threatens to drive the 17-nation euro economy into a recession.
Waning Demand

Cooling overseas demand is hurting American companies like Harley-Davidson Inc. (HOG) A pickup in the value of the dollar against the euro, which makes U.S.-made goods less attractive to overseas buyers, is also among reasons the biggest U.S. motorcycle maker said first-quarter sales fell 1.1 percent.

“There is an impact with regards to the events and the debt crisis and consumer confidence and potential recessionary pressures in Europe on our business there,” John Olin, chief financial officer, said on a June 26 conference call. “We are seeing the pressures of a devaluing currency” as “ everything that we send to Europe is made here” in the U.S., he said.

The dollar climbed 6.7 percent in the 12 months to June 29 against a trade-weighted basket of currencies from its biggest trading partners, according to Fed data.
Machinery Makers

Slowing global demand has limited shares of equipment makers. The Standard & Poor’s Supercomposite Machinery Index (S15MACH), which includes companies like Caterpillar Inc. (CAT) and Deere & Co., dropped 11 percent in the two months ended June 29, while the broader S&P 500 (SPX) index fell 2.6 percent.

China, the world’s second-biggest economy, is stepping up efforts to reverse a slowdown in growth as Europe’s turmoil limits exports and domestic property restrictions curb its housing market. The Asian nation on July 5 reduced benchmark interest rates for the second time in a month.

The trade deficit with China may remain a thorny issue as the U.S. presses it to allow its currency, the yuan, to rise against the dollar and improve access to its market. President Barack Obama this month expanded trade complaints against China, accusing the nation of imposing unfair taxes on American vehicles, mostly from General Motors Co. and Chrysler Group LLC.

            Bloomberg Survey

===========================================
                             Trade  Whlsale
                           Balance     Inv.
                            $ Blns     MOM%
===========================================
Date of Release              07/11    07/11
Observation Period             May      May
-------------------------------------------
Median                       -48.6     0.3%
Average                      -48.6     0.3%
High Forecast                -42.5     0.5%
Low Forecast                 -51.0    -0.2%
Number of Participants          70       29
Previous                     -50.1     0.6%
-------------------------------------------
4CAST                        -49.5     0.2%
ABN Amro                     -49.9     ---
Action Economics             -48.0     0.4%
Aletti Gestielle             -49.0     ---
Ameriprise Financial         -50.2     0.3%
Banca Aletti                 -47.5     ---
Barclays                     -50.0     0.2%
BBVA                         -49.5     0.2%
BMO Capital Markets          -42.5     0.3%
BNP Paribas                  -49.2     ---
BofA Merrill Lynch           -48.0     ---
Briefing.com                 -50.6     0.2%
Capital Economics            -48.0     ---
CIBC World Markets           -48.8     ---
Citi                         -47.5     ---
ClearView Economics          -48.5     0.5%
Comerica                     -45.0     ---
Commerzbank AG               -48.0     ---
Credit Agricole CIB          -49.0     0.4%
Credit Suisse                -48.5     0.0%
Daiwa Securities America     -49.3     ---
Desjardins Group             -49.4     0.2%
Deutsche Bank Securities     -48.0     0.4%
Deutsche Postbank AG         -49.5     ---
Exane                        -47.8     ---
Fact & Opinion Economics     -49.0     0.4%
First Trust Advisors         -49.5     ---
FTN Financial                -49.0     ---
Goldman, Sachs & Co.         -50.5     ---
Helaba                       -47.0     ---
High Frequency Economics     -49.0     0.5%
HSBC Markets                 -48.8    -0.1%
Hugh Johnson Advisors        -48.0     ---
IDEAglobal                   -48.0     0.5%
IHS Global Insight           -47.5     0.2%
Informa Global Markets       -49.0     0.5%
ING Financial Markets        -47.5     0.4%
Insight Economics            -49.0     0.5%
Intesa Sanpaulo              -48.5     ---
J.P. Morgan Chase            -49.6     ---
Janney Montgomery Scott      -48.3     0.4%
Jefferies & Co.              -48.5     0.4%
Landesbank Berlin            -49.0     0.3%
Landesbank BW                -47.7     ---
Market Securities            -49.2     ---
Mizuho Securities            -50.0     ---
Moody’s Analytics            -50.6     ---
Morgan Stanley & Co.         -48.6     ---
National Bank Financial      -48.0     ---
Natixis                      -49.5     ---
Nomura Securities            -49.3     ---
Nord/LB                      -49.5     ---
Pierpont Securities          -48.2     ---
PineBridge Investments       -47.0     0.1%
PNC Bank                     -47.0     ---
Raiffeisenbank International -49.5     ---
Raymond James                -47.8     ---
RBC Capital Markets          -48.4     ---
Scotiabank                   -48.0     ---
Societe Generale             -47.6    -0.2%
Standard Chartered           -48.2     ---
Stone & McCarthy Research    -49.5     0.3%
TD Securities                -47.5     0.5%
UBS                          -48.5     ---
UniCredit Research           -48.0     ---
Union Investment             -47.0     ---
University of Maryland       -48.4     0.2%
Wells Fargo & Co.            -48.7     ---
Westpac Banking Co.          -49.0     ---
Wrightson ICAP               -51.0     0.3%
===========================================

Euro zone in very dangerous situation: Finnish premier

The euro zone is in its most dangerous situation in more than two years, Finnish Prime Minister Jyrki Katainen was quoted as saying on Wednesday.

"This situation is dangerous, very dangerous," Katainen said in an interview with Finland's biggest daily, Helsingin Sanomat.

He added that the last time the euro zone's situation was so critical was in May 2010, when Greece was near collapse for the first time.

Katainen said it was very difficult to imagine what kind of chaos there would be if the euro area were to collapse.

"But we are not working for the break-up of the euro, but to preserve it and Finland's euro zone membership every day," he said.

Finland is one of few remaining euro zone members to retain a AAA credit rating and, conscious of public opinion at home, Helsinki has been wary of taking on more liabilities regarding weaker euro zone states. It is in talks with Spain on collateral against participation in the currency bloc's planned aid for Spanish banks.

Euro zone ministers agreed early on Tuesday to make 30 billion euros ($36.8 billion) available for Spanish banks by the end of July if struggling lenders urgently need funds.

Finnish Finance Minister Jutta Urpilainen said on Tuesday the Nordic country cannot participate in the planned aid for Spain by the end of July unless the two countries can agree on collateral before then.

Katainen said the euro zone's difficult situation had created lack of trust between AAA-rated northern countries and southern European countries grappling with debt crises.

"All euro area countries want to keep euro. There are differences of opinions about what kind of actions that requires," he said. ($1 = 0.8160 euros)

Italy eyes euro zone aid to ease debt pain

Italy said on Tuesday it may want to tap euro zone aid to ease its borrowing costs as finance ministers struggled to convince markets they are getting a grip on the bloc's debt crisis, which a top European Central Banker said could escalate.

Prime Minister Mario Monti, who is under intense market pressure to shape up his economy and avoid being drawn into the center of the debt crisis, said Italy could be interested in tapping the euro zone's rescue fund for bond support.

"It would be hazardous to say that Italy would never use (this mechanism)," he said after a meeting of European finance ministers in Brussels. "Italy may be interested."

He is worried by a rise in Italian bond yields, which were slightly below 6 percent on Tuesday having bounced above the day before. A sustained period above that threshold could open the way to 7 percent, beyond which servicing costs are widely deemed unsustainable.

Monti's comments show the 2-1/2 year-old euro zone crisis risks engulfing Italy, the bloc's third-largest economy and a member of the Group of Seven economic powers that is widely viewed as too big to bail out.

Overnight, finance ministers outlined an aid package for Spain - the euro zone's fourth-largest economy - but they struggled to convince markets it would help stabilize the bloc.

The ministers agreed to grant Madrid an extra year until 2014 to reach its deficit reduction targets in exchange for further budget savings. They also set the parameters of an aid package for Spain's ailing banks.

The decisions were aimed at preventing Spain, mired in a worsening recession, from needing a full state bailout which would stretch the limits of Europe's rescue fund and plunge it deeper into a debt crisis.

Markets were disappointed the meeting did not offer more. The euro initially traded near a two-year trough against the dollar and hit a five-week low versus the yen, with sentiment edgy as the focus shifted to a German court hearing.

Germany's top court also addressed whether Europe's new bailout fund and budget rules are compatible with national law in a process influencing not just how to tackle the euro zone crisis, but how much deeper European integration can go.

The hearing into complaints about the fund, the European Stability Mechanism (ESM), and fiscal pact may indicate how long the court will keep Europe on tenterhooks.

Anything more than a few weeks would mean a serious delay to implementing the ESM, which has already been postponed from July 1, and raise serious doubts about whether Europe will really get the extra firepower it needs to combat the crisis.

"A considerable postponement of the ESM (bailout fund) which was foreseen for July this year could cause considerable further uncertainty on markets beyond Germany and a considerable loss of trust in the euro zone's ability to make necessary decisions in an appropriate timeframe," German Finance Minister Wolfgang Schaeuble told the court.

Bundesbank President Jens Weidmann, a member of the ECB's policymaking Governing Council, went further and said a speedy ratification of the ESM fund and rules on budget discipline was no guarantee that the euro zone debt crisis would not worsen.

"A temporary ruling does not ensure that the risks can be comprehensively limited. Conversely, a quick ratification is no guarantee that the crisis will not escalate further," Weidmann told the court.

Keeping up the pressure on Monti, the International Monetary Fund said Italy must continue down the road to reform the economy Monti began when he took over last year.

SPAIN AID

At their meeting overnight, euro zone finance ministers did not agree a final figure for aid to ailing Spanish lenders, weighed down by bad debts due to a housing crash and recession, but the EU has set a maximum of 100 billion euros ($123 billion) and some 30 billion euros would be available by the end of July if there was an urgent need.

A final loan agreement will be signed on or around July 20, Eurogroup Chairman Jean-Claude Juncker told a news conference.

Luxembourg Finance Minister Luc Frieden said the 100 billion euros available to Spanish banks was much more than they needed.

"There's no emergency here, there's a clear path towards stabilization," said Frieden. "The markets have to realize that the money is there, more money than is necessary."

In one key decision watched by investors, ministers agreed overnight that once a single European banking supervisor is set up next year, Spanish banks could be directly recapitalized from the euro zone rescue fund without requiring a state guarantee.

That fulfils an EU summit mandate to try to break a so-called "doom loop" of mutual dependency between weak banks and over indebted sovereigns, but represented a climbdown for hardline north European creditor countries.

"It is a very, very positive agreement," Spanish Economy Minister Luis de Guindos said on arrival for Tuesday's meeting.

The Eurogroup ministers were tasked with fleshing out a bare-bones agreement reached by EU leaders at a summit last month on establishing a European banking supervisor and using the bloc's rescue funds to stabilize bond markets.

But differences persisted between north European countries such as Finland and the Netherlands and southern states led by Italy and Spain.

On Monday, ECB President Mario Draghi endured at times hostile questioning in the European Parliament, notably from German, Dutch and Finnish lawmakers concerned at the prospect of European bank bailouts using taxpayers' money.

GREECE SEEKS EXTENSION

EU finance ministers formally agreed on Tuesday to give Spain another year to bring its budget deficit down to within the EU's 3 percent of GDP ceiling, giving Madrid some oxygen, but even the new targets could be difficult to reach.

In a vote, ministers fixed Spain's deficit goals at 6.3 percent of GDP for this year, 4.5 percent for 2013 and 2.8 percent for 2014. Spain had originally been expected to reach the 3-percent level in 2013 and could face EU sanctions if it fails to meet its goals again.

Greece's new Finance Minister Yannis Stournaras told Reuters Television that he wanted to get his country's adjustment program back on track before requesting any kind of extension to a 130 billion-euro bailout from the EU and IMF.

Athens' second rescue envisages it returning to markets in 2015, but a five-year recession makes that look unlikely and the country may need more time to bring down its debt and regain investor confidence. Stournaras' stance appeared to mark a more measured tone. Last month the new Greek government said it wanted a two-year extension.

"We want to bring the program back on track and then we will see what kind of extension we can have," he said. "We have put forward the issue. The size of the recession justifies - as Spain got an extension - that we should get an extension."

European shares ease on growth, euro zone woes

European shares fell on Wednesday after profit warnings from U.S. companies compounded fears the sluggish global economy will erode earnings, while skepticism over the euro zone's ability to tackle its debt crisis pressured other risk assets.

The euro wallowed around two-year lows against the dollar at $1.2260 although industrial commodities and oil regained their footing after sharp falls on Tuesday.

"Risk appetite remains fragile as U.S. earnings worries and various unanswered questions in Europe weigh on sentiment," analysts at Credit Agricole said in a note to clients.

The FTSEurofirst 300 index .FTEU3 of top European companies reversed its previous day's gains to be down 0.4 percent at 1,034.55 points after falls on Wall Street overnight.

German bonds were steady ahead of a 5 billion euro, 10-year debt auction which should see good demand after the latest meeting of euro area finance chiefs did little to ease concerns about the region's three-year debt crisis.

Debt markets were also unnerved by Italy admission that it may want to tap euro zone aid to ease borrowing costs. Investors are also waiting for details of new Spanish austerity measures, due later as part of a deal to gain an extra year to meet deficit targets.

Forecast XAUUSD 11-07-2012 Trend Down

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Job Openings in U.S. Rose in May After April Plunge: Economy

Job openings increased in May after plunging the prior month, easing concern the U.S. job market was faltering.

The number of positions waiting to be filled climbed by 195,000 to 3.64 million, partially countering the 294,000 drop seen in April, the Labor Department said today in Washington. Another report showed confidence among small companies slumped in June.

Increasing demand for workers indicates some companies see an opportunity to expand as sales improve. At the same time, the report showed firings also picked up, indicating the European debt crisis and slowing growth in emerging markets like China may be prompting some employers to cut back.

“The labor market still looks pretty tenuous,” said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York. The April report “sent some worrying signals that maybe things were in free fall. You have the May report and you can see businesses were turning a bit more cautious, but they weren’t completely pulling back.”

Stocks fell for a fourth day as pessimism about the earnings season grew. The Standard & Poor’s 500 Index dropped 0.8 percent to 1,341.47 at the close in New York. The yield on the benchmark 10-year Treasury note decreased to 1.50 percent from 1.51 percent late yesterday.

Elsewhere, manufacturing in the U.K. unexpectedly surged in May by the most in a year, reflecting an additional working day after a public holiday was moved to last month. In China, imports rose less than anticipated in June, pushing the trade surplus to a three-year high and adding pressure on the government to support demand as the global economy slows.
Confidence Wanes

Confidence among U.S. small companies dropped in June to its lowest point since October, driven by concern that sales and the economy will deteriorate, another report today showed.

The National Federation of Independent Business’ optimism index fell to 91.4 from 94.4 in May, the biggest monthly decline in two years. Eight of its 10 components contributed to the slump, the Washington-based group said.

“The immediate future doesn’t look good,” William Dunkelberg, the group’s chief economist, said in an interview. “Nobody really expects business conditions and consumer spending to get any better.”

The increase in job openings in May reported by the Labor Department was broad-based, led by manufacturers and state and local government agencies, according to today’s report. Only employers in the arts and entertainment industry had fewer jobs available.
Hiring Improves

Employment climbed by 148,000 to 4.36 million in May, pushing the hiring rate up to 3.3 percent from 3.2 percent the prior month. Professional and business services, which include temporary-help agencies, and health-care providers saw the biggest increases in staffing.

Catalog Spree, which developed an application for mobile devices that allows users to browse and shop in catalogs, has grown to between double and triple the size Chief Executive Officer Jaoquin Ruiz envisioned when he started the firm in April 2011. The Los Altos, California-based company now employs 16 workers, up from 3 at the start, a number that may keep expanding, Ruiz said.

“We’re going to continue hiring in order to both address our number of users in a more personalized fashion, which requires more minds at work, and our need for more content,” Ruiz said in a June 29 interview. “It is extremely challenging to find the right people.”
More Firings

Total firings, which exclude retirements and those who left their jobs voluntarily, increased to 1.89 million in May, the most since July 2010, from 1.74 million a month before, today’s report showed.

About another 2.12 million people quit their jobs in May, little changed from 2.11 million the prior month. That pushed the total separations rate to 3.3 percent, the highest since June 2010.

“Companies are hiring the minimum number of people needed to do the additional work that needs to be done,” Carl Camden, president and chief executive officer at staffing provider Kelly Services Inc. (KELYA), said last week on Bloomberg’s “Hays Advantage” with Kathleen Hays. “They are not making investments in new products, new ventures, new software beyond what they have to. They are not going to until there is more economic certainty, policy certainty, and the situation in Europe clears up.”

In the 12 months ended in May, the economy created a net 1.8 million jobs, representing 51.1 million hires and about 49.3 million separations, today’s report showed.
More Candidates

Considering the 12.7 million Americans who were unemployed in May, today’s figures indicate there are about 3.5 people vying for every opening, up from about 1.8 when the recession began in December 2007.

The openings report helps illuminate the dynamics behind the monthly employment figures, which were released last week.

Payrolls climbed by 80,000 workers in June, less than forecast in a Bloomberg News survey, after a revised 77,000 gain in May that was larger than initially estimated, the Labor Department said July 6. The jobless rate held at 8.2 percent.

U.S. Stocks Fall on Earnings; Commodities, Euro Slump

U.S. stocks fell for a fourth day as pessimism about the earnings season grew while commodity producers slid amid lower oil and metal prices. The euro reached a two-year low versus the dollar, while European shares rallied.


The Standard & Poor’s 500 Index dropped 0.8 percent to close at 1,341.47 at 4 p.m. in New York, extending its longest slump since May. Ten-year Treasury yields slipped one basis point to 1.50 percent. The euro weakened as much as 0.6 percent to $1.2235 and touched a record low of 1.199 Australian dollars. Oil sank 2.4 percent to $83.91 a barrel as a strike in Norway was averted and China reduced purchases. Natural gas tumbled 5 percent; nickel and silver lost more than 2 percent.

Reduced sales projections at Advanced Micro Devices Inc., Applied Materials Inc. and Cummins Inc. spurred concern about the groups forecast to post the strongest profit growth among 10 industries in the S&P 500. (SPXL1) Technology and industrial company earnings grew more than 7 percent in the second quarter while profits for the entire S&P 500 are projected to have fallen 1.8 percent in the first decrease since 2009, according to analyst estimates compiled by Bloomberg.

“The bigger concern is with the next few quarters,” Bruce McCain, who helps oversee more than $20 billion as chief investment strategist at the private-banking unit of KeyCorp in Cleveland, said in a phone interview. “Earnings disappointments suggest that we’re going to have not only weakness this quarter, but it’s likely to carry on.”

Technology shares in the S&P 500 fell 1.2 percent as a group and were the biggest drag on the index among the 10 main industries, while industrial companies slid 1.6 percent for the largest decline.
Earnings Season

AMD (AMD), the second-biggest maker of processors for personal computers, tumbled 11 percent after reporting an unexpected drop in second-quarter sales, citing weakness in China and Europe. Micron Technology Inc. and SanDisk Corp. fell at least 4.2 percent. Applied Materials also cited weakness in Europe and China in cutting its 2012 sales and profit forecasts, sending shares of the chipmaking-equipment provider down 2.7 percent.

Cummins, a maker of truck engines, tumbled 8.8 percent after saying order trends have weakened and the company expects 2012 revenue “to be in line” with 2011 after projecting a 10 percent increase in February. Second-quarter preliminary revenue was about $4.45 billion, the company said, compared with the average analyst estimate for $5.08 billion.
Alcoa Slumps

Alcoa Inc. (AA) tumbled 4.1 percent after reporting a quarterly loss of $2 million and a drop in sales to $5.96 billion from $6.59 billion. Profit excluding certain items was 6 cents a share, compared with the 5-cent average of estimates compiled by Bloomberg. JPMorgan Chase & Co. reduced earnings estimates for Alcoa and cut its share price target to $12 from $14.50 due to lower aluminum prices.

“I don’t expect the rest of the earnings season to surprise to the upside,” John Augustine, who helps oversee $25 billion as chief market strategist at Cincinnati-based Fifth Third Asset Management, said in a phone interview. “Earnings will be the driver of the market coming up.”

The euro weakened against all 16 major peers as traders used the currency to fund purchases of higher-yielding assets five days after the European Central Bank reduced its key interest rate to a record 0.75 percent. The shared currency depreciated even as Europe planned to jump-start as much as 100 billion euros ($123 billion) in loans to shore up Spain’s banks, Luxembourg Prime Minister Jean-Claude Juncker said after chairing a meeting of euro-area finance ministers.
‘Funding Currency’

“The euro is now the main funding currency, and everyone wants to be short euro,” said Sebastian Galy, a senior foreign- exchange strategist at Societe Generale SA in New York. “The dollar is no longer the main funding currency.” A short position is a bet currency will decline in value.

The currencies of Sweden, Japan and South Africa led gains against the euro, rising more than 0.5 percent. The euro extended losses as Italian Prime Minister Mario Monti said he won’t serve in another government when his term ends next year. Monti said he is confident Italy would not need a full rescue from European allies, while not ruling out a request for the permanent bailout funds to buy the nation’s bonds.

Five shares rose for each that declined in the Stoxx Europe 600 Index (SXXP), sending the gauge up 0.8 percent. ASML Holding NV (ASML) jumped 8.6 percent as Intel Corp., the world’s largest semiconductor maker, agreed to invest as much as $4.1 billion in Dutch chip-equipment maker. Ipsen SA sank 11 percent after U.S. regulators put clinical trials of a hemophilia drug it’s developing on hold because of potential safety concerns.
‘Positive Progress’

European stocks also advanced as U.K. manufacturing rose 1.2 percent from April and industrial output grew 0.8 percent in Italy, defying the median economist estimates for declines.

Spanish equities and bonds also gained after finance chiefs agreed to make available 30 billion euros for struggling lenders by the end of this month. The goal is to eventually use the euro-area bailout fund to recapitalize banks directly instead of saddling the government with the debts.

“It’s positive progress showing that the European Union is moving towards a banking union,” Norman Chan, head of investment at Calibre Asset Management Ltd., a unit of National Australia Bank Ltd., said in an interview with Bloomberg Television. “It shows the EU is being pragmatic.”
Emerging Markets

The MSCI Emerging Markets Index slipped 0.1 percent, a fifth straight decline. Benchmark gauges in India and Thailand climbed more than 1 percent, while Brazil’s Bovespa sank 3.1 percent amid lower commodity prices. The Hang Seng China Enterprises Index of mainland shares slid 0.6 percent. China’s imports rose less than anticipated in June while growth in outbound shipments slowed, customs bureau data showed.

The extra yield investors demand to own Spanish 10-year debt over benchmark German bunds narrowed 25 basis points to 5.49 percent. The yield on 10-year Italian bonds fell 15 basis points to 5.95 percentage points. Germany’s 10-year yield was little changed at 1.32 percent.

The Markit iTraxx SovX Western Europe Index of credit- default swaps on 15 governments dropped 4.1 basis points. The Markit iTraxx Crossover Index of contracts tied to the debt of 50 mostly junk-rated European companies declined for a second day, falling 15.3 basis points.

Brent crude fell 2.3 percent to $97.97 a barrel after the Norwegian government ordered compulsory arbitration, preventing a lockout of platform workers that had been scheduled to start yesterday at midnight. Among the 24 commodities tracked by the S&P GSCI Index, only coffee and cotton advanced as the gauge tumbled 1.6 percent. Corn retreated from the highest price since September and soybeans fell from a four-year high amid speculation the surge in prices since the middle of June may curtail global food demand.

Germany urges swift court verdict over bailout fund

Germany's top court agreed on Tuesday to examine complaints lodged against the EU's bailout fund and new budget rules but gave no date for its verdict, keeping investors on tenterhooks over the prospects for overcoming the euro zone crisis.

Finance Minister Wolfgang Schaeuble urged the Constitutional Court to reach a speedy decision and said any significant delay in approval of the anti-crisis tools would stoke financial market turbulence and erode confidence in the common currency.

"We are in a very serious situation. Nobody can predict what will happen," he told the eight red-robed judges at the end of a day-long hearing at the court in Karlsruhe, southern Germany.

Schaeuble, a keen proponent of greater European integration, said he did not want to put undue pressure on the court but added: "The alternative to stabilizing the common currency is a breakup with consequences that are difficult to predict."

Legal experts and politicians had made clear that Tuesday's hearing would not deliver any verdicts in the complex case, but financial markets are anxiously seeking clear signs that the euro zone is getting on top of its long-running debt crisis.

Earlier, the euro fell sharply against the dollar and the Japanese yen as investors took fright at the risk of a lengthy legal process before Europe's largest economy can approve the bailout fund, the European Stability Mechanism (ESM).

The Finance Ministry put out a statement late on Tuesday expressing confidence that the court would eventually reject the complaints brought against the ESM and the fiscal pact and would also rule that they are in line with Germany's constitution.

"The fiscal pact and the European Stability Mechanism are important steps towards a European stability union. They are inseparable and this is a basic precondition for overcoming the crisis. They illustrate the principle that solidarity and solidity belong together," the statement said.

HIGH STAKES

The plaintiffs, who include rebels from Chancellor Angela Merkel's centre-right coalition, contend that the ESM and the fiscal pact undermine Germany's budget sovereignty and overstep constitutional limits to European integration.

They hope their request to the court for an emergency injunction will prevent President Joachim Gauck from signing the ESM and fiscal pact into law, pending arguments on the substance of the legislation that could take many months. The president has said he will await the court's green light before signing.

Without German backing, the ESM, which was originally meant to start on July 1, then on July 9, cannot come into effect, a state of affairs that could quickly see several heavily indebted euro zone states pushed into bankruptcy.

The government hopes the court will decide within weeks to dismiss the request for an injunction.

It was not clear on Tuesday evening whether, in addition to examining the plaintiffs' petitions, the judges might also speed up their review - requested by the government itself - of whether the ESM and fiscal pact conform to the constitution.

During the hearing, the head of the court, Andreas Vosskuhle, raised the possibility of a "very thorough summary review" which could take two to three months, but he stressed that that was just one option facing the court.

"In politics, unusual situations and crises often require unusual measures," Vosskuhle, said, adding that the judges were aware of the wider implications of the case but also had to protect the plaintiffs' right to object to the ESM.

Schaeuble, putting the Merkel government's case, left the judges in little doubt about what is at stake.

"A considerable postponement of the ESM, which was foreseen for July this year, could cause considerable further uncertainty on markets beyond Germany and a considerable loss of trust in the euro zone's ability to make necessary decisions in an appropriate timeframe," Schaeuble said.

"Some member states of the euro zone would end up having further big problems financing themselves, which could raise questions over the stability of the euro zone as a whole."

Striking an even more somber note, the head of Germany's central bank, Jens Weidmann, told the court even a swift ratification of the tools could not guarantee an end to the crisis.

"A temporary ruling does not ensure that the risks can be comprehensively limited. Conversely, a quick ratification is no guarantee the crisis will not escalate further," Weidmann said.

PROTESTS

The government argues that the tools for tackling the debt crisis were given legitimacy by parliament's approval of them by a large two thirds majority in late June.

"The judges have to realize that the banking and debt crisis in Europe has put us in a situation that forces politicians into borderline decisions," said Helmut Brandt, a legal expert from the ruling coalition, urging the court to decide in two weeks.

But protesters outside the court argued that the bailout fund and fiscal pact ceded too much power to Brussels on core issues such as budgetary powers.

Candles flickered around a cardboard tombstone bedecked with flowers, with the epitaph: "Here rests in peace the constitution of the German republic, born on May 23 1949, died on 29th June 2012. The citizens mourn."

The Karlsruhe judges have a reputation for being a stone in the shoe of European integration, especially after they held up the Lisbon Treaty updating the European Union's constitution in 2009 to defend the role of the Bundestag.

The court has chided Merkel's government repeatedly on this point since the sovereign debt crisis began more than two years ago, though it has never actually rejected any bailout itself - for Greece or other euro zone countries - as unlawful.

Merkel favors greater fiscal and political union, provided Europe gets strong enough institutions to ensure that the errors that led to the sovereign debt crisis are avoided in future.

Spain to get longer to reach budget goal

European ministers were set to grant Spain an extra year to reach its deficit targets in exchange for further budget savings but remained far from pinning down details of bank rescues and emergency bond-buying that are of greater concern to markets.

As finance ministers of the euro zone met in Brussels late on Monday, a top European Central Bank policymaker said the 17-nation currency area's debt crisis was now more acute than the 2008 financial turmoil that felled U.S. investment bank Lehman Brothers.

"The euro zone crisis is now much more profound and more fundamental than at the time of Lehman," ECB Executive Board member Peter Praet told a conference in Lisbon.

Eurogroup finance ministers were tasked with fleshing out a bare-bones agreement reached by EU leaders at a summit last month on establishing a European banking supervisor and using the bloc's rescue funds to stabilize bond markets.

But with differences persisting between north European countries such as Finland and the Netherlands and southern states led by Italy and Spain, EU officials said no breakthroughs were likely this week.

ECB President Mario Draghi endured at times hostile questioning in the European Parliament, notably from German, Dutch and Finnish lawmakers concerned at the prospect of European bank bailouts using taxpayers' money.

German Finance Minister Wolfgang Schaeuble sought to defuse growing opposition at home by saying it would take time to establish a European bank supervisor and only once it was fully in place might ministers decide to allow direct recapitalization of ailing banks by the euro zone's rescue fund.

Schaeuble said he expected ministers to agree on a timetable for up to 100 billion euros ($123 billion) in aid for debt-stricken Spanish lenders.

The ministers did agree to nominate Luxembourg central bank chief Yves Mersch for a seat on the ECB's six-member executive board, which has been vacant since Spain's Jose Manuel Gonzalez-Paramo's term ended in May.

A wider gathering of EU finance chiefs on Tuesday is set to ease a deficit reduction goal that has forced Madrid to make punishing cuts that are exacerbating a recession.

SLIPPAGE

Spanish and Italian borrowing costs continued to rise on Monday, with Spain's 10-year bond topping the critical 7 percent level, and world shares fell with a darkening global growth outlook and little prospect of early process on the euro zone's debt crisis.

Spanish Economy Minister Luis de Guindos was to spell out to finance ministers his government's plan for a package of up to 30 billion euros over several years through spending cuts and tax hikes that are due to be announced this Wednesday.

A source close to the Spanish government said 10 billion euros of cuts would come this year and that the measures would include a hike in VAT sales tax, reduced social security payments, reduced unemployment benefits and changes to pensions calculations.

In return, the European Commission will propose easing Madrid's deficit goal for this year to 6.3 percent of economic output, 4.5 percent for 2013 and 2.8 percent for 2014, officials said.

The new targets may still prove difficult to reach, according to the draft recommendation from the European countries to Spain, loosening its goals and demanding the country be subjected to three-monthly checks.

The figures highlighted Spain's dramatic fiscal slippage due to a worsening recession. Madrid was originally meant to cut its budget shortfall to 4.4 percent this year. Prime Minister Mariano Rajoy unilaterally changed the target to 5.8 percent in March before eventually accepting an agreed goal of 5.3 percent.

The Commission will make the new proposal on Tuesday to the EU's finance ministers, who would have to agree for the targets to become binding, two officials told Reuters.

Madrid had been due to reduce its national deficit to 3 percent of gross domestic product by the end of 2013. But a deep recession has put that beyond reach.

De Guindos said he hoped to reach agreement on a memorandum of understanding on the bank rescue on Monday, which would be followed on July 20 by a final loan agreement. As part of that, Spain will create a single bad bank to house toxic assets from its banking sector.

Spain and Italy again stepped up pleas for European action to put a cap on their borrowing costs.

"At this moment the only institution that has enough money to act is the ECB," Spanish Foreign Minister Jose Manuel Garcia-Margallo said at a conference. "For that reason, the ECB should intervene in markets, it should start massive purchases of public debt so that speculators understand that they will lose their bets against the euro."

But ECB President Draghi told EU lawmakers the key to restoring market confidence was for countries in difficulty to fully implement promised structural reforms and stick to programmes agreed with Brussels and international lenders, even if they caused "social tensions".

He left the door open to a possible further cut in interest rates after last week's 25 basis point cut to 0.75 percent but voiced concern that the ECB was being expected to act "in areas which don't seem to have a connection with monetary policy's traditional remit".

CROWDED AGENDA

Alongside Spain, euro zone ministers were also due to consider aid to Cyprus and whether to grant concessions to Greece, which has admitted it is missing its bailout programme targets.

EU leaders want to break the link between banks and sovereigns by not lumbering governments with debts for rescuing their lenders, making it harder for them to borrow.

They decided in principle on June 29 that euro zone rescue funds could be used to buy government bonds to lower borrowing costs, with conditions attached but without a full programme. However Finland, and to some extent the Netherlands, have since opposed such purchases.

Helsinki insists that there was no agreement on bond-buying by the ESM in secondary markets at the leaders' summit.

Much depends on the ECB's role as banking supervisor, which will need to be grounded in European law. It falls to the European Commission to propose such legislation, which is not expected until at least September.

Draghi said it was not yet agreed which banks the supervisor would oversee, but to a large extent the ECB would be reliant on existing national expertise.

Coordinating euro zone finance ministers has been the job of Luxembourg Prime Minister Jean-Claude Juncker since 2005, but his terms ends on July 17 and ministers were due to discuss his successor on Monday. French Finance Minister Pierre Moscovici said he expected Juncker's term to be extended, depending on how long he was prepared to stay on.

Ministers were also due to receive a report on the first mission by the "troika" of the EU, the ECB and the International Monetary Fund to Greece since June 17 elections.

Highlighting resistance to harsh austerity conditions imposed on Greece, Deputy Labour Minister Nikos Nikolopoulos resigned from the new government that won a parliamentary vote of confidence only on Sunday, saying it was not forceful enough in pushing lenders to ease the bailout terms.