European stocks moved higher in volatile trading yesterday despite Italy being forced to pay record rates at a bond auction and intense pressure on eurozone finance ministers to avert economic meltdown.
London’s benchmark FTSE 100 index gained 0.46 per cent to 5,337 points despite Britain slashing its growth forecasts.
In Paris the CAC-40 also rose 0.46 per cent to finish the day at 3,026.76 points, while in Frankfurt the DAX 30 put on 0.95 per cent to 5,799.91 points.
In Paris the CAC 40 gained 0.31 per cent to 3,022.39 points while Frankfurt’s DAX 30 rose 0.35 per cent to 5,765.42 points.
After briefly going above $1.34, the euro stood at 1.3346 at 1700 GMT compared with 1.3318 late in New York on Monday. The dollar slid to 77.85 yen from 77.97 on Monday.
Wall Street was also in positive territory near midday, despite American Airlines filing for bankruptcy protection.
At a bond sale closely watched by investors worried that the country could need a bailout, Italy managed to raise €7.5 billion in a bond auction, falling slightly short of its upper target of €8 billion.
However, borrowing rates shot up to a new high, breaking through the 7 per cent warning threshold, with an inversion of the yield curve reflecting investor concern that the country could default.
“It means that the markets perceive a serious risk of default in the short term,” said Sergio Capaldi, bond strategist with Italy’s Intesa Sanpaolo bank.
Because time is risk, the interest rate on long-term loans is usually higher than rates on shorter term lending.
The yield on Italian bonds maturing in 2014 shot up to 7.89 per cent from 4.93 per cent, while rates on those expiring in 2022 rose to 7.56 per cent compared with 6.06 per cent at the last similar operation – causing a yield curve inversion.
It is the first time recently that the yields have inverted on the Italian primary market, though the distortion began several days ago on the secondary market for already issued debt.
Capaldi said that while the fears Italy would not find takers for its debt had not been realised, “the rates are at scandalous levels.”
“It’s a price Italy cannot pay for more than a few quarters. All emissions at rates over 7 per cent bring us closer to the moment Italy will need outside help,” he said.
A weekend report that Italy was to get an International Monetary Fund bailout – later flatly denied – had been taken positively by dealers on Monday, sending stocks and the euro surging on the week’s first trading day.
In Britain, stocks slid after the government slashed its growth forecasts before rebounding. The British economy is now expected to grow by 0.9 per cent this year, about half the prior guidance for 1.7 per cent growth.
Growth in 2012 is now seen at 0.7 per cent, about a quarter of the previous official forecast of 2.5 per cent in March.
Chancellor of the Exchequer Osborne announced that Britain will spend £30 billion (€35 billion, $47 billion) extra on major infrastructure projects over the next 10 years to stimulate economic growth.
Meanwhile, eurozone finance ministers were meeting under urgent pressure to stop the debt crisis from shattering the monetary union.