Global stocks fall... investors worry about Europe

Sentiment in the markets took a knock Wednesday as investors faced the reality that Europe's debt crisis is far from over despite a pair of successful Italian bond auctions.

The debt sales proved a relief during the European morning as they eased concerns that Italy's borrowing costs would rise too high. The yield on Italy's 10-year bond rose past seven per cent on Tuesday - a level that has forced other countries to seek bailouts.

The prospect of an Italian default is particularly worrying because Italy is considered too big to rescue under current Eurozone bailout facilities, and investors fear that if it is squeezed out of borrowing from markets, the euro won't survive.

On Wednesday, the Bank of Italy said the average yield on its €9 billion ($11.8 billion) six-month offering was 3.251 per cent, half the 6.504 per cent rate it had to pay at the equivalent auction last month. An auction of two-year bills, which raised €1.732 billion ($2.3 billion), also saw the yield fall to 4.853 per cent from 7.814 per cent last month.

But the glee was short-lived, as analysts warned that one good auction did not mean the crisis was over.

"The odds are that the Eurozone crisis will intensify in the coming months and that Italy will remain the focal point for investor anxiety," said Nicholas Spiro of Spiro Sovereign Strategy. "The headwinds for Italy are getting stronger: persistently high borrowing costs, the prospect of a severe recession next year and growing doubts about the credibility of (Prime Minister Mario) Monti government's fiscal targets."

Fears that the crisis could be gathering steam for next year drove down global stock prices and the euro fell 1 per cent to $1.2933, its lowest level since January 11.

In France, the CAC-40 closed down 1 per cent at 3,071.08, while Germany's DAX fell 2 per cent to 5,771.27. The FTSE index of leading British shares ended 0.1 per cent lower at 5,507.40.

On Wall Street, the Dow Jones industrial average lost 1 per cent to 12,164, while the broader Standard & Poor's index retreated 1.1 per cent to 1,252.

In further evidence that tensions remain in Europe, the European Central Bank (ECB) reported that the continent's banks parked a record €452.00 ($590.72) billion overnight at the bank Tuesday, surpassing the previous record of €411.80 billion set only Monday.

tremendous distrust

Those figures reflect the tremendous distrust that still reigns among banks and indicates that instead of lending to one another, banks would prefer to hold money at low interest rates at the ECB. However, it can also rise and fall for technical reasons as banks adjust their liquidity requirements.

It also reflects a huge infusion of cheap three-year loans to banks from the ECB carried out just last week in an attempt to inoculate the system against the debt crisis.

In Asia, stocks fell overnight, mostly because of concerns about the broader economy.

Japan's Nikkei 225 index fell 0.2 per cent to close at 8,423.62 after news that its industrial output dropped a seasonally adjusted 2.6 per cent last month - the first decline in two months.

Hong Kong's Hang Seng Index fell 0.6 per cent to 18,518.67, while South Korea's Kospi lost 0.9 per cent to 1,825.12.

There are also concerns of a slowdown in China.