China, Greece concerns weigh on markets

Market Analyze

LONDON - Worries over China's economic growth and whether Greece can entice enough private creditors to participate in a bond swap deal weighed on markets Monday, at the start of a busy week which culminates with closely-watched U.S. jobs figures.

Investors are getting increasingly fearful that China's economy is coming off the boil. That's important because over the past few year, a booming Chinese economy has helped shore up the global economy in the wake of a banking crisis, the deepest recession since World War II and rising concerns over the debt problems afflicting a number of countries that use the euro.

On Monday, China's premier Wen Jiabao lowered the economy's growth target to 7.5 percent from the 8 percent it has stood at for years as he outlined plans to boost domestic consumption and to maintain a "prudent" monetary policy.

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"The softer mood did coincide with China trimming its growth target for the first time in eight years as it focuses on quality, rather than speed, of growth," said Sue Trinh, an analyst at RBC Capital Markets.

Further weighing on sentiment is a worry that Greece's bond swap may not be going according to plan, with particular concerns over the level of participation by the private sector. Results are due late Thursday.

Heavily indebted Greece and its bondholders have agreed on a debt swap that would reduce the face value of their holdings by 53.5 percent. Bondholders banks, insurance companies, and investment funds are offered new bonds that are worth less, have a longer time to be paid off and bear less interest. The debt reduction is one condition of Greece getting a second, 130 billion euro ($173 billion) bailout from other eurozone countries and the International Monetary Fund.

Greece, and its partners in the eurozone, are eager to bring the deal off as a voluntary exchange meaning that it does not trigger payouts on credit default swaps. Analysts say that since many swaps issues have hedged their risk, the net amount that would be paid out is estimated at about $3.2 billion.

Athens has passed into law but not yet used so-called collective action clauses that would force holdouts to take the deal, but most of Greece's bondholders have to agree to the deal in the first place.

"A large majority of private sector bond holders must agree to the terms of the swap to avoid the collective action clauses being activated and forcing them to accept the new bonds," said Jane Foley, an analyst at Rabobank International. "If less than 66 percent of the private bondholders do not participate even the CACs are invalid and a whole new can of worms will be opened regarding Greek debt."

The combination of concerns over China and Greece kept the pressure on stocks Monday, though the euro was steady round the $1.32 mark.

In Europe, Germany's DAX was down 1.1 percent at 6,842 while the CAC-40 in France was 0.8 percent lower at 3,472. The FTSE 100 index of leading British shares was down 0.5 percent at 5,881, with BP PLC helping the index outperform its peers after the British oil giant agreed a settlement with victims of the massive Gulf oil spill. BP said it expects to pay out $7.8 billion to settle a wide range of claims that also include property damage, lost wages and losses to businesses. BP's share price was up around 1.6 percent as investors welcomed the end of the uncertainty.

Russian shares were among the only to rise in Europe on Monday, with the Micex edging up 0.3 percent, as investors took the election of Vladimir Putin as president as a sign of continuing stability. In the longer term, however, analysts say Putin will have to deliver on promises to modernize the economy, reduce corruption and address the grievances of a growing base of political opposition.

Wall Street was poised for a lower opening Dow futures were 0.4 percent lower while the broader Standard & Poor's 500 futures fell 0.5 percent.

As well as monitoring developments over Greece's bond swap, investors will be keeping a close watch on a raft of U.S. economic data this week, culminating on Friday's nonfarm payrolls figures.

A marked improvement in U.S. economic data, particularly related to jobs, have helped sentiment in the markets recover this year. The main U.S. stock indexes are trading at their highest levels since before the collapse of investment bank Lehman Brothers in 2008.

Earlier in Asia, Japan's Nikkei 225 index fell 0.8 percent to 9,698.59 and South Korea's Kospi dropped 0.9 percent to 2,016.06. Hong Kong's Hang Seng lost 1.4 percent to 21,265.31. Mainland Chinese shares were mixed, with the Shanghai Composite Index closed down 0.6 percent to 2,445 and the smaller Shenzhen Composite Index marginally higher at 981.20.

Oil prices tracked equities lower benchmark oil was down 60 cents to $106.10 per barrel in electronic trading on the New York Mercantile Exchange. Oil prices remain elevated though, partly because of tensions over Iran's nuclear ambitions, and have become an increasing drag on stocks over the past couple of weeks.