DATA SNAP: US Jobless Claims Fall to 361K in Latest Week

By Jeffrey Sparshott and Eric Morath

WASHINGTON–The number of U.S. workers filing applications for jobless benefits fell slightly last week, suggesting that the labor market is stabilizing.

Initial jobless claims, an indication of layoffs, decreased by 6,000 to a seasonally adjusted 361,000 in the week ended Aug. 4, the Labor Department said Thursday. Economists surveyed by Dow Jones Newswires had forecast 370,000 new applications for jobless benefits last week.

Claims for the week ending July 28 were revised up to 367,000 from an initially reported 365,000.

The four-week moving average of claims, which smoothes out often volatile weekly data, rose by 2,250 to 368,250.

A Labor Department official said there were no unusual factors in Thursday’s report.

Jobless claims data has been volatile in recent weeks, and economists have been careful not to read too much into any single report. But the broad trend appears to have improved since June, when claims ranged around 385,000 a week.

“The longer the series remains near its current level, the more credible the lower range will seem,” economists at Wrightson ICAP said before Thursday’s numbers were released.

Typically job creation increases when layoffs decline.

So far this year, hiring has been uneven. A separate Labor Department report last week showed that the economy added 163,000 jobs in July, the biggest monthly gain since February and a welcome relief after a weaker June. But the politically important unemployment ticked up to 8.3%.

Policy makers at the Federal Reserve are closely monitoring the employment situation as they weigh another round of stimulus. At a meeting last week, officials said they “will provide additional accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions.”

The Fed’s policy makers next meet formally on Sept. 12 and 13.

Thursday’s Labor data showed the number of continuing unemployment benefit claims–those drawn by workers for more than a week–increased by 53,000 to 3,332,000 in the week ended July 28. Continuing claims are reported with a one-week lag.

The number of workers requesting unemployment insurance was equivalent to 2.6% of employed workers paying into the system in the week ended July 28, the same as the prior week.

The Labor Department report on jobless claims can be accessed at:

   Write to Jeffrey Sparshott at and Eric Morath at

Bank of Korea Holds Policy Steady

SEOUL–South Korea’s central bank kept its benchmark interest rate steady at 3% Thursday and offered a less pessimistic economic outlook than the previous month, suggesting it may adopt a measured pace in seeking further monetary easing through the rest of the year.

The Bank of Korea’s decision to stand pat in August comes as the euro-zone crisis and slowing growth in China weigh on South Korea, which depends heavily on exports for growth. Domestic demand also remains sluggish.

Markets took the expected decision in stride. The benchmark stock index finished up 2%, while the U.S. dollar fell to a four-month low of KRW1,125.50. Government bonds and bond futures fell on profit-taking.

In its policy statement, the central bank continued to flag downside risk to the global economy and its negative impact on Korea, but toned down its assessment of the current situation.

The BOK’s monetary policy committee appraises the trend of economic growth “to have slowed,” owing to lackluster exports and domestic demand, the BOK said after the board unanimously decided to keep the policy rate steady. Last month, it said the economy has “weakened more than originally anticipated.”

BOK Gov. Kim Choong-soo didn’t provide any direction in regard to the bank’s future rate moves, but added it would take “the most appropriate action in line with changing conditions.”

Many analysts said another rate cut is imminent, but the timing of the next easing has become more uncertain than before, heavily dependent on data.

“[The BOK] will react flexibly amid the currently weak macro backdrop. The governor stressed that he is neither worried about price nor debt deflation, implying no urgency for now in cutting the rate,” Goldman Sachs economist Kwon Goo-hoon said.

A survey of 14 analysts conducted by Dow Jones Newswires after the rate decision showed they unanimously forecast the BOK would cut rates either next month or in October.

In a surprise move, the BOK last month cut interest rates for the first time in more than three years, joining a global wave of policy easing as signs of economic stress in Asia’s fourth-largest economy mounted.

South Korea’s exports plunged 8.8% in July from a year earlier–the worst performance in nearly three years. Meanwhile, inflation eased to a more than 12-year low of 1.5%, reducing concerns about upward price pressures.

The central bank’s latest forecast is for the domestic economy to expand 3% this year but Gov. Kim has said there are risks that may be too optimistic.

Gov. Kim said demand-pull inflation pressure isn’t high given the economic slowdown, although conditions aren’t pointing to deflation either.

The BOK modified the reference to its future monetary policy in the forward-looking statement, saying it would strive to stabilize price increases “at the inflation target” of 2% to 4% from “the midpoint of the inflation.”

Some analysts say the recent surge in global grain prices could limit BOK rate cuts for the rest of the year and instead pressure the government to ramp up spending.

Politicians have been pressuring the government to produce a stimulus package to boost spending, but the Ministry of Strategy and Finance has thus far resisted such calls, saying the current economic conditions don’t warrant an extraordinary budget and that the government needs to preserve its fiscal health.

–Kwanwoo Jun contributed to this article.

-Write to In-Soo Nam at

ECB Visco: Favors Redemption Fund For Excess Government Debt

ROME (Dow Jones)–Bank of Italy Governor Ignazio Visco said Thursday he favored the use of a redemption fund scheme to manage excess government in the euro area, adding that facilities such as the European Stability Mechanism also need to be deployed to purchase sovereign bonds and intervene in banks when appropriate.

European Union authorities and the European Central Bank itself must show “practical commitments” to markets when they deem a euro-area member state is making positive progress in correcting its imbalances, Mr Visco said in his concluding remarks at the central bank’s annual shareholder meeting.

Current sovereign bond yield spreads actually “fuel further imbalances,” making tensions inside the currency union worse, said Mr Visco, who is also a member of the ECB’s Governing Council.

Current yield spreads–or differences in sovereign borrowing costs–impede the correct functioning of the single monetary policy, he said. The ECB objects to providing monetary aid to patch over fiscal problems but in the past has justified special interventions when they were deemed to correct malfunctioning markets.

Still, ECB actions can only fill a “temporary vacuum” and not replace actions that are properly the functions of governments, Mr Visco said.

He also warned against the “dangerous renationalization” of euro-area financial systems, urging efforts to counter such trends.

He also urged a prompt and incisive peer review by regulators about how they allow banks to account for their risk-weighted assets. Italian banks are significantly more prudent in their calculations than their euro-area peers, but that requires them to have higher capital ratios.

-By Christopher Emsden, Dow Jones Newswires;; +39 06 6976 6921

EU Rehn: Euro Area Must Act To Avoid “Disintegration”

BRUSSELS (Dow Jones)–Euro-zone countries must act to bring down borrowing costs and improve its ability to deal with contagion if it is to survive the ongoing crisis, European Commissioner for Economic and Monetary Affairs Olli Rehn said Thursday.

“We need both a genuine stability culture in the euro zone and its member states, and a much upgraded capacity to contain contagion and reduce borrowing costs for its members,” Rehn said during a speech at an economic forum in Brussels, adding that “this is the case if we want to avoid a disintegration of the euro zone and instead make the euro survive and succeed for the sake of its member states.”

Assessing the progress made over the last two years in the euro-area to stem the relentless crisis that has been battering member states and their banks, Rehn said they it had been “all in all… solid but uneven and seemingly insufficient.”

-By Matina Stevis, Dow Jones Newswires, 00 32 2741 1483; @MatinaStevis

EUROBONDS: Banks Dominate Primary Market, Indexes Unchanged

By Sarka Halas 

LONDON (Dow Jones)–Financial institutions dominated the European primary bond market Thursday as the costs of insuring European corporate and sovereign debt were mostly unchanged.

Back in the primary after postponing its bond last year, VEB Finance PLC, issuing on behalf of Russia’s Vnesheconombank, has set an initial price guidance of mid-5% on its benchmark-size, dollar-denominated five-year bond.

VEB is the second Russian issuer this year. On Tuesday, Russia’s largest private bank launched a two-part bond offering.

Also in the market was German mortgage bank Bayerische Landesbodenkreditanstalt, or BayernLabo. It priced its EUR500 million, 10-year, senior unsecured bond at 29 basis points over midswaps

Another financial issuer was Erste Abwicklungsanstalt, the bad bank for WestLB AG. EAA has set pricing on its minimum EUR500 million, 4.5-year, senior unsecured floating rate note in the area of 35 basis points over the three-month Euribor.

Nederlandse Waterschapsbank NV, or NWB Bank, has set pricing on its dollar-denominated, benchmark-size, bond at 115 basis points to 120 basis points.

In the corporate space, the primary saw an issuer from the European periphery. Italian toll-road operator Atlantia set final terms on its EUR1 billion, seven-year bond.

Final price guidance is 275 basis points over midswaps, in line with initial price guidance of 270 to 280 basis points over midswaps and well below the initial price thoughts, which were in the area if 290 basis points.

Orders on the issue were north of EUR6 billion as books closed.

Sweden’s SBAB Bank is not yet in the market, but has mandated Citigroup and UBS to organize a series of meetings across Europe. A capital markets transaction may follow.

The meetings start in London Friday and move to France, the Netherlands, Germany, Switzerland and Scandinavia next week.

Elsewhere, European debt insurance costs were largely unchanged from Wednesday’s close, as ongoing Greek debt talks offered no sign of resolution or direction to the market.

Around 1240 GMT, the SovX Western Europe index which investors can use to buy or sell credit default swaps on a basket of 15 sovereign borrower, was unchanged at 325/330 basis points, according to data-provider Markit.

Credit default swaps are derivatives that function like a default insurance contract for debt. If a borrower defaults, sellers compensate buyers.

The iTraxx Europe index which comprises 125 high-grade borrowers, 25 of which are banks and insurers, was unchanged at 138/139 basis points, while the Crossover index of 40 mostly sub-investment-grade European corporate borrowers, was also unchanged at 588/591 basis points.

-By Sarka Halas, Dow Jones Newswires; +44 (0) 207 842 9236;

(Serena Ruffoni and Ben Edwards in London contributed to this report)

TIP SHEET: T Rowe Tech Fund Reads Company, Industry Trends

By Matt Jarzemsky

NEW YORK (Dow Jones)–Ken Allen’s wide-ranging investing style takes his fund from well-known products such as Microsoft Corp.’s (MSFT) Windows software to more esoteric subjects, like IPG Photonics Corp.’s (IPGP) fiber lasers.

The T. Rowe Price Science & Tech fund (PRSCX) manager relies on his understanding of tech sector trends and input from more than a dozen analysts to find value the broader market has overlooked. The result is a variety of stocks that has outperformed in recent years.

“Some good picks and savvy timing have helped the fund out recently,” Morningstar analyst Kathryn Young said.

The fund had $2.6 billion in assets under management at the end of 2011. It is up about 2.2% over the past year, as of Jan. 25, while the Standard & Poor’s 500 index is nearly 4.9% higher, according to Morningstar. It has outperformed the broader equity market and its category over the last three and five years. Morningstar rates the fund three stars out of five.

The fund got a boost from its sizable position in National Semiconductor Corp., Young said, which Texas Instruments Inc. (TXN) bought last year for a hefty premium. It also benefited from bets on Blackboard Inc., which was taken private by Providence Equity Partners, and Electronic Arts Inc. (EA), she added.

Among Allen’s current picks is Microsoft, whose shares represent a relative bargain and are set to take off after it unveils a slate of products starting later this year, he said.

“They have a big catalyst in Windows 8, not just for computers and smartphones, but also their server product,” he said. “Soon after that, the next version of Outlook is likely to be released. That’s basically all of their profit.”

Another company that stood out to Allen recently was IPG Photonics, a maker of lasers used in manufacturing. IPG’s profit more than tripled in the first nine months of 2011 as its revenue surged 77%. But shareholders began selling it late in 2011, worried a potential economic slowdown would hinder the company.

Allen thought the company had enough promise to make it worth the risk. He bought shares at an average price in the mid-$40 range. IPG shares recently traded above $50.

Some of the fund’s picks have more to do with finding companies that can capitalize on a particular trend. Much of Allen’s interest in Google Inc. (GOOG) comes from its potential to benefit from the rise of mobile computing.

“Searches from smartphones and tablets have grown dramatically,” he said. “People over-focus on whether a smartphone is an iPhone or an Android phone. Bottom line is, those people searching from a smartphone are searching from Google.”

Atmel Corp. (ATML), a maker of components that power the touch screens of tablets and smartphones, is another beneficiary of the mobile computing boom, Allen said.

Atmel’s technology is also used in new thin and light laptops that a host of computer makers are rolling out to challenge Apple Inc.’s (AAPL) MacBook Air. Allen sees these new computers as a big growth area for the personal computer market.

T. Rowe Price Science & Tech has taken positions in private companies in addition to its publicly traded holdings. The fund invested in daily-deal website operator Groupon Inc. (GRPN) and Chinese online video provider Youku Inc. (YOKU) before either company’s initial public offering.

“I want to make sure all opportunities that are available are things that I’m looking at,” he said.

Allen started managing the fund at the start of 2009 after serving as a software analyst for T. Rowe.

“Allen’s short tenure on the fund causes some uncertainty, though that is somewhat allayed by his tenure as a software analyst prior to taking over the fund,” Morningstar’s Young said. “In addition, Allen’s tendency to take big positions and hold around 40% of assets in the top 10 holdings could cause the fund to lag if he makes any missteps.”

(Matt Jarzemsky covers technology companies for Dow Jones Newswires. He can be reached at 212-416-2240 or by email at

DATA SNAP: US 4Q GDP Rises To +2.8%

By Josh Mitchell and Eric Morath

WASHINGTON (Dow Jones)–The U.S. economy grew at its fastest pace in more than a year and a half in the final three months of 2011, signaling a sturdier recovery took hold despite troubles in other parts of the world.

The nation’s gross domestic product–the value of all goods and services produced–grew at an annual rate of 2.8% between October and December, the Commerce Department said Friday. That is up from 1.8% growth in the third quarter and 1.3% in the second quarter. It was the fastest pace since the second quarter of 2010.

Economists surveyed by Dow Jones Newswires expected 3.0% growth.

The faster growth capped an otherwise sluggish year in which the economy grew by 1.7%, slower than the 3.0% growth in 2010. Now, the question is whether the momentum in the fourth quarter will simply be another blip in a recovery marked by fitful starts, or whether it marks a stronger phase of the recovery.

One encouraging sign was that consumers continued to step up spending, as more Americans got jobs, their disposable incomes rose and price increases eased. Consumer spending, which accounts for more than two-thirds of demand in the economy, rose 2.0% in the fourth quarter compared with 1.7% in the third and 0.7% in the second quarter. The increase in spending came as Americans continued to dip into their savings, as the personal savings rate slipped a bit.

Another key factor in the growth was a restocking of shelves by businesses, who had whittled their inventories during the summer amid fears of a second recession back then. Since those fears ebbed, businesses have been replenishing their inventories to respond to increased demand.

Business investment grew at a much slower pace, however, a factor that the government said dragged on growth. Nonresidential fixed investment grew by 1.7%, compared to 15.7% in the third quarter and 10.3% in the second quarter. The government said a boost in spending in a separate category that reflects inventory investment rose more sharply.

Real final sales–GDP less changes in private inventories–increased 0.8%, compared with a 3.2% rise in the third quarter.

Another drag was an acceleration in imports, widening the trade deficit, the government said.

Exports rose 4.7%, the same pace as in the third quarter. Economists have warned that exports could be a vulnerable part of the economy as conditions in the euro-zone deteriorate this year.

Governments continued to cut spending. Overall government spending declined 4.6%, with federal, state and local governments all pulling back.

Even with the speed-up in growth, economists are expecting the economy to grow only modestly this year, as the sovereign-debt crisis in Europe threatens to hurt U.S. exports, and while governments at home continue to cut.

Federal Reserve officials estimate that GDP will expand between 2.2% and 2.7% this year. Fed officials said after their latest policy-making meeting this week that they expected to keep short-term interest rates near zero for almost three more years and signaled they could restart a controversial bond buying program in the latest attempt to boost the recovery.

One issue will be whether inflation remains at bay. Friday’s report showed a significant slowing in price increases as energy costs eased. The price index for personal consumer expenditures–the Fed’s preferred gauge for inflation–was 0.7% in the fourth quarter, compared with 2.3% in the third and 3.3% in the second. The core inflation rate–which excludes volatile moves in food and energy prices and is closely watched by the Fed–was 1.1%, compared to 2.1% in the third quarter.

Gross domestic purchase prices were up 0.8%, while the chain-weighted GDP price index increased by 0.4%.

The Commerce Department’s release on GDP can be found at: -By Josh Mitchell and Eric Morath; Dow Jones Newswires; 202-862-6637;

The usual anti-euro rant by Nicholas Hastings – FOREX FOCUS: Greece Will Wipe Away The Draghi Magic

By Nicholas Hastings


LONDON (Dow Jones)–Mario Draghi probably surprised himself.

Only his third outing as president of the European Central Bank and he had the euro eating out of his hand.

He lowered speculation over further monetary easing. He waxed lyrical about the success of the bank’s long-term refinancing operation in averting a credit crunch. And, with Italy’s bond yields finally falling back under the key 7% level that is seen as unsustainable, his optimism over improvements in the financial system was nearly infectious.

The euro reflected this, bounding nearly 1% higher as he spoke.

But, all this Draghi magic is little more than that–just magic.

The increasingly protracted and delicate talks between Greece and its private-sector investors are keeping the risks of a sovereign default very much alive.

With some hedge funds throwing a spanner in the works by demanding insurance payments rather than taking the voluntary writedown that Athens is seeking, chances are that Greece may be unable to meet the restructuring targets it needs to avoid seeking even more official funding.

Tensions over the apparent standoff are only likely to rise next week when negotiators from the European Union, the International Monetary Fund and the ECB–the international “troika”–arrive in Athens for their update of the terms of the second bailout package that is needed in March if Greece is to meet its repayment obligations.

The likely size of the Greek funding shortfall, as well as the inherent risks associated with the PSI negotiations, mean that, despite a more relaxed investor sentiment elsewhere in global markets, the future of Greece’s membership of the euro is still in doubt.

Certainly, further German support for Greece is still very much in doubt with Chancellor Angela Merkel once again having to defend her country’s sizeable contribution to the Greek bailout to her CDU party leadership Friday, amid rising pressure for Greece to be cut loose from the euro.

But, it isn’t only Greece that will ensure that Draghi’s magic is short-lived and the euro is once again on the defensive.

Despite his reassurances about bank funding and the success of the LTRO’s in easing credit conditions, European banks still face massive recapitalization to ensure they can withstand the losses from exercises such as Greece’s debt write down.

As Sebastian Galy at Societe General suggests, all Draghi has done is “patch the plumbing.”

A second LTRO in February may well go a long way to ease liquidity conditions, but banks are nowhere near returning to normal funding.

Draghi’s magic also doesn’t extend to the rather large problem of credit downgrades. The threat of Standard & Poor’s taking away France’s coveted triple-A rating still hangs over the market and Fitch is due to complete its latest review at the end of this month.

It comes as little surprise, therefore, that the euro has already started to reverse its Draghi-driven gains and that UBS has decided to lower its forecast for the euro to $1.15 by the end of the year from $1.25 previously.

Bloomberg TNI FRX POV

Reuters USD/DJ

Thomson P/1066 or P/1074

(Nicholas Hastings is a Senior Correspondent in London for Dow Jones Newswires who has written about foreign exchange for more than 20 years. He previously covered a variety of markets, including equities, fixed income, commodities and energy. He can be contacted on +44-20-7842-9493 or by email: or on twitter @NickHastingsDJ)

GLOBAL MARKETS: European Stocks Push Up; Spain, Italy Auctions Good

By Michele Maatouk and Andrea Tryphonides

LONDON (Dow Jones)–European stocks rose Thursday and the euro gained ground against the dollar, following well-received auctions by Spain and Italy, as investors await key rate and monetary policy announcements from the Bank of England and European Central Bank.

At 1100 GMT, the benchmark Stoxx Europe 600 index was up 0.6% at 251.44. London’s FTSE 100 was up 0.4% at 5691.67, Frankfurt’s DAX was up 1.5% at 6243.51 and Paris’s CAC-40 was 1.1% higher at 3238.54.

Spain sold just under EUR10 billion of bonds dated July 2015, April 2016 and October 2016–twice as much as the upper end of the target range. Meanwhile, Italy sold the targeted EUR12 billion in 12-month Treasury bills and borrowing costs came in sharply lower than at the previous auction.

“Today’s [Spanish] auction is more encouraging than we had anticipated,” said Newedge. “Dealers have not been stopped by the news that Spain will exceed its budget deficit target by 2% in 2011 and–at the current levels–definitely saw some value in Spain,” it said.

After the auctions, the 10-year Italian bond yield dropped 42 basis points to 6.56%, while the corresponding Spanish bond yield fell 11 basis points to 5.18%, according to Tradeweb.

The auctions also helped the euro to perk up, and by 1100 GMT the single currency was at $1.2758, from $1.2706 late Wednesday in New York.

Bunds hit session lows after the auctions, however, and by 1100 GMT the lead March 10-year bund contract was down 30 ticks at 139.05.

With much of the focus firmly on the auctions, investors largely shrugged off weaker-than-expected euro-zone industrial production data, which showed a 0.3% decline on the year in November, compared with estimates of a 0.3% rise.

In terms of sectors, bank and insurance stocks were providing support following comments from Fitch Ratings that it doesn’t expect the French government to provide capital to banks. ING Groep gained 5.7%, BNP Paribas was up 5.3% and UniCredit surged 9.3%.

Speaking at a conference in Paris, Fitch’s David Riley also said France isn’t viewed by the credit ratings company as a crisis country and it won’t be downgraded so long as its debt isn’t pushed up sharply.

Meanwhile, Royal Bank of Scotland gained 8% in London after investors embraced its restructuring proposals, which are largely focused on cutting back large parts of its investment banking unit.

Despite the positive tone, retailers were a massive drag Thursday, weighed down by London-listed Tesco, which slumped 14% after disappointing the market with a warning that profit growth in fiscal 2013 will be minimal. As a result, the supermarket will be investing hundreds of millions of pounds to improve U.K. sales. Tesco’s U.K. supermarket peers also slumped. Wm. Morrison Supermarkets fell 6.8% and J Sainsbury dropped 4.6%, but France’s Carrefour reversed initial losses to trade up just 0.1%. The FTSE 350 general retailers index was down 1.1% at 1506.11, while the Stoxx Europe 600 retail index dropped 4.8% to 237.50.

Investors are looking ahead to rate announcements from the Bank of England and European Central Bank. Colin Tan, research analyst at Deutsche Bank, said: “The market and Deutsche Bank expects the ECB to leave its refi rate unchanged. Focus will be on the post-meeting press conference… We expect the ECB to remain vague regarding future sovereign bond purchases but believe it will continue to intervene if conditions deteriorate.”

In the U.K., there is a risk that the BOE will approve more quantitative easing Thursday but Deutsche Bank’s house view is for the monetary policy committee to wait until early February before sanctioning more asset purchases.

Jitters about Greece continued to simmer in the background. The country might need to cut its debt by an additional EUR15 billion even after it completes a deal with private creditors for a 50% haircut, people familiar with the matter told Dow Jones Newswires Wednesday. However, at the same time Greek Finance Minister Evangelos Venizelos said talks with private sector creditors on the country’s debt write-down plan are “at a very good point.”

Earlier Thursday, Asian stock markets closed mostly lower as easing inflation in China failed to overcome worries over stresses in Europe’s economy. Japan’s Nikkei Stock Average finished down 0.7%, Australia’s S&P/ASX 200 fell 0.2% but South Korea’s Kospi Composite rose 1.0%. Hong Kong’s Hang Seng Index fell 0.3% and China’s Shanghai Composite was flat.

At 1100 GMT, the dollar was buying Y76.89, from Y76.85 late Wednesday in New York, while the pound was at $1.5341 from $1.5318, despite the release of weak U.K. data. Manufacturing output fell 0.2% on the month in November, in line with expectations, but the 0.6% year-on-year decline was worse than expected.

Among commodities, spot gold was at $1,653.50 a troy ounce, up $15.10 from its New York settlement on Wednesday. February Nymex crude oil futures were up $1.26 at $102.13 a barrel and March Brent futures were $1.32 higher at $113.38.

The Bank of England’s rate announcement is at 1200 GMT and the ECB’s is at 1245 GMT.

U.S. stock-index futures pointed to a moderately higher open on Wall Street, with the Dow Jones Industrial Average futures contract and the S&P 500 front-month futures contract up 0.4% at 12,435.00 and 1293.80, respectively.

-By Michele Maatouk, Dow Jones Newswires; +44-20-7842-9447;

European Debt Insurance Costs Fall, Europe Remains In Focus

LONDON (Dow Jones)–The cost of insuring European sovereign and corporate debt against default was lower in early trading Tuesday; Europe, however, will remain in focus as Monday’s meeting between German Chancellor Angela Merkel and French President Nicolas Sarkozy was light on details.

At around 0745 GMT, the SovX Western Europe index, which investors can use to buy or sell credit default swaps on a basket of 15 sovereign borrowers, was at 377/383 basis points, three basis points tighter from Monday’s close, according to data provider Markit.

Credit default swaps are derivatives that function like a default insurance contract for debt. If a borrower defaults, sellers compensate buyers.

The iTraxx Europe index, which comprises 125 high-grade borrowers, 25 of which are banks and insurers, was three basis points tighter at 177/178 basis points. The Crossover index of 40 mostly sub-investment-grade European corporate borrowers was nine basis points tighter at 747/751 basis points.

Merkel and Sarkozy showed a united front and were optimistic on a fiscal compact being agreed to by European leaders as early as the Jan. 30 summit, but at the latest by the end of the next month.

“That, however, is unlikely to do much to reassure investors that there are sufficient resources in place to contain contagion and provide an effective backstop for Italy and Spain should they lose market access,” said Chris Scicluna, an analyst at Daiwa Capital Markets.

There are no major economic data expected Tuesday.

-By Sarka Halas, Dow Jones Newswires; +44 (0) 207 842 9236;