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Stocks and the euro fell on Wednesday after policymakers in the United States dimmed hopes of fresh asset-buying, underlining its divergence from a Europe facing recession and firmly back in crisis-fighting mode after a weak Spanish bond sale.
Spain, firmly at the sharp end of the euro zone crisis, raised less debt than hoped at rising yields, focusing market attention on a European Central Bank certain to hold the region's borrowing costs at record lows later in the day.
Sagging orders kept euro zone businesses in the doldrums in March, probably pushing the region into a mild recession, Markit data suggested on Wednesday, while euro zone retail sales data also weakened.
By 10:06 GMT, European shares and world stocks were both down around 0.9 per cent, while emerging market shares were 1.1 percent lower. U.S. stock index futures all pointed to a lower open on Wall Street.
"There is still the risk of a double-dip recession in Europe. It's not clear where the engine of growth overall will come from in the euro zone and there are still some big picture risks out there," Philip Poole, global head of macro investment strategy at HSBC Global Asset Management, said.
"The performance of European equities will be much more data-dependent and that data over the past month or so has been disappointing."
The euro extended early falls to trade down 0.5 per cent against the dollar and 1.1 per cent against the yen. The greenback climbed 0.1 per cent against a basket of currencies.
Both stocks and the euro were pushed to session lows by the Spanish auction, while bond investors moved back into safe-haven debt with Bund futures rising 31 ticks to 138.63.
U.S. Treasuries edged up in Europe ahead of the release of U.S. private sector jobs numbers.
The auction result "suggests investors remain very cautious towards Spanish bonds at the moment," said Nick Stamenkovic, rate strategist at RIA Capital Markets.
It also highlighted broader risks for the euro zone, and the ECB is expected to resist German pressure to flag an exit from its crisis-fighting mode on Wednesday.
By contrast, in the face of a flurry of improved economic data from across the Atlantic, overnight minutes from the U.S. Federal Reserves's March meet showed less support for more quantitative easing (QE) or bond-buying.
"The market is moving on reduced probability of further QE in the near-term and that's helping to support the U.S. dollar across the board," said Lee Hardman, currency economist at Bank of Tokyo-Mitsubishi.
"The euro is likely to adjust lower on the back of the euro zone economy underperforming which will require the ECB to run a loose policy stance. There could potentially be a slightly more dovish stance from the ECB today and that contrast with the Fed will provide euro/dollar with some downward momentum."
A T-bill sale in Portugal met with better demand than the auction in Madrid, though the shorter-term nature of the debt meant its wider market impact was muted.
Following the twin auctions, yields on Spanish benchmark 10-year debt rose, and Spanish 5-year credit default swaps extended their early rise after the auction to be up 20 basis points on the day at 457 bps by 0957 GMT, Markit data showed.
On Tuesday, Spain, which recently announced fresh budget cuts as it slides back into recession, said its debt level is on course to reach a 22-year high.
Spain's large service sector continued to contract in March, albeit at a slower pace, data on Wednesday showed, propelling the euro zone laggard towards a technical recession, after its economy contracted in the last quarter of 2011.
Commodities fell broadly on the Fed comments, although by mid-morning, Brent crude oil, the European benchmark, had pared losses to trade down 0.2 per cent, while was lower, at around $1,633.50 an ounce.
Copyright @Thomson Reuters 2012
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