Spanish bailout fears stalk markets

A currency trader passes by screens showing the Korea Composite Stock Price Index, left, and foreign exchange rates at the foreign exchange dealing room of the Korea Exchange Bank headquarters in Seoul, South Korea, Monday, July 23, 2012. The Korea Composite Stock Price Index fell 1.84 percent, or 33.49, to close at 1,789.44. (AP Photo/Ahn Young-joon)
AP Photo/Ahn Young-joon

(AP) LONDON - Growing fears that Spain will need to be bailed out hit markets hard Monday, sending stocks around the world sharply lower and the euro down to a fresh two-year low against the dollar.

With the yield on Spain's benchmark 10-year bond well above 7 percent, investors appear to be resigned to the prospect of the euro area's fourth-largest economy needing a financial rescue like Greece, Ireland and Portugal.

Spain's 10-year borrowing rate rose 0.23 percentage points Monday to 7.45 percent - its highest level since the euro was established in 1999 and above the level that prompted the other three countries to seek an international rescue.

"Those levels indicate that Spain may soon struggle to fund itself in the market and therefore unless some positive action is taken the country will need a full bailout," said Gary Jenkins, managing director of Swordfish Research.

Coupled with worries that the financial firewall Europe has built up to deal with its debt crisis is insufficient and growing concerns of the financial health of regions within Spain, markets have started the week on a sour note.

In Europe, the FTSE 100 index of leading British shares was down 1.7 percent at 5,554 while Germany's DAX fell 1.6 percent to 6,523. The CAC-40 in France was 2 percent lower at 3,130.

The stock markets in Spain and Italy were faring worst of all with Madrid's IBEX down 4 percent and Milan's FTSE MIB 4.6 percent lower. Though Spain is at the forefront of concerns at the moment, investors are concerned that Italy will be back in the spotlight soon. Its 10-year yield was up 0.28 percentage points to 6.35 percent.

Wall Street was heading for a sharply lower opening too, with Dow futures and the broader S&P 500 futures down 1 percent.

The euro was also under pressure, trading 0.3 percent lower at $1.2122. Earlier it had fallen to $1.2081, its lowest level since June 2010. The euro has also fallen to a near 12-year low against the yen.

"What participants will be looking for in order to reverse euro selling is a catalyst, and, so far, finding one that will be net positive could prove to be as well hidden as Spain's outlook looks fragile," said David White, a trader at Spreadex.

A forecast from a Chinese central bank adviser that China's economy could wane further in the third quarter also deepened concerns about the global slowdown. China's economic growth slowed to a three-year low of 7.6 percent in the second quarter.

Japan's Nikkei fell 1.9 percent to 8,508.32 and Hong Kong's Hang Seng dived 3 percent to 19,053.47. China's Shanghai Composite Index shed 1.3 percent to 2,141.40. South Korea's Kospi dropped 1.8 percent to 1,789.44.

Investors are awaiting quarterly financial results from industry bellwethers around the world - from tech giants Apple, Amazon and Facebook, to automakers and energy firms.

Oil prices took a hit, too, as investors fretted over Europe's debt woes and the global economy, with the benchmark New York rate down $2.52 a barrel at $89.31.