Investors take break from credit worries

Financial markets took a breather from worries about a credit crunch on Monday with European equities rising and currency markets stabilizing.
Signs of the recent bout of risk aversion, however, were not far away. MSCI's main world stock index was 6 percent off its all-time high just 10 days ago and Wall Street volatility was at highs not seen since April 2003."Clearly credit worries are still very much at the fore of investors' minds," said Nick Stamenkovic, bond strategist at RIA Capital Markets.
Markets have been shaken over the past two weeks as concerns about trouble with riskier -- subprime -- U.S. mortgages have spilled over into credit markets generally, forcing a rethink on some corporate borrowing and raising credit costs.
For example, the iTraxx Crossover index, the most widely watched indicator of European credit markets, is more than 250 basis points wider since mid-June.
But Monday was proving a calmer day than recently.
European stocks rose in early trade on Monday as gains in miners and chemicals group ICI offset fears over the impact of a credit crunch on liquidity and mergers and acquisitions.
The pan-European FTSEurofirst 300 index was up 0.4 percent at 1,523.53.
ICI jumped more than 7 percent after it rejected an improved 7.8 billion-pound ($15.9 billion) takeover proposal from Dutch rival Akzo Nobel ,saying the sweetened bid was not enough. Earlier, Japan's Nikkei average finished almost flat after hitting its lowest in nearly four months, largely brushing aside the defeat of Prime Minister Shinzo Abe's ruling camp in Sunday's upper house elections.
The Nikkei ended up 0.03 percent, or 5.49 points, at 17,289.30. The broader TOPIX index added 0.35 percent or 6 points to end at 1,705.71.
CURRENCIES, BONDS
The dollar slipped modestly against a basket of major currencies, giving back some of last week's gains.
"All eyes are on credit and equity markets today to see whether or not the risk-reduction moves will continue this week," said Niels From, currency strategist at Dresdner Kleinwort in Frankfurt.
"From an FX perspective, we'll be looking at how the risk perception develops and how the carry trade develops."
Under the carry trade, investors borrow in low-yielding currencies such as the Japanese yen to buy higher-yielding assets. When risk aversion hits, such trades can unwind.
The dollar was down 0.2 percent on the day against a basket of six major currencies at 80.990, having gained around 1 percent last week, its biggest weekly gain in six months.
The dollar was up 0.3 percent against the yen at 119.02 yen. The euro was up 0.2 percent against the dollar at $1.3660.Yields on euro zone government bonds were flat. Such bonds have been a safe-haven play for investors.
Ten-year cash yields were 4.332 percent while the interest rate-sensitive two-year Schatz yield was at 4.268 percent.