Six-week closing low as Merkel cools hopes

Eurostoxx: 2,236.68 (-6.10) Frankfurt DAX: 5,800.24 (-48.94) Paris CAC: 2,997.01 (-13.28)EUROPEAN SHARES ended at a six-week closing low yesterday after comment from German chancellor Angela Merkel cooled market hopes that Europe's largest economy would back monetary measures to tackle the euro zone debt crisis.

The FTSEurofirst 300 index of top European shares closed 0.7 per cent lower at 950.95 points, for a weekly fall of 3.4 per cent.

Responding to a call for “decisive action” from Britain’s prime minister, David Cameron, Merkel said European Union institutions “cannot pretend to have powers do not have”.

While the European Central Bank is not allowed to buy sovereign bonds on the primary market, a growing number of market participants have called for the central bank to intervene as a lender of last resort for struggling euro zone countries.

“The scepticism comes from the realisation that there is no magic bullet in place to solve this crisis,” said Giancarlo Perasso, chief economist at Redux-Matrix, which has $100 million under management.

The ECB intervened on the secondary bond market yesterday to relieve ease pressure on Italian notes after its new government announced far-reaching reforms in response to a debt crisis that now threatens to engulf France and Spain.

Spain’s IBEX 35 and Italy’s FTSE MIB outperformed their European peers, rising 0.5 per cent and 0.2 per cent, respectively.

“Italian banks finally benefited from political stability and ECB intervention and the same thing applies to Spain, which holds elections on Sunday,” a trader in Milan said.

Italy’s new prime minister, Mario Monti, who won a final confidence vote in the lower house yesterday, unveiled a programme centred on fiscal discipline and aimed at stimulating economic growth.

Fiscal consolidation is also a key part of the platform presented by the Popular Party in Spain, expected to win a general election tomorrow.

“The fact that the primary balance remains in deficit makes Spain’s debt dynamics more vulnerable to the sovereign debt crisis,” Credit Suisse said in a note, saying this was partly due to an economic growth rate of 0.6 per cent this year. – (Reuters)