European shares were set to fall sharply on Friday after closing at their lowest in six weeks in the previous session, with concerns mounting that borrowing costs in some euro zone countries could rise beyond sustainable levels and further deepen the debt crisis.
Spain saw on Thursday its borrowing costs rising to their highest since it joined the euro. Although 10-year Spanish bond yields slightly fell from highs by late trade and Italian 10-year bond yields eased as the European Central Bank intervened and Italy's new prime minister pledged additional economic reforms, investors remained jittery.
Many consider these (Spanish bond yield) levels unsustainable after the demise of the likes of Greece and Portugal when their yields hit similar levels, said Stan Shamu, strategist at IG Markets.
Spain will be heading to the polls this weekend after a shocker of a week in the bond market. Recent leadership changes in Italy and Greece have failed to drive the market to a sustainable recovery, suggesting it will take much more than a leadership change to appease investors.
Italy's new technocrat prime minister, Mario Monti, unveiled sweeping reforms and said Italians were confronting a serious emergency, but analysts said equity investors were expected to take some money off the table before going into the weekend break.
Futures for Euro STOXX 50, for Germany's DAX and for France's CAC were down 0.8 to 1 percent. Financial spreadbetters earlier predicted Britain's FTSE 100 <.FTSE> to fall as much as 1.3 percent.
Banks <.SX7P>, which have slumped 36 percent this year on their exposure to debt-laden European countries and taken a hit on their balance sheets, were expected to feel the pressure again on Friday after falling 2.2 percent in the previous session. The sector index is down 11 percent so far this month.
The sector's outlook remained gloomy, with Standard & Poor's planning to update its credit ratings for the world's 30 biggest banks within three weeks and may well mete out a few downgrades in the process.
On Thursday, the euro zone's blue chip Euro STOXX 50 <.STOXX50E> fell 1.1 percent to 2,242.78 points to stay just above its 50-day moving average. The index could find some support at around 2,221 that represents a 50 percent retracement of the index's rise in September and October, but a break of the level could open the door for a drop towards 2,055, a low in October.
In a sign global funding strains may spread to Asia, benchmark three-month euroyen interest rates futures fell to an eight-month low on concerns that tightness in dollar money markets may prompt non-Japanese banks to raise yen at a higher rate.
The FTSEurofirst 300 <.FTEU3> index of top European shares fell 1.3 on Thursday to 957.85 points, the lowest close since early October. It is down 15 percent in 2011, mainly on worries the euro zone debt crisis could derail a fragile global economic recovery and affect profitability of companies.
Deutsche Boerse and NYSE Euronext
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