World markets flat on pre-summit nerves

Investors seemed reluctant to place big bets before the European Union summit starting tomorrow as they await concrete evidence their optimism about committed action by the region's policy makers toward solving its fiscal crisis is warranted.

There's been a recurring theme of high hopes doused by a lot of talk and little action by EU leaders as they failed to get on top of the debt problem that has gripped the euro zone for two years, driving up borrowing costs across member nations and stunting economic growth.

The euro zone's anchor team of Germany and France is taking different approaches as they prepare to gain support for their plan to amend EU treaties to boost control over national budgets of member states. Germany is trying to downplay expectations while France sees an opportunity for a leap forward.

"I think the hopes [for a deal in the summit] are certainly still there. There's a belief in the marketplace that the euro zone doesn't have a death wish," Art Hogan, managing director at Lazard Capital Markets in New York, told Reuters.

In afternoon trading in New York, the Dow Jones Industrial Average edged 0.05 per cent lower, the Standard & Poor's 500 Index fell 0.35 per cent, and the Nasdaq Composite Index declined 0.42 per cent.

In Europe, the Stoxx 600 Index closed with a 0.2 per cent drop for the day. Earlier in the session, it rose as much as 1.2 per cent, according to Bloomberg News.

US Treasury Secretary Timothy Geithner, who is in Europe for pre-summit discussions, supports the Franco-German plan, according to Reuters.

"I have a lot of confidence in what the president of France and the minister are doing, working with Germany to build a stronger Europe," Geithner told reporters after talks with French Finance Minister Francois Baroin, according to Reuters.

Highlighting the difficulties in the negotiations were reports that Germany rejects proposals to combine current and permanent euro-area rescue funds a day after the Financial Times reported EU leaders may agree on a package including the existing 440 billion euro bailout fund and a new 500 billion euro facility.

The euro fell 0.1 per cent to US$1.3387 at midday trading in New York and declined 0.1 per cent to 104.01 yen.

"You have a lot of uncertainty in the market before the meetings," Fabian Eliasson, head of US currency sales at Mizuho Financial Group in New York, told Bloomberg News. "It really comes down to the next two days. The market has high expectations for this and if the market is disappointed you could see risk being taken off and really strong moves."

Eyes are also on the European Central Bank which meets on Thursday. Most economists expect it to cut interest rates to 1.0 per cent from 1.25 per cent, introduce longer-term liquidity tenders for banks and widen the collateral they can use to borrow from it, according to Reuters.

Meanwhile, other life lines are eagerly taken. The ECB said demand for three-month dollar loans climbed to US$50.7 billion today following last week's agreement with five other central banks to reduce interest rates on such loans. That compares with the US$395 million lent in the last such offering on November 9, according to Bloomberg, and is five times the US$10 billion forecast in a Reuters poll of money market traders.