Speculation on increased integration boosts euro

The euro rallied and bonds retreated from last week’s record low yields yesterday, as speculation increased that authorities will seek greater fiscal integration in the eurozone.

US stocks fell, but oil, copper and other commodities rebounded as investors speculated new action may be in the works to address the debt crisis and keep Greece from leaving the euro zone.

A rally in Europe’s troubled banking sector lifted battered Spanish, French and Italian stocks, with the eurozone’s blue-chip Euro STOXX 50 index closing up 0.5%. An index of the eurozone banking sector rose 3.4%.

The euro was 0.4% higher at $1.2480, off the near two-year lows on Friday.

German chancellor Angela Merkel is pressing for much more ambitious measures, including a central authority to manage euro-area finances and major new powers for various European entities. In Spain, prime minister Mariano Rajoy is pushing for a direct European rescue of the country’s troubled banks.

France and the European Commission signalled their support yesterday for an ambitious plan to use the eurozone’s bailout fund as European officials try to reassure investors they can contain an escalating crisis.

Senior EU officials have promised decisions at a summit at the end of June to resolve the two-and-a-half-year debt saga to deepen integration in the eurozone and underpin the common currency, showing they are committed to its future.

Wall Street zigzagged between losses and gains.

The Dow Jones industrial average was down or 0.2%, at 12,115. The Standard & Poor’s 500 Index was up 0.7 point, or 0.51%, at 1,278. The Nasdaq Composite Index was up 0.4%, at 2,757.

In thin European markets, the FTSE Eurofirst 300 index of top shares closed down 0.5% at 949.94 points.

The MSCI world equity index fell 0.6% to 290.25.

Traders took profits in safe-haven US and German debt, wary that a policy response to the euro zone’s debt crisis might be in the works.

“It’s relatively difficult to be positive on these developments,” said Marius Daheim, senior fixed-income analyst at Bayerische Landesbank. “But we haven’t given up because the past has also taught us that European politicians usually move when things become really dangerous. I think we are quickly moving towards this point.”

The benchmark 10-year US Treasury note was down 20/32, with the yield at 1.5239%.

The price of the 10-year German bond fell and its yield rose to 1.215%.

Another factor on traders’ radar was that potential monetary easing may come from a meeting of the European Central Bank tomorrow, as some investors positioned for an outside chance of a rate cut. Factory prices held steady in the eurozone in April, giving the ECB room to cut rates.

“They (the ECB) have made it clear that they want the solution to come from Europe’s leaders, but the recent deterioration in economic data and slide in asset prices makes easier monetary policy inevitable,” said Kathy Lien, director of currency research at GFT in Jersey City, New Jersey.

Brent crude futures rose 42 cents to $98.85 a barrel, while US crude gained 80 cents to $84.03 a barrel.