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updated: 8/21/2012 7:22 AM

Hopes for European rescue plan underpin markets

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Associated Press

LONDON -- Hopes that the European Central Bank will reach a deal to help Spain and Italy borrow at cheaper rates nudged financial markets higher on Tuesday.

Investors are increasingly convinced that the ECB will buy some eurozone countries' government bonds to help reduce their borrowing costs. The German central bank, a key member of the ECB, is alone in opposing such a move and some traders are betting that a compromise will be reached.

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Britain's FTSE-100 index of leading stocks was up 0.3 percent to 5,843.33 while Germany's DAX advanced 0.4 percent to 7,062.09. France's CAC-40 climbed 0.7 percent to 3,504.37.

Wall Street was set to open higher -- Dow Jones industrial futures rose 0.2 percent to 13,255 while S&P 500 futures added 0.2 percent to 1,417.

Spain and Italy's borrowing rates have in fact been dropping over the past few weeks on expectations for such an ECB plan. On Tuesday, Spain was able to raise (euro) 4.4 billion ($5.4 billion) in short-term debt at sharply lower interest rates than at the last such auction.

Economists say the German central bank is unlikely to on its own to block the ECB from going ahead with some form of rescue plan -- even German Chancellor Angela Merkel has sounded open to the ECB's ideas.

"While the ball might well be in the court of the German hard-liners, it is very difficult to see what shot they can take from here," said Simon Derrick, analyst at Bank of New York Mellon.

According to preliminary sketches of the ECB's bond-buying plan, Spain would first have to formally ask for financial aid from Europe's bailout funds. Madrid would have to accept some conditions, such as economic policies and debt reduction targets, in exchange for the aid. The country has said it would consider such a move if the conditions are reasonable.

Investors are also looking for progress from Greek Prime Minister Antonis Samaras' visits this week to Germany and France, where he is expected to request an extension of Greece's deadline to meet fiscal targets as the country carries out painful reforms. Samaras also will meet with visiting Luxembourg Prime Minister Jean-Claude Juncker, who chairs the eurozone finance ministers' meetings, in Athens on Wednesday.

Markets received a boost earlier in the day on news that the Chinese central bank had moved to ease funding shortages through money market operations.

China's Shanghai Composite Index jumped 0.5 percent to 2,118.27, boosted also by reports Chongqing, a huge metropolis in southwestern China, plans to spend 1.7 trillion yuan ($236 billion) to upgrade its manufacturing sector.

Japan's Nikkei 225 index, however, traded in a narrow range, closing 0.2 percent lower at 9,156.92, while South Korea's Kospi gave up early gains, losing 0.2 percent to 1,943.22. Hong Kong's Hang Seng slipped marginally to 20,100.09, while Australia's S&P/ASX 200 added 0.4 percent to 4,383.40.

Crude oil rose 67 cents to $96.64 per barrel in electronic trading on the New York Mercantile Exchange. The contract fell 4 cents to $95.97 per barrel in New York on Monday.

In currencies, the euro was trading at $1.2423, up from $1.2348 late Monday in New York. The dollar was roughly unchanged against the Japanese currency, at 79.42 yen.

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