GLOBAL MARKETS: European Stocks Fall As Koreans Exchange Fire

LONDON (Dow Jones)--European stocks fell Tuesday, led by banks and basic-resources issues, as the exchange of fire between North and South Korea, on top of the continuing worries about European sovereign debt, hit sentiment.

As investors shifted to safe-haven assets, the dollar and the Swiss franc strengthened, as did German bunds and gold prices.

Adding to the already downbeat mood were the reports that North Korea fired artillery at South Korea's Big Yeonpyeong island in the Yellow Sea and that South Korea returned fire.

By 0900 GMT, the Stoxx Europe 600 index was down 0.6% at 266.04. London's FTSE 100 was 0.7% lower at 5643.39, Frankfurt's DAX lost 0.3% to 6802.24 and Paris's CAC-40 was down 0.7% at 3793.37.

Banks suffered the brunt of the selling. Standard Chartered, which has a strong exposure to Asian markets, paced the sector decline in London. The stock fell 2.5%, closely followed by Lloyds Banking Group and Barclays. The Stoxx Europe 600 index for the sector lost 1.7% to 196.48.

Basic resources also posted hefty losses, as lingering fears of further fiscal tightening in China and the trouble in Korea put pressure on commodity prices. The Stoxx Europe 600 index for the sector slid 1.6% to 560.64. Among individual stocks in the sector, Vedanta Resources fell 3.1% and ArcelorMittal lost 2.2%.

At the same time, uncertainty about the Irish rescue plan--details of which are yet to be finalized--as well as speculation as to which European nation might be next to ask for help, continued to unsettle investors, traders said.

"The markets currently have virtually zero confidence that the bailout in Ireland will solve the European 'crisis' even though fiscal austerity measures in both Portugal and Spain have been severe and, prima facie, sufficient to ease market concerns," said Lloyds TSB Corporate Markets.

Meanwhile, Exane BNP Paribas said Ireland's debt is small in absolute terms, and the real worry is Spain. "The Spanish situation is the most daunting. It is a much bigger country, with high household debt and pressure for wage moderation, which could make household deleveraging painful. Moreover, further fiscal tightening measures are likely as we estimate that the Spanish government has announced just 75% of what is needed to stabilize its public debt-to-GDP ratio."

Still to come on the economic calendar, U.S. gross domestic product figures are due at 1330 GMT and existing home sales at 1500 GMT.

On Wall Street Monday, blue-chip stocks declined, led lower by financials as the market cringed over new details of a widespread insider-trading investigation and worried about Ireland's debt woes.

The Dow Jones Industrial Average closed down 0.2% at 11,178.58 and the Standard & Poor's 500 index shed 0.2% to 1197.84 but the Nasdaq Composite rose 0.6% to 2532.02.

The market tumbled early Monday after Ireland agreed over the weekend to accept a bailout, formally applying for tens of billions of euros in aid from the European Union and the International Monetary Fund. Later stocks pared their losses after Irish Prime Minister Brian Cowen said he would call for the dissolution of parliament in the new year after a vital budget vote on December 7.

Meanwhile, stoking fresh worries for the financial sector, The Wall Street Journal reported that Federal Bureau of Investigation agents raided the offices of three hedge funds, Diamondback Capital Management LLC, Level Global Investors LP and Loch Capital Management LLC, amid a far-reaching insider-trading investigation.

In Asia, shares ended down Tuesday as resources plays took a hit amid investor nervousness China may introduce further tightening moves and over Europe's debt crisis.

Australia's S&P/ASX 200 fell 1.2% and South Korea's Kospi Composite lost 0.8%. China's Shanghai Composite dropped 2.5%, while Hong Kong's Hang Seng Index shed 2.7%. Markets in Japan were closed for a public holiday.

In the European foreign exchanges, the dollar and the Swiss franc gained from safe-haven flows on the news from Korea while the Japanese yen failed to do so. At 0910 GMT, the euro was trading at $1.3591, down from $1.3627 in late New York business Monday. The dollar was trading at Y83.61, up from Y83.34, and at CHF0.9898, barely changed from CHF0.9896.

Among commodities, spot gold was at $1366.60 per troy ounce, up $8.97 from New York, while January Nymex crude oil futures were down seven cents at $81.67 per barrel.

In the bond markets the December bund futures contract was up 0.34 at 128.28, benefiting from the safe-haven flows prompted by the news from Korea. The yield spread between 10-year Portuguese and German sovereign bonds widened by 15 basis points to 420 bps, while the Irish/German yield spread widened by 9 bps to 553 bps.