European debt fears to push markets lower

Italy had to pay an average yield of 7.814% to raise €2 billion in two-year bills, much higher than the 4.628% it had to pay in the previous auction in October.

Raising €8 billion for six months proved exorbitantly expensive. The yield for this auction spiked to 6.504%, nearly double the 3.535% rate in the last equivalent auction last month.

U.S. futures were lower ahead of a shortened session on the New York Stock Exchange as traders returned to work following the Thanksgiving holiday.

The Dow Jones industrial futures lost 68 points to 11,166, the Nasdaq futures were down 13 points to 2,148 while the S&P 500 futures dropped 5.9 points to 1,154.

Italy’s borrowing rates in the markets skyrocketed in the wake of the auctions, with the 10-year yield spiking 0.34 of a percentage point to 7.3%, above the seven per cent threshold that is widely considered unsustainable and eventually forced Greece, Ireland and Portugal had to seek financial bailouts.

However, with debts of around €1.9 trillion, or a huge 120% of its economic output, Italy is considered too big to bail out.

The negative showing on markets came as the TSX lost 86 points Thursday after French president Nicolas Sarkozy appeared to temper his calls for the European Central Bank to play a bigger role in solving the debt crisis, instead supporting a German effort to change EU treaties to improve the governance of the troubled eurozone.

There have been calls for the ECB to deal with the crisis by declaring itself lender of last resort and printing money to buy the bonds of debt-laden eurozone countries. But both the ECB and the German government are loath to do that, warning that it lets the more profligate countries off the hook for their bad practices.

For the same reason, Germany has opposed the use of eurobonds which would be backed by the eurozone’s 17-member countries.

Markets have been in a deep funk for weeks over the failure of eurozone leaders to come up with a comprehensive fix for the debt crisis, which threatens a fragile global recovery, the region’s financial system and the euro itself.

Fears about worsening economic conditions have also pressured commodity prices and the January crude contract on the New York Mercantile Exchange lost $1.08 to US$95.09 a barrel.

Metal prices also declined with the December copper contract in New York down two cents to US$3.26 a pound.

Bullion was also lower with the December contract down $14.20 to US$1,681.70 an ounce.

A higher U.S. dollar also pressured commodity prices. A stronger greenback usually helps depress prices for oil and metals, which are denominated in dollars, as it makes them more expensive for holders of other currencies.

European bourses were lower as London’s FTSE 100 index slipped 0.21%, Frankfurt’s DAX was off 0.19% and the Paris CAC 40 fell 0.64%.

Earlier in Asia, trading was sluggish. Japan’s Nikkei 225 index closed marginally lower, while Hong Kong’s Hang Seng dropped 1.4%.

In mainland China, the benchmark Shanghai Composite Index lost 0.7%.

Aside from Europe’s debt crisis, traders in the U.S. were bracing for a crucial test of the world’s biggest economy — so-called Black Friday, the day that kicks off the holiday shopping season. How well retailers do will have consequences for the still-fragile U.S. economic recovery, as well as for the global economy.

Meanwhile, thousands of Indonesians jammed into a glitzy shopping mall in Jakarta on Friday to get hold of the first BlackBerry Bold 9790s being sold worldwide. Fearing a riot, hundreds of police were deployed outside, tying up traffic in the heart of the capital for hours. The retailer had offered a 50% discount on the $540 phone for the first 1,000 buyers.

In other corporate developments, Kinross Gold Corp. (TSX:K) has revised its financial guidance to lower its forecast for depreciation, depletion and amortization in 2011 to approximately US$600 million compared with earlier guidance of US$651 million. The gold miner’s guidance for production and cost of sales for the year was unchanged.

Shareholders of metals royalty company Lumina Royalty Corp. have approved a takeover by gold-focused royalty company Franco-Nevada Corp. (TSX:FNV) for US$60 million in common shares and $6 million worth of warrants.