Hopes for European Central Bank action on borrowing costs to push markets higher

TORONTO – The Toronto stock market headed for a positive start to trading Tuesday on hopes that the European Central Bank will ease the debt crisis by taking steps to reduce the borrowing costs of deeply indebted countries such as Spain and, to a lesser extent, Italy.

The Canadian dollar gained 0.25 of a cent to 101.42 cents US amid rising commodity prices.

U.S. futures also advanced on hopes that the ECB will buy government bonds as a way to reduce borrowing costs, which had spiked earlier this year to unsustainable levels in those countries. The German central bank, the Bundesbank, is alone in opposing such a move and some traders are betting that a compromise will be reached.

The Dow Jones industrial futures gained 29 points to 13,258, the Nasdaq futures were up 7.2 points to 2,787.2 and the S&P 500 futures rose three points to 1,417.7.

Optimism about resolving the eurozone debt crisis spread to bond markets Tuesday morning as Spain’s Treasury sold €4.4 billion in a short-term debt auction that saw interest rates down sharply.

It sold €3.5 billion in 12-month bills at an average interest rate of 3.07 per cent compared with 3.92 per cent last month. It also sold €981 million in 18-month bills on a yield of 3.33 per cent, down from 4.24 per cent.

Borrowing costs have also fallen amid growing speculation that Spain, which is mired in deep recession, will seek a bailout. The country has said it would consider such a move if the conditions are reasonable.

The TSX closed little changed Monday after the Bundesbank poured cold water on the idea of the ECB ramping up bond purchases.

But economists say the German central bank is unlikely,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.

The TSX will likely find support from the resource sector as prices for crude, copper and gold all advanced.

The September crude contract on the New York Mercantile Exchange gained 80 cents to US$96.77 a barrel.

The September copper contract on the Nymex reversed Monday’s five-cent loss, climbing six cents to US$3.43 a pound.

December bullion rose $5.80 to US$1,628.80 an ounce.

European bourses were positive as London’s FTSE 100 index rose 0.3 per cent, Frankfurt’s DAX gained 0.41 per cent and the Paris CAC 40 was up 0.65 per cent.

Earlier in Asia, markets received a boost 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 per cent, boosted also by reports that Chongqing, a huge metropolis in southwestern China, plans to spend 1.7 trillion yuan to upgrade its manufacturing sector.

Japan’s Nikkei 225 index, however, traded in a narrow range, closing 0.2 per cent lower, while South Korea’s Kospi lost 0.2 per cent and Hong Kong’s Hang Seng slipped marginally. Australia’s S&P/ASX 200 added 0.4 per cent.

In corporate news, commodities trader Glencore International PLC reported Tuesday that net profit in the first six months of 2012 was down eight per cent from the first half of 2011 amid falling prices for materials and global economic weakness. Glencore is following up a deal to acquire Canadian grain handler Viterra with an attempted purchase of Anglo-Swiss mining group Xstrata PLC.

Chinese state-owned oil company CNOOC Ltd., which plans to buy Canada’s Nexen Inc. in a $15.1-billion deal, said Tuesday that first-half profit fell 19 per cent as costs rose and a big oil spill in China’s Bohai Bay cut production.

The company also cut its dividend by 40 per cent to 15 Hong Kong cents a share to save up cash needed for the Nexen deal.

Facebook stock was down one per cent in pre-open trading following news that Peter Thiel, one of Facebook’s earliest investors, was among the insiders selling stock in the social network after a lockup expired last week. A regulatory filing says that Thiel sold about 20 million shares of Facebook last Thursday and Friday.

The social networking company’s shares fell below the US$19 level Monday, half the price of the stock when it embarked on its initial public offering in May.