* Initial euro, share rally on Ireland bailout short-lived
* Euro zone contagion fears linger
* Ireland yields, CDS drop, yield spreads narrow
* Investors cautious, euro zone, U.S. concerns remain
By Naomi Tajitsu
LONDON, Nov 22 (Reuters) - The euro pared early gains while
European shares slipped on Monday as initial euphoria over
Ireland's request for a debt bailout fizzled.
Riskier assets gave up gains and reversed course on concerns
that other euro zone countries may need similar help, and after
Ireland's junior party called for an election, prompting
concerns about political instability in the country.
[]
Ireland's news initially whetted investor appetite for
higher-risk currencies, stocks and commodities, while boosting
Irish government debt prices on the view that the latest episode
in the euro zone debt saga has been contained. []
World shares pulled back from an early rise, while U.S.
shares were poised to open slightly lower.
"The deal was inevitable ... but there are still hurdles
ahead for other countries, particularly next year," said Nick
Stamenkovic, rate strategist at RIA Capital Markets.
The cost of insuring against an Irish sovereign default
tumbled in early trade and its two-year government bond yield
dropped as Dublin outlined austerity measures to the European
Union and the IMF in return for loans to shore up its crippled
banking sector. []
Market participants say Portugal may be the next country
forced to seek a bailout, which could reignite concerns about
the stability of the euro zone.
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For an overview of Europe's debt struggles, click:
http://r.reuters.com/hyb65p
For an interactive euro zone debt crisis timeline, click:
http://link.reuters.com/nyx95q
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Some analysts say that in the unlikely situation that no
more bailouts are needed, concerns about the region will remain
elevated due to pressure on euro zone economic growth resulting
from the rescue packages laid out for Greece and Ireland.
"Even assuming the best case scenario of no further
bailouts, the necessary adjustments required to rectify internal
imbalances in the euro zone are deeply deflationary and will
quickly become evident by the under-performance of the euro zone
economy," BTM UFJ analysts wrote in a note.
By 1216 GMT, the euro <EUR=> was flat on the day at $1.3689,
pulling back from the day's high of $1.3786. The safe-haven
dollar slipped 0.1 percent versus a currency basket <.DXY>.
Last week, markets had been awash with expectation that
Ireland would be able to secure debt assistance, which had
triggered a recovery in the euro after it was sold off earlier
this month.
LINGERING EURO ZONE, US ISSUES
World share prices rose, nudging the MSCI world equity index
<.MIWD00000PUS> up 0.1 percent, although the index pared gains
after Ireland's Green Party called for a January election.
European shares fell 0.5 percent following the announcement,
relinquishing early gains. U.S. stock futures <SPv1> slipped 0.1
percent.
The two-year Irish government bond yield <IE2YT=TWEB> fell
as much as around 50 basis points, while benchmark 10-year
yields <IE10YT=TWEB> fell more than 20 basis points. Five-year
Irish CDS prices fell 35 basis points to 470 basis points.
Irish debt yields continued their retreat after rocketing to
the highest in the history of the euro zone earlier this month
when concerns about Ireland's debt problems resurfaced, sowing
doubts about the stability of the euro zone.
Gains in periphery bonds put selling pressure on German
debt, widely considered to be the most stable in the euro zone.
A rise in benchmark 10-year German bonds helped to further
narrow the spread against its Irish counterpart.
Commodities gained, but pulled back from an early rise. Ooil
prices <CLc1> were up 0.2 percent at $82.14 per barrel, after
climbing 1 percent.
Investors were hesitant to get too excited about the risk
rally as euro zone fiscal problems were expected to continue,
while questions remain about whether the U.S. Federal Reserve's
latest round of quantitative easing will work.
The Fed earlier this month said it would buy more U.S.
Treasuries in an effort to boost market liquidity, but this has
not yet led to significant dollar weakness and lower Treasury
yields, as some in the market had been expecting.
Market participants said they would be wary of taking big
positions in either direction on risky assets until they get a
clearer picture of whether the second round of QE will be
successful, and whether more euro zone bailouts will be needed.
"Both the U.S. and European situation will remain until the
year end and so volatility will remain elevated," said Thanos
Papasavvas, head of FX management at Investec.
"We don't expect any significant rally in risk from here nor
a significant shock to the downside. We'll probably remain in
range for now," he said, adding that he expected the euro to be
hemmed in a $1.30-$1.40 range for now.
Others in the market say that China's ongoing moves to
tighten monetary policy -- the latest of which was a rise in
banking reserve requirements late last week -- will also cool
expectations of how much the global economy will grow.
(Additional reporting by Kirsten Donovan; Editing by Hugh
Lawson)
