Cyprus leaves shares facing worst week since November

World shares were heading for their worst week since November and gold was nearly at a one-month high on Friday as Cyprus scrambled to avoid a meltdown of its banks and exit from the euro that could upset the whole region.

The European Union has given Cyprus until Monday to raise 5.8 billion euros to secure a 10-billion euro international bailout. Parliament already rejected one deal.

A few signs of progress ahead of what was expected to be a difficult weekend of negotiations on the island helped European shares pare back early losses but uncertainty remained.

Cypriot finance minister Michael Sarris flew home from Moscow empty-handed after failing to win support in two days of crisis talks with Russia on a possible new financing package. Many Russians hold savings in Cypriot banks.

Cyprus's partners in the 17-nation euro zone have little patience as lawmakers prepared to debate plans to bundle state assets in what has been likened to "a national fire sale".

Europe's stock markets have borne the brunt of this week's worries and the pan-European FTSEurofirst 300 was flat as midday approached in London, leaving it on course for its worst week since mid-November.

It had been deep in the red before a rebound following news Cyprus had resurrected a deal to spin off the Greek operations of its battered banks.

But it was not enough to fully turn market sentiment. Asian shares had ended the week at 2013 lows and minor gains on Germany's DAX and France's CAC, left the MSCI world share index down 0.2 percent.

Data from Germany also weighed on the market mood after a survey from the Ifo institute showed business morale in the euro zone's biggest economy fell for the first time in five months.

Germany's economic resilience remains the bloc's best hope of pulling out of recession but David Brown of New View Economics said the Ifo survey suggested "the bells are starting to toll in Germany that the euro zone crisis is about to hit recovery prospects again".

As the Cyprus worries underpinned demand for safe-haven assets, gold was near a 3-1/2-week high of $1,612.96 an ounce and on track for its biggest weekly rise in four months.

German government bonds were also strong. The yield on 10-year Bunds fell to its lowest level of the year in early trading and traders expected further falls if the crisis on the Mediterranean island of 1.1 million remains unresolved.

Having rejected a proposed levy on bank deposits in exchange for the EU bailout earlier in the week, Nicosia had turned to the Kremlin hoping the billions of euros wealthy Russians have in its now crippled banks would squeeze Moscow to provide help.

But with those hopes dashed, the focus was back on what could be done before the ECB pulls the plug on Monday on the emergency funding that is keeping the Cypriot banks afloat.

A Cypriot government spokesman said "the next few hours" would "determine the future of the country".

Although deal with the EU was possible over the weekend, Alessandro Giansanti, a rate strategist at ING, said investors were still moving funds into "core" European bonds like Bunds:

"We still have the risk that the situation can get out of control especially in terms of the banking sector," he said, adding, "That's why we have pressure for lower core yields."

Gold high

US stock futures pointed to a steady open on Wall Street while the dollar slipped slightly against a basket of major currencies.

In contrast to this week's tumble in stocks, the euro and the bonds of Italy and Spain, the two countries which remain the largest concern for euro zone watchers, have held firm.

Although Cyprus's plan to reduce its debts by seizing up to 10 per cent of savings has added a new dimension to the crisis, investors appear reassured by the promise by ECB head Mario Draghi to do whatever needed to ensure the euro's survival.

The currency had been firm all morning and rose to a session high of $1.2945 versus the dollar and recovered from a two-week low against the yen after news of the agreement with Greece to spin off Greek units of Cypriot banks.

Spain enjoyed a strong debt sale on Thursday and its 10-year bond yields, along with those of Italy and Portugal, continued to fall on Friday, although a Cypriot government bond due to pay out in June saw its yield spike to a staggering 131 per cent.

Key commodities such as oil and copper prices have also been hit by Cyprus' troubles, which have rekindled worries the euro zone crisis could damage the still-fragile global recovery.

Brent oil was holding above $107 a barrel at 1115 GMT but was set for a second week in the red, having dropped 2 per cent drop since Monday.

Carsten Fritsch, an analyst at Commerzbank, listed rising North Sea supply and the resumption of exports from South Sudan as two additional reasons for the weakness.

"The latter might be attributable to Cyprus to some extent," Mr Fritsch said.

 "But all this Cyprus fear is overdone," he added.

Copyright @ Thomson Reuters 2013