Stocks, euro hit by Spanish credit rating warning

[December 15, 2010]  LONDON (AP) -- World markets and the euro fell Wednesday after Spain was warned it may have its credit rating downgraded, echoing a similar report on Belgium the day before and renewing worries about Europe's debt crisis.

In Europe, the FTSE 100 index of leading British shares was down 22.92 points, 0.4 percent, at 5,868.29 while Germany's DAX fell 55.70 points, or 0.8 percent, to 6,971.70. The CAC-40 in France was 34 points, or 0.9 percent, lower at 3,868.87.

Wall Street was poised to open lower following modest gains Tuesday -- Dow futures were down 42 points, or 0.4 percent, at 11,379 while the broader Standard & Poor's 500 futures fell 4.6 points, or 0.4 percent, to 1,232.20.

Sentiment was knocked after Moody's Investor Services put Spain's Aa1 rating on review for possible downgrade because of its high refinancing needs in 2011, a potential rise in the debt burden and increased concerns over the ability of the government to get its public finances into shape.

Moody's warning put Europe's debt crisis back to the forefront of investors' concerns after a brief respite on the back of confirmation that the European Central Bank was taking a more active role in the crisis.

Following Tuesday's similar warning on Belgium from rival agency Standard & Poor's, investors are once again nervous that the debt crisis will spread, particularly to Spain, following bailouts of Greece and Ireland so far this year.

"Jumpy investors will not be pleased at the return of eurozone fiscal difficulties to headlines," said Ben Critchley, sales trader at IG Index.

With this contagion fear back, the euro faltered, trading 0.7 percent lower at $1.3287.

The key event for the euro and Europe's debt crisis will be the meeting of EU leaders in Brussels Thursday and investors will be looking to see if any fresh measures to bolster the monetary union framework will be agreed.

"In order to prevent contagion it is imperative the EU politicians must strengthen the framework," said Jane Foley, senior currency strategist at Rabobank International.

The focus over the rest of the day will shift to Dublin, where the Irish government is poised to narrowly win a vote in Parliament to back November's euro67.5 billion rescue from the EU and the International Monetary Fund.

Derek Halpenny, European head of global currency research at the Bank of Tokyo-Mitsubishi UFJ, said there's a worry out there as to why Irish yields have not moved down much since the rescue deal was agreed.

"The failure of yields to correct more substantially is reminiscent of Greece and is a clear indication that even with euro67.5 billion of external financial aid, Ireland is in trouble," said Halpenny. "The euro's resilience could give way at any moment."

While the euro was getting knocked by the Moody's warning, the dollar continued to garner support from a seeming improvement in the U.S. economic data. On Tuesday, government figures showed retail sales up by more than anticipated in November.

The improving consumption figures, together with the tax compromise agreed between the Obama administration and Republicans in Congress, have lifted U.S. Treasury yields on ten-year bonds to around 3.5 percent, increasing returns for dollar holders.

The statement Tuesday from the Federal Reserve following its latest policy meeting held few surprises, giving investors little reason to stop selling U.S. government bonds and pushing yields up further.

Further weighing on sentiment in stock markets Wednesday was the news that the Bank of Japan's quarterly "tankan" survey of business confidence showed that the key index for large manufacturers fell for the first time in seven quarters as companies continue to fret about the value of the yen. Just a couple of months ago the yen was seemingly heading to post World War II highs against the dollar, before the U.S. currency returned to favor once more.

As a result, trading in Tokyo was lackluster and the Nikkei 225 stock average fell 0.1 percent to 10,309.78.

Elsewhere in Asia, Hong Kong's Hang Seng index lost 2 percent to 23,975.35 and the Shanghai Composite index fell 0.5 percent to 2,911.41. Australia's S&P/ASX 200 added less than 0.1 percent to 4,767.80 and South Korea's Kospi reversed losses to close up 0.4 percent at 2,017.48.

Benchmark oil for January delivery was down 80 cents at $87.48 a barrel in electronic trading on the New York Mercantile Exchange. The contract lost 33 cents to settle at $88.28 on Tuesday.

[Associated Press; By PAN PYLAS]

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