Renewed European debt fears stalk markets after Moody’s downgrade of Allied Irish Banks

By Pan Pylas, AP
Tuesday, September 28, 2010

Renewed European debt fears weigh on markets

LONDON — Renewed worries over Europe’s government debt crisis and a report that the Federal Reserve may announce a limited package of stimulus measures at its next rate-setting meeting weighed on European stock markets Tuesday

However, expectations of a rebound at the U.S. open helped Europe’s stock pares pare a large chunk of their earlier losses.

In Europe, the FTSE 100 index of leading British shares was down 14.38 points, or 0.3 percent, at 5,559.04 while France’s CAC-40 was down 3.32 points, or 0.1 percent, at 3 762.84. Germany’s DAX was 3.06 points, or 0.1 percent, higher at 6,281.95.

Stocks in Europe had been far lower earlier, but a turnaround in Wall Street futures shored up sentiment — Dow futures were up 33 points, or 0.3 percent, at 10,783 while the broader Standard & Poor’s futures rose a point to 1,138.70.

Hopes about further mergers and acquisitions lay behind the expected rally on Wall Street.

Drug developer Endo Pharmaceuticals Holdings became the latest company to join the acquisition trail when it revealed that it is buying Qualitest Pharmaceuticals for $1.2 billion.

In Europe though, the main focus is on Europe’s government debt crisis after Moody’s Investor Services cut its rating on Anglo Irish Bank Corp. by three notches. Mounting speculation that Moody’s is also preparing a downgrade of Spain’s debt was also weighing on shares — in June Moody’s put Spain on notice for a possible downgrade of its triple A rating and the three-month review process ends this week.

“Sovereign debt worries are once again adding to traders’ woes with the threat of a credit downgrade for Spain by Moody’s,” said Ben Critchley, sales trader at IG Index.

“This together with the profit taking ahead of the month and quarter end could lead to a broad-based sell-off that could leave markets in a state of limbo for some time yet,” he added.

Also weakening sentiment Tuesday was a report in the Wall Street Journal saying that the Fed may not announce massive bond purchases with a finite end as it did in 2009 but instead opt for a smaller-scale program that can be adjusted as the recovery unfolds. The Fed’s next meeting is in early November.

One of the reasons why stocks have been relatively buoyant of late is the expectation that the Fed would commit to another big package of measures to shock the financial system back into life — the prospect of a bigger pool of dollars in the system had been supporting shares while simultaneously hitting the dollar.

“If the Fed is to take a more cautious approach then the markets might pare back some of the gains in risk assets,” said Neil MacKinnon, global macro strategist at VTB Capital.

The main focus in the U.S. will be the latest consumer confidence survey from the Conference Board as investors look to see if the recent talk of a double-dip recession is having a major impact on sentiment — the consensus in the markets is that confidence slipped slightly during September to 52.5 from 53.5.

The state of the U.S. consumer is important for the pace of the economic recovery as consumer spending accounts for around 70 percent of the world’s largest economy.

Earlier in Asia, Japan’s Nikkei 225 stock average slid 107.38 points, or 1.1 percent, to 9,495.76 with exporters hurt by the yen’s sustained strength.

Investors are closely monitoring the Japanese currency, which authorities may try to weaken again soon after the Japanese central bank earlier this month bought dollars to weaken the yen for the first time in six years. The Nikkei financial daily reported that the central bank will discuss further monetary easing when it meets next week.

By early afternoon London time, the dollar was 0.2 percent lower on the day at 84.11 yen, while the euro was 0.2 percent higher at $1.3467.

South Korea’s Kospi lost 0.3 percent to 1,855.97, Hong Kong’s Hang Seng retreated 1 percent to 22,109.95 and the Shanghai Composite Index fell 0.6 percent to 2,611.35.

Australia’s S&P/ASX 200 benchmark reversed course to close down 0.1 percent at 4,669.80.

Benchmark crude for November delivery was down 70 cents at $75.82 a barrel in electronic trading on the New York Mercantile Exchange. The contract added 3 cents to settle at $76.52 on Monday.

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