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Euro hit by Spain credit downgrade

Source: Reuters - Thu 10th Mar 2011

European stocks and the euro fell today as Moody's downgraded Spain, reigniting worries over the euro zone debt crisis ahead of the bloc's summit and prompting investors to turn to safer bets such as Bunds.

Brent crude, which has gained 13% over the past 3 weeks, dipped below $115 earlier today, but the retreat was limited as forces loyal to Libyan leader Muammar Gaddafi launched an assault on the eastern Libyan oil town of Ras Lanuf, sparking worries about long-term damage to the country's oil infrastructure.

Investors were also fretting about surprisingly weak Chinese trade data that hit Asian stocks and copper prices.

China swung to a trade deficit in February of $7.3 billion - its largest in 7 years - as the Lunar New Year holiday dealt a sharper blow to export activity than had been expected.

"China's trade figures have been a shocker, setting the tone in Asia's trading session. Add to that Spain's credit downgrade and oil prices that aren't retreating, and the glass is now half empty," said Lionel Jardin, head of institutional sales at Global Equities in Paris.

Moody's downgraded Spain to Aa2 from Aa1 with a negative outlook and warned of further cuts, saying the country's plans to clean up the battered banking sector will cost more than the government expects and add to its debt burden.

The move comes a few days after Moody's steep three-notch downgrade of Greece, fuelling negative sentiment towards struggling euro zone sovereign borrowers on the eve of a summit of the currency bloc.

"If speculators really hit Portugal hard there would appear to be an increased possibility that Spain will be put back under the spotlight, but we don't think Spain will need to be bailed out," said Jane Foley, senior currency strategist at Rabobank.

The euro hit the day's low around $1.3805, although sovereign demand and technical support buffered the currency against more intraday losses.

The yield gap between 10-year Spanish yields and equivalent German Bunds was 5 basis points wider on the day at 228 bps, after rising to 232 bps earlier.

Negative sentiment in the periphery has pushed investors to seek safer trades, and Bund futures rose 27 ticks to 121.86. The 10-year Bund yield fell 3.2 basis points to 3.706%.

The FTSEurofirst 300 index of top European shares was down 0.7%, hitting a 6 week low, while Spain's benchmark index IBEX 35 was down 1.3% at a near 2 month low.

World stocks as measured by the MSCI world equity index were down 0.7%.

U.S. stock index futures were also in the red, suggesting a weak start for Wall Street.

"The recent geopolitical events that have boosted oil prices are nothing to reassure retail investors, who have been shunning equities," said Philippe Marchessaux, CEO of BNP Paribas Investment Partners, which has 546 billion euros under management.

"But at the same time, when you look at corporate results and equity valuations, stocks are tremendously cheap."

The broad MSCI world equity index carries a forward price-to-earnings ratio of 12.2, well below a 20-year average of 16.6, according to Thomson Reuters Datastream.

In the UK, the FTSE 100 index .FTSE extended its losses and sterling slipped in afternoon trading after the Bank of England's Monetary Policy Committee left interest rates on hold at 0.5%, as expected.

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