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GLOBAL MARKETS-Moody's Spain warning hits euro, Fed weighs

Published 12/15/2010, 07:26 AM
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* Moody's Spain downgrade threat hits euro, European stocks

* Wall Street set for losses

* Fed concern about U.S. jobs market weighs on sentiment

* U.S. Treasury yields fall after hitting 7-month high (Updates prices, adds Greek protests, Portugal auction, Wall Street outlook)

By Jeremy Gaunt, European Investment Correspondent

LONDON, Dec 15 (Reuters) - A downbeat assessment of the U.S. recovery from the Federal Reserve weighed on global equities on Wednesday while European shares and the euro came under tough pressure from a threat to downgrade Spain's debt.

Wall Street looked set to join in the stock selloff with losses at the start.

Yields on U.S. Treasuries climbed to seven-month highs in Asian trading, partly because of concern about the U.S. deficit, before later falling back.

A warning from Moody's on a possible downgrade of Spain's credit ratings served as a reminder to investors of the risks to the global recovery heading into 2011, pushing the euro sharply lower.

The FTSEurofirst 300 stock index was down a half a percent, albeit after a seven-session winning streak.

In putting Spain's AA1 ratings on review, Moody's cited concerns about its mounting debt and 2011 funding needs.

Robert Ryan, FX strategist at BNP Paribas in Singapore, said the threat of a downgrade was not really a surprise given Spain's 10-year yield spread was about 250 basis points over Bunds.

"This just focuses attention back on Spain," he said, referring to the rolling euro zone debt crisis.

The euro zone debt crisis was also in focus in peripheral economies Portugal and Greece.

Three-month borrowing costs nearly doubled from a previous sale in a Portuguese debt auction, but at 3.403 percent came in lower than markets had expected.

In Greece, Athens police fired teargas at protesters who threw petrol bombs at two luxury hotels near parliament as a demnstration against government austerity measures escalated.

EURO HITS LOW VS SWISS FRANC

The euro hit a record low against the Swiss franc as investors sought safety and avoided the dollar, which has been highly volatile.

"There is an unwillingness among investors to hold riskier euro zone bonds over the year-end, so they are selling and going into Swiss francs," said Carl Hammer, currency strategist at SEB in Stockholm.

Against the dollar, the euro was down 0.4 percent at $1.3332 . The dollar was up 0.4 percent against a basket of currencies.

U.S. Treasury yields were slightly lower, recovering from a sell-off in earlier Asian trading.

The yield on 10-year Treasuries rose in Asia to just above 3.5 percent, its highest level since mid-May, having climbed about 70 basis points so far this month. It was later yielding 3.428 percent.

The benchmark notes could be on track for their worst month since April 2004.

FED HITS EQUITIES

Investors have generally become more bullish about holding equities as year-end approaches and sold off government bonds as a result.

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For a graphic on 2010 equity and bond returns, click:

http://r.reuters.com/cyg32r

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But sentiment towards equities took a hit from the Federal Reserve saying on Tuesday that the U.S. recovery was still too slow to bring down stubbornly high unemployment. Investors were also booking profits from a long autumn rally before year-end.

At its last policy meeting of the year, the Fed offered only a cautious nod to improving prospects for the U.S. economy and reaffirmed its commitment to buy $600 billion in bonds to stimulate growth.

"The very first line of the very first paragraph is justification for what it's doing -- it talks about a recovery that just isn't strong enough to bring down the unemployment rate," said Mike Lenhoff, chief strategist and head of research at Brewin Dolphin Securities.

MSCI's all-country world stock index was down 0.4 percent.

Oil prices fell 88 cents to $87.40 a barrel on worries about the recovery and spot gold dipped to $1,388 an ounce, under some pressure from the firming dollar after opening little changed at just over $1,395. (Additional reporting by Ronald Popeski, Brian Gorman and Jessica Mortimer, Editing by Sitaraman Shankar)

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