S&P downgrade on Spain saps euro, European shares

By Daniel Bases

NEW YORK (BestGrowthStock) – The euro fell (Read more about the trembling euro. ) to a one-year low on Wednesday and European stocks slid after Standard & Poor’s cut Spain’s credit rating, raising anxiety over sovereign risk in the euro zone, while U.S. equities largely managed to maintain gains ahead of the Federal Reserve’s interest rate decision.

The downgrade on Spain sapped the euro’s efforts to regain ground on news of an aid package that emerged from a meeting between German officials and the head of the International Monetary Fund in Berlin on Wednesday.

On Tuesday S&P had slashed its ratings on Greece to junk status and downgraded Portugal.

IMF Managing Director Dominique Strauss-Kahn estimated an aid package for Greece at 100 billion to 120 billion euros over three years, according to German officials who met with him.

“The hesitant and haphazard reaction of euro zone policy makers to Greece’s predicament underscores the dangers of contagion,” Marco Annunziata, chief economist at UniCredit Group wrote clients.

“The euro zone has taken over six months to react and is allowing uncertainty to persist nearly to the eve of the May redemptions — this does not bode well for their ability to react quickly should a second flashpoint burst,” he noted, referring to Greek debt payments coming due next month.

Investors responded to the Spain downgrade by pumping cash into the traditional safety of gold, though there was little reaction in U.S. Treasuries ahead of the Federal Reserve’s interest rate decision and policy statement as well as an auction of five-year notes.

The euro fell (Read more about the trembling euro. ) to a one-year low of $1.3112, before trading down 0.24 percent at $1.3131. The U.S. dollar index (Read more about the global trade. ), a measure of the greenback against a basket of major trading-partner currencies, rose 0.62 percent (.DXY: )

Bund futures rose after the Spain downgrade — one notch to AA from AA-plus — while the Spanish/German 10-year bond yield spread edged out to 119 bps from 116 bps.

European share prices fell for a second straight session as the Spain downgrade came at the tail end of the trading day, with banks leading the fall. S&P said it was concerned about a more protracted period of sluggish growth than previously expected.

The 10-year Greek/German government bond yield spread narrowed to 879 basis points after earlier peaking at more than 1,000 basis points.

At one point the Greek government’s two-year debt yield surged to 38 percent.

In early afternoon trade, the Dow Jones industrial average (.DJI: ) was up 47.53 points, or 0.43 percent, at 11,039.52. The Standard & Poor’s 500 Index (.SPX: ) was up 6.56 points, or 0.55 percent, at 1,190.27. The Nasdaq Composite Index (.IXIC: ) was down 2.49 points, or 0.10 percent, at 2,468.98.

Earnings season stayed in high gear, with Dow Chemical Co (DOW.N: ) up 5.25 percent to $31.65 after reporting a profit that beat expectations.

U.S. bank shares rose, buoying the S&P 500, with JPMorgan & Co (JPM.N: ) up 2 percent to $43.25, while the KBW bank index (.BKX: ) added 1.5 percent.

Shares of Goldman Sachs Group (GS.N: ) rose 1.96 percent a day after members of a U.S. Senate subcommittee grilled the bank’s executives on its role in the financial meltdown. Goldman has been accused of fraud by the U.S. Securities and Exchange Commission.

“Fundamentals are pretty strong, earnings should continue to surprise to the upside, and investors are catching their breath, realizing policy makers will ultimately do the right thing for Greece,” said Paul Zemsky, head of asset allocation at ING in New York.

U.S. investors also looked ahead to the Federal Reserve’s interest rate decision and accompanying policy statement at the close of its two-day meeting later on Wednesday. The Federal Open Market Committee is expected to hold interest rates near zero and repeat its vow of very low rates for an extended period. The statement is expected at around 2:15 p.m. EDT. (1815 GMT) For details, see [ID:nN2298630].

European shares fell for a second straight session after recording their biggest one-day fall in five months on Tuesday. The FTSEurofirst 300 (.FTEU3: ) index of top European shares lost 1.15 percent to close at 1,056.89 points.

World stocks as measured by MSCI (.MIWD00000PUS: ) were down 0.96 percent, having lost more than 2 percent on Tuesday. The more volatile emerging market index (.MSCIEF: ) lost 1.64 percent to add to 1.4 percent in the previous session.

U.S. Treasuries fell back from Tuesday’s gains ahead of both the Fed’s policy announcement and the sale of $42 billion worth of five-year notes. The benchmark 10-year Treasury fell 15/32 of a point in price, pushing the yield up to 3.747 percent.

Gold recovered ground to make a new high for the year, rising 0.31 percent or $3.62 to $1,171.65 on the euro zone’s sovereign risk.

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(Additional reporting by Ryan Vlastelica and Richard Leong in New York, Jeremy Gaunt, Atul Prakash and Jessica Mortimer in London; Editing by Leslie Adler)

S&P downgrade on Spain saps euro, European shares