S&P mass downgrade warning tames world stocks

World stocks sank Tuesday after Standard and Poor’s warned 15 countries using the euro that it could downgrade their credit ratings. Skepticism over a new plan to prevent a breakup of the common currency also dragged markets lower.

European stocks fell in early trading but Wall Street appeared on the verge of a higher opening. Asian shares sank earlier in the day. Benchmark oil hovered below $101 per barrel while the dollar rose against the euro and was steady against the yen.

The S&P announcement came only hours after French President Nicolas Sarkozy and German Chancellor Angela Merkel on Monday unveiled sweeping plans to change the European Union treaty in an effort to keep tighter checks on overspending nations.

The S&P warning left out only two of 17 countries that use the euro: Cyprus, whose bonds have near-junk status, and Greece, whose low ratings already suggest it is likely to default soon anyway.

The inclusion on the list of Germany and France means those countries could lose their coveted triple-A ratings. Without the triple-A rating – the highest available – those two countries might not be unable to raise enough money to bail out their weaker neighbours.

Mr. Sarkozy and Ms. Merkel discussed several broad changes for the EU treaty, including the introduction of a penalty for any government that allows its deficit to exceed 3 per cent of gross domestic product. The penalty would be automatic – unless a majority of nations opposed it, a loophole that drew sharp criticism from analysts.

Andrew Sullivan, principal sales trader at Piper Jaffray in Hong Kong, said the sanctions were “subject to political control” and in reality represent no meaningful change from mechanisms already in existence.

Among major European markets, Britain’s FTSE 100 was marginally lower at 5,563.98. Germany’s DAX slid 0.8 per cent to 6,055.42 and France’s CAC-40 lost 0.2 per cent to 3,194.52.

On Wall Street, Dow Jones industrial futures (YM-FT12,101.0035.000.29%) were up 0.2 per cent at 12,084 and S&P 500 futures (ES-FT1, rose 0.1 per cent to 1,256.10.

In Asia, Japan’s Nikkei 225 dropped 1.4 per cent to close at 8,575.16. South Korea’s Kospi fell 1 per cent to 1,902.82 and Hong Kong’s Hang Seng lost 1.2 per cent to 18,942.23. Australia’s S&P/ASX 200 shed 1.4 per cent to 4,262.

In mainland China, the Shanghai Composite Index edged down 0.3 per cent to 2,325.91.

The French-German proposal on budget control will be taken up at a summit of EU leaders on Thursday and Friday aimed at fixing a debt crisis so severe that it threatens the viability of the euro currency. A collapse could lead to a severe recession in Europe and trigger economic ramifications across the globe.

Some analysts feel the proposal, which demands strict austerity measures, misses the mark completely and will only worsen already feeble economies like Greece by making it impossible to borrow money and repay loans.

Derek Cheung, chief investment office of Neutron INV Partners Ltd. in Hong Kong, said he believes that central banks printing money – instant cash with which government debt could be repaid – is the only way to stanch the crisis in the short-term.

“In the short term, belt-tightening will do more harm than good,” he said. “If their economies continue to slow down, do you think people will still continue to buy their bonds?”

Losses were broad, hitting sectors across most key markets.

Among steel makers, Japan’s Kobe Steel Ltd. and Nippon Steel both fell 3 per cent.

Airlines also felt the pinch. Hong Kong-listed China Eastern Airlines dropped 5 per cent and Korean Air Lines Co. fell 2.2 per cent.

Retailers skidded in Hong Kong. Esprit Holdings dropped 10.5 per cent after the company announced the resignation of chief financial officer Chew Fook Aun. Prada SpA lost 4.3 per cent.

Australian gold miner Newcrest Mining fell 4 per cent and Zijin Mining Group, China’s biggest gold miner, lost 4.6 per cent. The price of the precious metal fell about 1 per cent Monday as some investors sold holdings at a profit after the price rose nearly 4 per cent last week.

Camera and medical equipment maker Olympus skyrocketed ahead of the release of a probe that confirmed the company had falsified accounting records to cover up huge investment losses from the 1990s. Shares of Olympus gained 9.1 per cent as investors bet the company would not face a delisting by the Tokyo Stock Exchange.

On Wall Street, the Dow Jones industrial average rose 0.7 per cent to 12,097.83. The S&P 500 rose 1 per cent to 1,257.1. The Nasdaq added 1.1 per cent to 2,655.76.

Benchmark crude for January delivery was down 28 cents to $100.71 a barrel in electronic trading on the New York Mercantile Exchange. The contract rose 3 cents to settle at $100.99 on Monday.

In currency trading, the euro fell to $1.3375 from $1.3382 late Monday in New York. The dollar was nearly unchanged at ¥77.76 from ¥77.77.



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