Spain’s downgrade fresh blow for Europe

NEW YORK — World equities slid and the euro fell on Friday after a downgrade of Spain’s credit rating sent a new chill through markets already worried about the European debt crisis.

The downgrade by Fitch Ratings ignited a new round of selling in equities that were already lower after lacklustre U.S. economic data injected a note of caution ahead of long holiday weekends in both the United States and the UK.

Fitch downgraded Spain’s credit rating to AA-plus, and said it expects the country’s adjustment to a lower debt level will materially reduce its rate of economic growth over the medium-term.

Fitch cited an inflexible labour market and a restructuring of of regional and local savings banks as hindrances to the pace of adjustment.

"This should exacerbate the tremendous volatility we’ve seen in global stocks as the world wrestles with the idea of a debt-based collapse," said Chip Hanlon, president of Delta Global Advisors in Huntington Beach, Calif.

"Adding to this is the fact that no one wants to be long over a holiday weekend."

Analysts at Brown Brothers Harrison said they do not expect this to be the last downgrade for Spain.

“Believe it or not, Moody’s still has Spain as a triple-A credit,” said Win Thin, senior currency strategist at the New York-based firm. “We don’t think that can last, and we stress again that we see multiple downgrades ahead for Spain. Indeed, Spain is the 800-pound gorilla in the room. Greece and Portugal are small countries, but Spain is about five times their size with regards to GDP.”

The euro took the downgrade on the chin, giving up all Friday’s gains and is now flirting with US$1.23 level.

“We commend the ratings agencies in general for the impeccable timing of their announcements, coming today in holiday-thinned conditions as both U.S. and U.K. shut down ahead of Monday holidays,” Mr. Thin said. “In general, this should serve as a reminder that while the news stream out of Europe was generally quiet this week, the potential and risk is for more bad news to emerge from time to time and roil markets. Spain is coming increasingly into the crosshairs due to negative developments in its banking system, and the lines of contagion from Greece are growing."

The euro fell as low as US$1.2284, according to electronic trading platform, near a session of US$1.2281.

The euro also dropped versus the yen, and was last down 0.9 % at 111.59 yen.

The major U.S. stock indexes shed more than 1%, and U.S. Treasuries slightly extended gains, hitting session highs after the Fitch downgrade. Benchmark 10-year notes were last up 18/32 in price, yielding 3.30%.

Investors had been shunning risk even before the Fitch downgrade on Spain.

A Commerce Department report that U.S. consumer spending failed to rise in April after six straight months of gains, cast a cloud over the outlook for the consumer-driven U.S. economy. Traders were particularly cautious ahead of long holiday weekends in London and New York, and ready to step back and take profits after a strong equities rally on Thursday.

The Dow Jones industrial average was down 119.94 points, or 1.17%, at 10,139.05. The Standard & Poor’s 500 Index was down 15.13 points, or 1.37%, at 1,087.93. The Nasdaq Composite Index .IXIC was down 32.14 points, or 1.41%, at 2,245.54.

The S&P 500 and the Nasdaq had each fallen more than 1% earlier in the day, though had pared losses sharply before the news on Spain sparked a new wave of selling.

In Toronto the S&P/TSX composite index deepened losses, falling 71.6 points to 11,677.5.

Technology bellwether Apple Inc AAPL.O managed to buck the downtrend, after Asian and European customers mobbed stores as the iPad tablet computer debuted outside the United States. Apple shares rose 1.5 %. Bank of America Merrill Lynch raised its price target on Apple by US$25 to US$325 and kept its "buy" rating.

But still pressuring global shares and the euro was concern of contagion from the Greece debt crisis. Despite the lack of major shocks from Spain, Portugal or Ireland, which all have heavy debt loads, investors were still loathe to add risky assets due to questions of how shakier sovereign credit would affect the economic recovery.

© Thomson Reuters 2010

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