Tuesday, Sep 20, 2011

-- European stocks set to open lower

-- S&P's credit downgrade of Italy weighs on sentiment

-- Fears over Greece persist

-- Financial stocks expected to come under pressure 


 
   By Ishaq Siddiqi 
   Of DOW JONES NEWSWIRES

LONDON (Dow Jones)--European stock markets are expected to open lower Tuesday, after Standard & Poor's downgraded its credit rating for Italy, deepening worries about the euro-zone debt crisis, while Greece's ongoing debt turmoil continues to hang over sentiment.

Late Monday, ratings agency Standard & Poor's pulled the trigger on Italy's sovereign-debt rating by cutting it a notch to A from A-plus, saying that the nation's weak economic growth and fragile government coalition will make it harder to head off the growing crisis sweeping the euro zone.

"Although the downgrade and negative outlook for the Italian economy are no surprise, the fact that the crisis has moved from a 'peripheral' European country on to a core country is enough to spark some risk aversion today," said Capital Spreads.

Adding to the debt worries were reports in Greek newspaper Kathimerini that the country's Prime Minister George Papandreou is considering a referendum on whether the country should exit the euro zone. However, a Greek government official, speaking to Dow Jones Newswires, denied the report and dismissed talk of such a referendum as "comical."

Instead, Greek officials said the country has had "a productive and substantive discussion" with its official creditors Monday in talks aimed at releasing a new slice of bailout aid. A Greek Finance Ministry official said an agreement was close and the outline of a deal are likely to be announced by Wednesday following a cabinet approval.

Against this backdrop, Capital Spreads expects European markets to open on a softer note Tuesday. It calls London's FTSE 100 to open down 19 points to 5241, the DAX in Frankfurt off eight points to 5408 and the CAC-40 in Paris down four points at 2936.

Traders noted that financial stocks are likely to be under pressure following news that a large Chinese state-run bank has suspended trading of foreign exchange swaps with several European banks, people familiar with the situation told Dow Jones Newswires Tuesday. The Chinese bank, described as "the most active in the market," notified the banks about its decision last week and the trading halt started Monday, one of the people said.

There are also reports that German industrial firm Siemens AG has pulled more than EUR500 million from a large French bank and transferred it to the European Central Bank. The Financial Times reported this on Monday, but said it isn't clear from which bank Siemens withdrew the funds.

In Asia Tuesday, stock markets were mixed in choppy trade, after the Italy downgrade by S&P. Despite some buying in beaten-down stocks, many financial and growth-sensitive commodities plays suffered.

Japan's Nikkei Stock Average dropped 1.7%, Australia's S&P/ASX 200 fell 1.0%, Hong Kong's Hang Seng Index was down 0.2%, but the Shanghai Composite Index was up 0.7%, and South Korea's Kospi Composite tacked on 0.6%.

In the currency markets, the euro was knocked back hard on the Italy debt downgrade. By 0556 GMT, the single currency was at $1.3624 against the dollar, from $1.3685 late Monday in New York, and at Y104.12 against the yen, from Y104.27. The dollar was at Y76.53 compared with Y76.59.

Meanwhile, October crude oil futures were recently just eight cents lower at $85.62 a barrel. Spot gold was at $1,774.80 a troy ounce, down $4.10 from New York Monday. In the European bond market, the December German bund contract was up 0.38 at 137.81.

-By Ishaq Siddiqi, Dow Jones Newswires; +44-20-7842-9488; ishaq.siddiqi@dowjones.com

(END) Dow Jones Newswires

September 20, 2011 02:12 ET (06:12 GMT)