Irish rating cut hits shares, euro
The euro fell against the dollar and world stocks dropped on Friday, dragged down by renewed concerns over eurozone debt after a downgrade of Ireland's credit rating.
Moody's slashed Ireland's credit rating by five notches, and warned that further downgrades could follow if the country did not stabilise its debt situation. The move followed Fitch's downgrade last week, when it cut Ireland's credit level by three notches. Earlier this week, Moody's placed Spain and Greece on review for possible downgrades.
World markets gained little comfort after leaders at a European Union summit agreed to create a permanent financial safety net from 2013, though they did not provide any new measures to deal with the immediate crisis.
In New York trading, the euro extended losses against the dollar to hit a two-week low after a drop below $1.32 triggered automatic sell orders.
European stock markets followed, with the FTSEurofirst 300 index of leading European shares down 5.27 points, or 0.47%, to 1126. The MSCI's all-country world stock index dipped 0.2%, while the Thomson Reuters global stock index fell 0.3%.
US equity indices struggling in late-morning trading. The Dow Jones industrial average was down 24.79 points, or 0.22%, at 11474; the Standard & Poor's 500 Index was down 0.64 points, or 0.05%, at 1242; and the Nasdaq Composite Index was up 7.33 points, or 0.28%, at 2644.
Better-than-expected data on German business morale from think tank Ifo temporarily bolstered the euro in late European trade and marginally lifted gold and oil prices. The two commodities have flattened out since, with US crude oil up 26 cents, or 0.3%, to $87.96 per barrel, and spot gold prices nudging 0.01% lower to $1369.10/oz.
Against the backdrop of the Ireland rating cut, investors edged back into US Treasuries. The benchmark 10-year US Treasury note was up 8/32, with the yield at 3.40%. Over the past two weeks, treasuries have been underselling on concerns about ballooning deficits, stemming from the extension of the Bush tax-cut plan. Late on Thursday, the US House of Representatives passed the deal between US President Barack Obama and Republican leaders to extend expiring tax cuts. The measure now goes to Obama to sign into law.
Even so, treasuries attracted interest in the wake of renewed eurozone debt concerns.
"There's a risk that the sovereign crisis will spread across the Atlantic to the US. There's already evidence that it's turning to disorderly unwinding," said David Woo, head of global rates and currencies at Bank of America-Merrill Lynch. "There are clearly very uncomfortable positions in the market that will be unwound, especially if data holds up."
High up on investors' radar is Ireland, whose debt levels have quadrupled since late 2007 on the back of a banking sector meltdown. The premium that investors demand to hold 10-year Irish government bonds over German Bunds rose 29 basis points to 571bp, while spreads on 10-year Portuguese bonds were up 11bp to 361bp. Benchmark 10-year Bund yields fell 2bp to 3.029% as investors took refuge in German government debt.
The cost of insuring sovereign bonds issued by eurozone peripheral countries rose, with the five-year credit default swaps on Ireland widening 15bp to 581bp and Portuguese CDS moving out by 13bp to 470bp.