U.S. stocks, euro, Treasuries fall on debt worries
NEW YORK (Reuters) - The euro sank to a 10-month low against the dollar on Wednesday while prices of U.S. stocks and Treasuries fell on mounting concerns about a spiraling debt burden in some developed economies.
A downgrade of Portugal's credit ratings by Fitch set the negative tone in European markets, which have already been fretting about the fiscal situation of Greece and other weaker members of the euro zone.
U.S. Treasuries, which typically are a safe haven when risk appetite ebbs, were also hit by poor demand in an auction of five-year notes, which left investors apprehensive about a massive supply of new debt in the next few days.
Further underscoring the fiscal troubles of the main world economies, Japan approved its new budget with a record $490 billion in new bond issuance. And Britain's final pre-election budget offered no positive surprises for investors, driving gilt prices lower.
"Risk-averse selling will continue until the European Union and the IMF can stabilize the debt situation and shift the narrative to a positive tone," said Andrew Busch, global FX strategist at BMO Capital Markets in Chicago.
A two-day European Union summit is scheduled to begin on Thursday and investors will be watching it keenly for a response to Greece's debt problems.
Fitch Ratings cut Portugal's sovereign credit rating by one notch to AA-minus and warned of a possible further downgrade.
The move on Portugal encouraged Wall Street investors to pocket some of the recent gains that had driven the Dow industrials and the benchmark S&P 500 to 18-month highs on Tuesday.
"This raises further concerns about other countries in the area and the markets are haunted by the lack of clarity on how Europe will deal with the issues," said Todger Anderson, president of Westcore Funds in Denver, Colorado.
Rick Meckler, president of investment firm LibertyView Capital Management in New York called the debt downgrade "a negative because it sends the message that investments that were previously thought to be safe could have problems."
The Dow Jones industrial average .DJI closed down 47.69 points, or 0.44 percent, at 10,841.14, while the Standard & Poor's 500 Index .SPX declined 6.23 points, or 0.53 percent, to 1,167.94. The Nasdaq Composite Index .IXIC fell 15.01 points, or 0.62 percent, to 2,400.23.
The MSCI all-country world stock index .MIWD00000PUS plunged 2.4 percent. In Europe, the FTSEurofirst 300 .FTEU3 index of top shares seesawed during most of the session to end practically unchanged. It closed 0.01 percent higher after earlier hitting its highest level since October 2008.
"The market was increasingly overbought, so Portugal is a perfect excuse to book some profits," said Kenneth Broux, market economist at Lloyds TSB in London.
Concerns about the fiscal situation of the euro zone weighed on the euro and created safe-haven demand for the dollar, which climbed 1.28 percent to its highest level since May last year against a basket of major currencies .DXY.
The euro was 1.30 percent lower at $1.3323. Following the Fitch announcement on Portugal, the single European currency hit its weakest level against the greenback since early May 2009.
"Sovereign credit worries in Europe and Japan are leading to some general risk aversion," said Michael Malpede, a market analyst at Easy Forex in Chicago.
Analysts said the euro's weakness, despite a stronger-than-expected reading of the Ifo Institute's survey of German business sentiment, suggested strong downward momentum in the common European currency.
Against the Japanese yen, the dollar was up 2.01 percent at 92.23.
Japan's parliament approved a record $1 trillion budget for the fiscal year from April, with an all-time high of 44.3 trillion yen ($490 billion) in new bond issuance underlining its public finance troubles.
A stronger dollar sent commodity prices down. U.S. crude oil prices fell $1.30, or 1.6 percent, to $80.61 per barrel, while spot gold fell as low as $1,084.85 an ounce, its weakest price since February 12.
Oil prices also fell after government data showed a larger-than-expected increase in U.S. crude stocks last week.
TREASURIES NOT IMMUNE
Increased aversion to risk did not translate into demand for U.S. Treasuries, though. Bond prices fell sharply, sending benchmark 10-year yields to their highest in over two months, on concerns about a large government debt issuance ahead.
A $42 billion auction of five-year U.S. Treasury notes drew poor investor demand, increasing concerns about Thursday's auction of $32 billion in seven-year notes.
The benchmark 10-year U.S. Treasury note fell 37/32 in price, with the yield at 3.8312 percent. The notes were on track for the worst daily performance in more than seven months.
The 30-year bond lost 58/32, sending the yield to 4.7198 percent.
Ten-year British gilts prices fell sharply after British finance minister Alistair Darling announced only a modest improvement for the government's planned borrowing needs. June gilt futures fell 54 ticks on the day to 114.95.
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