Greece downgrade hurts stocks, euro up

NEW YORK Mon Jun 14, 2010 5:03pm EDT

A pedestrian is reflected in a stock index board outside a brokerage house in Tokyo May 28, 2010. REUTERS/Kim Kyung-Hoon

A pedestrian is reflected in a stock index board outside a brokerage house in Tokyo May 28, 2010.

Credit: Reuters/Kim Kyung-Hoon

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NEW YORK (Reuters) - U.S. stocks finished Monday's session little changed in thin volume after a global rally was interrupted by a downgrade of Greece's debt to junk status, while the euro soared on strong European economic data.

Oil prices settled almost 2 percent higher as risk appetite improved on economic recovery optimism, while safe-haven U.S. Treasuries and gold prices fell as investors' taste for risk grew.

The euro and stocks had been struggling lately on fears that debt crises in several European countries would imperil the banking sector and slow growth in the 16-country euro zone to a crawl, hampering a global economic recovery.

Although not unexpected, the downgrade weighed on a market that had rallied briskly off earlier data showing euro-zone industrial output surged in April, achieving the biggest year-on-year percentage gain in almost two decades.

Moody's Investors Service lowered Greece's sovereign debt rating to BA1, which is junk-grade status, from an investment-grade level of A3, citing concerns about risks associated with euro zone's IMF support package.

"The market took this report negatively. But I am not really surprised because even absent the ratings agency action, Greece's paper is worthless except for that fact that the European Central Bank is buying it," said Richard Franulovich, senior currency strategist at Westpac in New York.

The Dow Jones industrial average .DJI slipped 20.18 points, or 0.20 percent, to close at 10,190.89. The Standard & Poor's 500 Index .SPX dipped 1.97 points, or 0.18 percent, to finish at 1,089.63. But the Nasdaq Composite Index .IXIC squeaked out a tiny gain of just 0.36 of a point, or 0.02 percent, to end at 2,243.96.

The euro rose to a session high, coming within a breath of $1.23, its highest level since early June, but it later pared gains after Moody's cut Greece's credit rating as the country faces substantial risks. For more see [ID:nWNA3381]. Late Monday in New York, the euro was up 1 percent at $1.2234.

But analysts said most investors had anticipated the move, which let them focus instead on stronger-than-expected euro-zone industrial data and extend a bout of short-covering that has added some 4 cents to the euro since it hit $1.1876 last week, its lowest since 2006.

"We've been trading with this for a long time and just the facts that the agencies finally recognize reality doesn't have too much impact," said Sebastien Galy, senior strategist at BNP Paribas in New York. "Asset managers are fairly smart people and anticipated this, as did pension funds, a long time ago."

Despite Monday's gains, the euro is still down almost 15 percent against the dollar this year.

However the CBOE volatility index .VIX or VIX, Wall Street's main barometer of investor fear, fell 0.73 percent to end at 28.58. This decline indicated the market was not anticipating a return of recent volatility when the VIX rose to nearly 50 in mid May.

U.S. oil prices rose $1.34, or 1.82 percent, to settle at $75.12 per barrel. Before the downgrade, oil futures prices rose more than 2.5 percent.

Spot gold prices fell $3.90, or 0.32 percent, to $1,222.00 an ounce.

U.S. Treasuries eased in light trading volume as early strength in stocks undermined the safe-haven appeal of lower- risk U.S. government debt.

The benchmark 10-year U.S. Treasury note was down 5/32, with the yield at 3.26 percent. The 2-year U.S. Treasury note was unchanged, with the yield at 0.7350 percent. The 30-year U.S. Treasury bond was down 15/32, with the yield at 4.18 percent.

(Reporting by Manuela Badaway; Additional reporting by Steve C. Johnson, Edward Krudy and Gertrude Chavez-Dreyfuss; Editing by Jan Paschal)

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