GLOBAL MARKETS-Stocks, euro fall as Portugal cut to junk

Tue Jul 5, 2011 4:35pm EDT

* Moody's downgrades Portugal rating to junk

* Oil rallies after Barclays raises price forecasts

* Safe-haven Swiss franc, Treasuries advance (Updates with market's close, adds comment, details)

By Wanfeng Zhou

NEW YORK, July 5 (Reuters) - World stocks slipped from five-week highs on Tuesday and the euro tumbled broadly on concerns about the global economic outlook and after a major ratings agency downgraded Portugal to junk status.

Oil prices jumped about 2 percent after Barclays Capital raised its 2012 forecasts for crude oil, leading a broad rally in commodity prices as bargain-hunters bought into oversold markets.

Media reports about a possible rate rise in China and a Moody's report saying the scale of problem loans at local governments in China may be much bigger than previously thought dented demand for risky assets. For more, see [nL3E7I507Y]

Adding to investor worries, a survey showed the euro zone's dominant service sector slowed for a third straight month in June, while Moody's Investors Service cut Portugal's credit rating by four levels to Ba2, two notches into junk territory.

Moody's said there is great risk the country will need a second round of official financing before it can return to capital markets. The news added to lingering worries about Greece even as Athens narrowly averted a near-term default.

"The Portugal downgrade clearly is negative because as the downgrades spread from the weakest to the weaker, the market is now asking, 'If Portugal is downgraded, will Spain be next?'" said Cary Leahey, economist and managing director at Decision Economics in New York. "It's symptomatic of the contagion effects in the eurozone."

World stocks as measured by the MSCI world equity index .MIWD00000PUS fell 0.3 percent after earlier hitting their highest since June 1. The index has risen almost 5 percent since January.

On Wall Street, shares ended mostly lower. The Dow Jones industrial average .DJI fell 12.90 points, or 0.10 percent, to 12,569.87. The Standard & Poor's 500 Index .SPX was down 1.79 points, or 0.13 percent, at 1,337.88. The Nasdaq Composite Index .IXIC , however, gained 9.74 points, or 0.35 percent, to 2,825.77, helped by strength in Netflix shares (NFLX.O).

Investors were cautious about taking on more risk after the recent run-up in equities, when world stocks posted their best weekly gain in a year last week. U.S. stocks had their best week in two years last week, with the S&P up 5.6 percent.

Volume is expected to remain low in the holiday-shortened week, with all eyes on Friday's U.S. monthly jobs data. Markets were closed on Monday for the U.S. Independence Day holiday.

European stocks .FTEU3 ended slightly higher at 1,122.23 points. Emerging market stocks .MSCIEF fell 0.3 percent.

The euro fell 0.8 percent to $1.4419 EUR=EBS, after hitting a session low of $1.4395 on Reuters data, snapping six straight days of gains. It also tumbled 1.6 percent to 1.2128 Swiss francs EURCHF=EBS.

The downgrade on Portugal followed another setback for Greece on Monday when ratings agency Standard & Poor's warned it would treat a rollover of privately held Greek debt, now being discussed, as a selective default. [ID:nL6E7I408N]

Losses in the euro were limited by expectations the European Central Bank would raise rates to 1.5 percent on Thursday and likely signal more tightening.

OIL, SAFE HAVENS SHINE

ICE Brent futures for August LCOc1 rose to a high of $114.44 a barrel, the highest since June 22, before settling at $113.61, gaining $2.22, or 1.99 percent. U.S. crude CLc1 ended up $1.95, or 2.05 percent, at $96.89 per barrel.

Barclays Capital raised its 2012 forecast for Brent by $10, to $115 per barrel, and upgraded its 2012 forecast for U.S. crude by $4, to $110. The bank said it expects a further reduction in global spare capacity in 2012, together with a significant intensification of the geopolitical background.

Commodities rallied broadly in spite of a stronger dollar and weaker stocks, extending their rebound from a nearly six-month low as investors bet the sell-off in the second quarter -- when the Reuters-Jefferies CRB index .CRB dropped 6 percent, the biggest fall since late 2008 -- was overdone.

Spot gold XAU= was bid at $1,514.66 an ounce, against $1,495.54 late in New York on Monday.

"We may be seeing some running to commodities as a safe haven. When in doubt about all the currencies, move into commodities. And the sector was a little oversold coming out of the holiday," said Phil Flynn, analyst at PFGBest Research in Chicago.

Jitters over euro zone peripheral economies pushed safe-haven U.S. government debt prices higher and helped put on the back burner, for now, concerns over the risk of a possible U.S. default. The benchmark 10-year note US10YT=RR was up 14/32 for a yield of 3.13 percent. (Additional reporting by Ellen Freilich, Nick Olivari, Edward Krudy, Richard Leong, Gene Ramos and Robert Gibbons; Editing by Dan Grebler)

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