* European shares edge lower after Italian downgrade
* U.S. stocks poised to retreat from record highs
* Dollar near 3-1/2-year high vs yen on U.S. jobs growth
* Oil, copper lower as Chinese data dents demand
By Richard Hubbard
LONDON, March 11 European shares edged away from
4-1/2-year highs on Monday as weak economic data from China and
worries about Italy undermined the optimism generated by last
week's strong U.S. jobs numbers.
The dollar held onto gains from the payrolls data, trading
near a 3-1/2-year high against the yen and a 3-month peak to the
euro and keeping pressure on gold and oil.
Europe's broad FTSEurofirst 300 index had fallen
0.4 percent by midday, down from September 2008 peaks hit last
week, as a cut in Italy's credit rating and weak Chinese factory
output data undermined sentiment.
The cautious mood also looked to set to infect Wall Street,
with U.S. stock index futures pointing to a lower open.
"I think the Italian downgrade is acting as a bit of a wake
up call," Alastair Winter, chief economist at investment bank
Daniel Stewart & Co.
Fitch cut Italy's rating one notch and gave it a negative
outlook late on Friday, citing political uncertainty following
last month's election, a protracted recession and high levels of
The ratings cut and fresh data showing Italy's economy
contracted a hefty 2.8 percent last year saw Italian shares drop
0.7 percent and also hit Spain, where the main equity index, the
IBEX, sank by 1.3 percent.
"I think the downgrade has caused a ripple in the Italian
market, which has been very calm since the election two weeks
ago," said Heinz-Gerd Sonnenschein, equity markets strategist at
The bigger euro zone market indexes like Paris's CAC-40
and Frankfurt's DAX were 0.4 and 0.25 percent
lower, respectively, while the main euro zone blue chip index,
the Euro STOXX50E dropped 0.6 percent.
China reported over the weekend that annual industrial
production for January and February combined rose 9.9 percent -
the lowest level since October 2012 - while its consumer price
index jumped more than expected last month.
Winter said the combination of weak industrial data from
China and the renewed spotlight on the euro zone's problems
caused by the Italian downgrade may have made investors wary of
pushing prices higher after the strong gains so far in March.
The benchmark Euro STOXX50E has outperformed the more widely
watched Dow Jones Industrial index this month, even as
the U.S. benchmark has been posting record highs.
MSCI's world equity index was little changed
at 360.4 points holding near its mid-2008 highs.
The Italian downgrade also sent tremors through Europe's
sovereign bond market with investors worried about its effect on
a bond sale for up to 7.25 billion euros ($9.4 billion) of new
debt on Wednesday.
Ten-year Italian government bond yields rose 7
basis points to 4.66 percent, while the main futures
based on the debt was down 0.5 percent at 108.83.
The yield gap between 10-year Italian and safer German bonds
widened to 320 basis points, and the
cost of insuring Italy's debt against default also rose.
Fitch cut Italy's debt to BBB-plus from A-minus and gave the
rating a negative outlook, raising the risk its next ratings
change will be a further downgrade.
"The downgrade in itself is limited to one notch, but the
negative outlook means that should the structural reform come to
a stop and the recession deepen further then more downgrades are
in the pipeline," Nicola Marinelli, fund manager at Glendevon
King Asset Management, said.
Foreign exchange markets were focused on the dollar, which
has gained sharply against a broad range of currencies since
Friday's strong payrolls data boosted hopes of a steady economic
recovery this year.
The data has also fuelled speculation the U.S. Federal
Reserve could back off from its ultra-loose monetary policy
sooner than anticipated and this adds to the currency's appeal
as other major central banks hint at looser polices ahead.
"There are expectations that the Fed could consider reducing
the size of its asset purchases in the second half of the year
and this could help the dollar," said Valentin Marinov, head of
European G10 FX strategy at Citi.
The dollar was steady at 82.74 against a basket of major
currencies, not far from the seven-month high of 82.92
hit on Friday, having risen nearly 5 percent since early
The euro dipped 0.1 percent to $1.2995, not far from
a three-month low of $1.2955 also hit on Friday, while the yen
was also 0.1 percent lower against the greenback.
The gains in the dollar and the weak Chinese industrial
production data weighed on commodity markets, despite the latest
outlook from Paris-based Organisation for Economic Cooperation
and Development pointing to better growth ahead.
The OECD said its latest monthly leading indicator for the
world's 33 major industrialised nations was at its highest level
since June 2011.
Brent crude fell 54 cents to $110.30 a barrel, after
ending last week marginally higher to snap three straight weekly
losses. U.S. oil slipped 10 cents to $91.85, after ending
39 cents higher on Friday.
Copper, which is closely linked to the outlook for demand
from China, dropped 0.5 percent to $7,710 a tonne on the
London Metal Exchange.
Gold was little changed and seen staying with a narrow range
all week while investors keep an eye on the dollar and monitor
speculation abut the Fed's next move in monetary policy.
The Fed's aggressive policy easing has helped push gold to
record highs in recent years as investors sought a hedge against
the prospect of rising inflation. But as evidence of an
economic recovery build, fears grow about how long this policy
will last, sapping the interest in gold.
Spot gold was at $1,577.60 an ounce on Monday and
seen staying within a range of $1,560 to $1,590 an ounce.