December 6, 2011 / 11:39 AM / 6 years ago

Hopes rise for euro zone deal after S&P warning

4 Min Read

LONDON (Reuters) - Global stocks halted their rally and most euro bond yields rose on Tuesday after rating agency Standard & Poor's threatened to downgrade 15 euro nations, but the euro drew some support from the view that the bloc's leaders might now be spurred into more decisive action.

The unprecedented warning by S&P, which sent the MSCI world equity index .MIWD00000PUS down nearly 0.5 percent, was being seen as a wake-up call that could help Germany and France force through treaty changes at a summit this week.

U.S. stock index futures were higher, pointing to a stronger start on Wall Street.

The euro also recovered, buoyed in part by a surprise jump in German industrial orders as well as expectations euro zone policymakers will stitch together a deal to save the currency bloc.

The timing of S&P's announcement and the inclusion of Europe's economic powerhouse Germany among the 15 countries facing a ratings cut has put the focus firmly on the need for the next EU summit to deliver.

"It highlights the importance of the weekend," said Jim O'Neill, the chairman of Goldman Sachs Asset Management.

"If they (EU leaders) come up with something along the lines they have been talking about, I doubt they (S&P) will go through with it," he added.

European stocks as measured by the FTSEurofirst 300 .FTEU3 were around 0.4 percent lower, off a five-week high struck on Monday.

In the debt market, yields rose on top-rated German and French bonds, though they did better than the debt of some of the region's more vulnerable economies. However, yields on Italian 10-year bonds bucked the trend, taking implied borrowing costs below six percent.

O'Neill said Italian debt looks attractive unless this week's European Union summit is a "complete fiasco."

The shared currency, which initially moved lower against the U.S. dollar, recovered thanks to a surprise jump in German industrial orders and the view that some sort of deal will emerge over the weekend.

Steve Barrow, head of G10 currency research at Standard Bank, said he did not expect the countries to be downgraded by S&P and the EU summit was likely to see some sort of agreement.

The euro was barely changed on the day at $1.342, recovering from a session low of $1.333.

Ecb Rate Cut Eyed

The EU said the euro zone's economy barely grew in the third quarter, giving grounds for the European Central Bank to cut rates later this week.

A Reuters survey of 73 analysts showed a 60 percent chance the ECB will cut rates by 25 basis points to a record low of 1.0 percent on Thursday.

The ECB is also likely to offer ultra-long liquidity operations to support banks, while leaving the door open to further measures to fight Europe's debt crisis if governments agree fiscal reforms, the survey showed.

Elsewhere, the IMF approved a 2.2 billion euro ($3 billion) tranche of aid for Greece, which was seen as taking the threat of an imminent default off the table.

The Reserve Bank of Australia, citing Europe's woes as a key factor, cut interest rates by 25 basis points and left the door open for more easing.

Additional reporting by Kirsten Donovan and Anirban Nag; Editing by Ruth Pitchford

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