LONDON (Reuters) - European stocks and the euro inched higher on Tuesday after steep selloffs, staying vulnerable to further losses on warnings by rating agencies about the euro zone’s outlook following an EU summit that disappointed markets.
U.S. markets were poised to open higher on Wall Street after sharp falls on Monday with stock index futures up around 0.5 percent ahead of the latest Federal Reserve assessment of the U.S. economy.
The Fed’s FOMC holds its final scheduled meeting of the year later but investors expect the U.S. central bank to hold off on offering the economy any fresh stimulus as it weighs encouraging signs on the recovery against the risks coming from Europe.
Foreign exchange traders said there was a clear bias to sell the euro on any bounce after the threat of further imminent sovereign downgrades because EU leaders had failed to come up with decisive steps to tackle the region’s debt crisis.
“The only thing that would be enough to restore confidence for now would be aggressive bond buying by the ECB,” said Audrey Childe-Freeman, EMEA head of currency strategy at JP Morgan Private Bank.
Europe’s problems were highlighted when the European Central Bank reported it had seen demand for close to 300 billion euros -- a new 2-1/2 year high -- at its weekly handout of limit-free cash for banks unable to access open markets.
The euro hovered around $1.32, above a two-month low set in Asia of about $1.3160, and due mainly to traders covering existing short positions.
“The last blow for the euro was the announcement from the ratings agencies last night,” said Niels Christensen, currency strategist at Nordea in Copenhagen.
Fitch Ratings said last week’s EU summit, in which leaders agreed to draft a new treaty for deeper economic integration, failed to provide a “comprehensive” solution to the crisis, thus increasing short-term pressure on euro zone sovereign ratings.
While Moody’s Investors Service said on Monday it intends to review the ratings of all 27 members of the European Union in the first quarter of 2012 after EU leaders offered “few new measures” to resolve the crisis.
The lack of progress on short-term measures to solve the region’s debt crisis worried equity investors even as stock prices recovered slightly after Monday’s sharp sell-off.
The MSCI All Country World Index (ACWI) .MIWD00000PUS was barely changed, down 0.05 percent, while Europe’s main stock index, FTSEurofirst 300 .FTEU3, was up 0.7 percent after falling 1.9 percent on Monday.
A survey of German analysts and investors showed expectations for the economy in the coming six months unexpectedly improved in December, but perceptions of current developments remained on a downward trend.
The result meant Germany was likely to suffer from a bad first quarter next year but avoid a recession, economist Michael Schroeder of the Mannheim-based ZEW economic think tank said.
Prices in the core German debt market dipped slightly after the survey meanwhile the risk of sovereign rating downgrades saw Italian bond yields rise.
Longer-dated Spanish bonds also rose as riskier assets suffered due to the risk that rating agency Standard and Poor’s could act on its warning over the region’s debt ratings.
In the Treasury bill market Spain and Belgium’s short-term borrowing costs dropped sharply, though yields remained painfully high for Madrid as nervous markets braced for those potential euro zone rating downgrades.
The euro zone rescue fund, the EFSF, held its first auction of short-term debt, selling nearly 2 billion euros of three-month bills at an average yield of 0.22 percent.
Demand was strong at 3.2 times the amount offered, and the yield compared well with German equivalent paper which offers between -0.01 percent and 0.07 percent.
Editing by Anna Willard, John Stonestreet