France rating cut rekindles eurozone fears

A powerful rally that saw global equity markets experience their best day for weeks coupled with gains for other risk assets, shuddered to a halt on Tuesday as concerns about the eurozone resurfaced.

The FTSE All-World equity index, which had its best session for five months on Monday, slipped into negative territory on Tuesday after a downgrade of France's sovereign credit rating curtailed risk appetite.

However, the index was well off the lowest levels of the day, just one-tenth of a point weaker at 212.96. US futures moved into positive territory as the mood improved following a well-received €4.9bn auction of Spanish Treasury bills and another set of encouraging housing data.

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Dow Jones Industrial Average futures dipped lower after Hewlett Packard revealed a fresh $8.8bn writedown on the value of Autonomy, the UK software company it bought for $10bn in 2011, sending the share down more than 10 per cent in pre-market trading.

But the downgrade of France by Moody's late on Monday once again put the eurozone and worries about the regions high debt levels and lack of growth at the forefront of investor concerns.

The rating agency followed rival S&P and cut France's coveted triple-A sovereign bond rating by one notch to Aa1.

Moody's said the outlook for France, which has public debt levels of more than 90 per cent of gross national product, was "uncertain" and highlighted "multiple structural challenges, including its gradual, sustained loss of competitiveness and the longstanding rigidities of its labour, goods and service markets".

Barclays in a note to clients said France was falling behind other European countries such as Ireland, Portugal and Spain in implementing structural reforms, particularly in the labour market, to boost growth. The bank said it still expected the French economy to grow next year despite an expected 2 per cent structural adjustment in the country's fiscal deficit.

However, it added: "The medium- to long-term outlook does not look bright given the structural weaknesses that need to be addressed."

The euro, which gained 0.5 per cent against the dollar on Monday, was barely changed at $1.2812 on Tuesday but above the day's lows of $1.2763. The FTSE Eurofirst 300 index of leading European shares was also slightly weaker at 1,090.68, having fallen 0.3 per cent earlier in the session.

The downgrade comes as European finance ministers prepare to meet in Brussels later on Tuesday to sign off up to €44bn of long-overdue aid to Greece. Yet differences remain about the country's debt levels that could still delay the disbursement of funds, according to people close to the talks.

In the US, S&P 500 futures moved into positive territory, having been down for most of the European session, after data showing the number of houses that started to be built last month unexpectedly climbed to a four-year high, adding to Monday's upbeat report from the National Association of Realtors.

The Commerce Department said housing starts jumped 3.6 per cent in October from September to a seasonally adjusted annual rate of 894,000. The September figure, however, was revised down to 863,000 from a previously reported 872,000.

Applications for building permits, a sign of future construction, fell 2.7 per cent to 866,000, after jumping 12 per cent in September to a four-year high.

Investors will now look forward to a speech by Ben Bernanke, chairman of the Federal Reserve, who is due appear in New York amid speculation the central bank is preparing to extend its asset purchase programme.

The Fed has helped boost demand in the housing market by buying up to $40bn of mortgage-backed securities each month since September to push down the cost of borrowing.

Ahead of the speech by Mr Bernanke the yield on 10-year US Treasuries was up 1bp at 1.63 per cent, while the dollar index was down 0.1 per cent as risk appetite improved at 80.98.

The S&P 500 recorded its biggest gains in more than two months on Monday and treasuries fell as hopes that talks to avert the fiscal cliff of tax rises and government spending cuts will succeed.

In Asia, the FTSE Asia Pacific index managed gains of 0.08 per cent to 235.04, with shares in Sydney outperforming after the Reserve Bank of Australia said more interest rate reductions may be appropriate to spur economic growth as the nation's mining boom wanes. However, the Australian dollar slipped 0.2 per cent against its US counterpart to $1.0382 on expectations of lower interest rates.

The dollar strengthened against the yen, after reaching a seven-month high on Monday, to Y81.65 following the release of the US housing data.

Earlier, the Bank of Japan resisted pressure to launch more monetary easing. However, the central bank raised expectations of further expansion of its asset purchase programme in December after highlighting the "high degree of uncertainty" over the domestic outlook.

Oil prices accelerated their retreat from one-month highs as Hillary Clinton, the US secretary of state, prepared to travel to the Middle East to add weight to diplomatic efforts to stop the fighting between Israel and Palestinian militants.

Brent crude extended losses, down 0.5 per cent at $111.15 a barrel, WTI light crude fell 0.9 per cent to $88.48 a barrel.

Gold was steady following its biggest one-day rise in two weeks, supported by hopes of a US solution to its fiscal problems and Middle East tension. The bullion traded at $1,733.56 an ounce.