GLOBAL MARKETS-Stocks, euro recover but downgrade fears weigh

LONDON (Dec 13): 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 U.S. 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.

STOCKS RECOVER

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) was barely changed, down 0.05
percent, while Europe's main stock index, FTSEurofirst 300, 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. - Reuters