Asia stocks, euro slide after Italy downgrade

Singapore: Asian stocks and the euro fell on Tuesday after ratings agency S&P downgraded Italy and amid fears of a Greek default, as investors worried that the euro zone’s debt woes will pitch the global financial system into a full-blown banking crisis.

Oil steadied after tumbling on Monday on concerns the economic damage wreaked by the euro zone crisis would hurt industrial demand. The dollar firmed as market players sought safety in the US currency despite expectations of further easing steps by the Federal Reserve this week.

[caption id=“attachment_87631” align=“alignleft” width=“380” caption=“The MSCI index is in bear market territory. Reuters”]  [/caption]

Standard and Poor’s cut its unsolicited ratings on Italy by one notch to A/A-1 and kept its outlook on negative, a surprise move, saying the fragility of Rome’s ruling coalition would likely limit the government’s ability to tackle the crisis.

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“It only adds to the contagion risk over Greece and has encouraged the flight to safety in markets here,” said Stephen Roberts, a senior economist at Nomura in Sydney, pointing to a sharp fall in the Australian dollar on the news.

Japan’s Nikkei share average fell 1.5 percent, partly catching up with falls elsewhere on Monday when Tokyo markets were closed, while MSCI’s broadest index of Asia Pacific shares outside Japan fell 0.5 percent.

The MSCI index is in bear market territory - traditionally defined as a fall of 20 percent or more - after sliding 21.7 percent from its 2011 high in April.

Global markets have been haunted since late July by the twin concerns of the grinding euro zone crisis and worries that the United States is slipping back into recession.

The euro fell 0.5 percent after the Italy downgrade to trade around $1.3620, while the Australian dollar - which is influenced by expectations for commodity prices and so sensitive to the outlook for global demand - slid to a one-month low of $1.0166.

The dollar rose 0.2 percent against a basket of major currencies.

Oil has weathered much of the turmoil in financial markets over the past month thanks to supportive fundamentals, such as diminished North Sea production and healthy Chinese demand, but succumbed to broader macroeconomic pressures on Monday, when Brent crude dropped more than $3 a barrel.

Brent was flat around $109.21 a barrel on Tuesday, while US crude eased 0.1 percent to $85.60.

Reuters