US stocks drop on S&P rate warning

HOPES that policymakers are working toward a solution to the debt crisis lifted global shares yesterday, but a late-day credit warning from Standard & Poor’s underscored what was at stake.

Reports that the warning was coming caused US stocks to cut gains in the afternoon, while the euro retreated. S&P said after the closing bell that it may downgrade the credit ratings of 15 Eurozone countries.

S&P placed the ratings of Eurozone countries, including top-rated Germany and France, on credit watch negative – an unprecedented move that signals a possible downgrade within three months.

US stock index futures dipped after the news and the euro last traded at $1.3385, down 0.1 per cent on the day, near a session low of $1.3374.

“We know Europe is facing a dire situation here and this action seems appropriate. Ultimately, it may be S&P signalling to the EU, ‘This is it,’ that they’ve got to get something done now,” said Brian Dolan, chief strategist at Forex.Com in Bedminster, New Jersey.

“If they are trying to send a message, now is a good time.”

The rating agency’s move came as the leaders of France and Germany agreed to a master plan for imposing budget discipline across the region ahead of a summit on Friday.

The proposal from French President Nicolas Sarkozy and German Chancellor Angela Merkel included automatic penalties for governments that fail to keep their deficits under control.

Wall Street ended off the day’s highs, though it was still near one per cent higher. World stocks as measured by MSCI gained 0.8 per cent, also off earlier highs.

The Dow Jones industrial average gained 78.41 points, or 0.65 per cent, to 12,097.83. The Standard & Poor’s 500 Index rose 12.80 points, or 1.03 per cent, to 1,257.08. The Nasdaq Composite Index climbed 28.83 points, or 1.10 per cent, to 2,655.76.

European stocks hit a five-week closing high, though analysts were wary the optimism could prove overdone.

There were signs not everyone was convinced of a positive outcome in Europe. Interbank dollar borrowing costs inched up as uncertainty over policymakers’ ability to contain the crisis made banks wary of lending to each other.

Investors are hoping the agreement will pave the way for the European Central Bank to buy large amounts of government bonds to stop the crisis.