World stocks recover but euro caution remains

Stock markets recovered Tuesday after big declines the previous day when investors fretted over whether the deal to fix the euro crisis would actually solve Europe's debt debacle.

Optimism over last Friday's agreement by the 17 countries that use the euro and nine other European Union (EU) nations to adopt a closer fiscal union evaporated Monday, after credit-rating agencies Moody's and Fitch both said the plan was insufficient and would not address some nations' crushing debt loads or their rising borrowing costs.

Moody's warned it will review all EU governments' ratings for possible downgrades in early 2012 - a threat that analysts said was particularly worrisome to France, a major contributor to Europe's emergency bailout fund. A downgrade of France's top triple-A credit rating could hurt its ability to fulfil its commitments to the fund, and would raise borrowing costs for the fund itself.

Investors are also awaiting the response of rival agency Standard & Poor's. Last week, it warned it could downgrade most of the 17 Eurozone economies, including Germany, if the euro deal failed to deliver.

"It was not the reaction to the summit that politicians had hoped for, but it was in line with previous market response to summits, which are sold as being the solution to all of Europe's problems but end up raising more questions than they answer," said Gary Jenkins, an analyst at Evolution Securities.

In Europe, Germany's DAX recouped some of Monday's lost ground, trading 0.9 per cent higher at 5,836, while France's CAC-40 rose 0.4 per cent to 3,101. The FTSE 100 index of leading British shares rose 1.5 per cent to 5,510.

In the United States (US), the Dow Jones industrial average was up 0.9 per cent at 12,124 while the broader Standard & Poor's 500 index rose an equivalent rate to 1,247.

The advance on Wall Street came despite figures showing that US retail sales rose by a monthly rate of 0.2 per cent in November, below market expectations for a 0.6 per cent increase. November figures are important because it's the start of the key holiday shopping season.

calmer tone

"This was not a bad report, but certainly a disappointment compared to market expectations," said Michael Woolfolk, an analyst at the Bank of New York Mellon.

Tuesday's calmer tone in markets was evident in the performance of the euro, which was trading 0.2 per cent higher at $1.3200. On Monday, the single currency fell to a 10-week low over worries that Europe's new financial pact won't be enough to stop the region's growing debt crisis.

"The financial markets are now digesting the details of the EU deal struck last Friday, and it is quickly becoming apparent that the financial markets have once again given it the thumbs down," said Derek Halpenny, an analyst at The Bank of Tokyo-Mitsubishi UFJ.

He added that could mean major funding difficulties in the first half of 2012, when European nations, in particular Italy, have sizeable sovereign debts that need to be refinanced.