Asian stocks and the Euro fell on Tuesday, after ratings agency Standard & Poor's (S&P) issued a warning prior to possible en masse downgrade of Eurozone countries, if European leaders failed to produce a credible plan to solve the region's debt crisis, at a summit later this week.
The warning brought a halt to a rally in global equities that began last week and continued to Monday, when the leaders of both France and Germany agreed on a plan to guide the region out of the crisis that has run for two years now.
European stocks were expected to fall back from a five-week high, with major regional bourses seen opening as much as 0.8 percent lower.
We are entering a critical stage, said Kenichi Hirano, the Operating Officer at Tachibana Securities in Tokyo, There are high market expectations for positive developments out of the European leaders' meeting this week and if there are any indications that decisions will be pushed back it will have negative consequences for the market.
Oil and copper prices also retreated after the S&P statement, which came late in the U.S. trading day, while Wall Street index futures fell and U.S. Treasury yields edged down, indicating investors were seeking safety in the dollar.
MSCI's broadest index of Asia Pacific shares outside Japan fell 1.8 percent, with the heaviest losses in the growth-sensitive materials sector. Tokyo's Nikkei share average fell 1.4 percent, while S&P 500 futures eased 0.6 percent, pointing to a lower start for Wall Street after Monday's 1 percent gain. Financial bookmakers called the FTSE 100 to open down 0.8 percent, Germany's DAX to fall 0.7 percent and France's CAC-40 to slip 0.5 percent.
The credit ratings agency said it had warned 15 of the 17 Eurozone countries, including Germany, France and four others with an AAA rating it might downgrade them within 90 days, depending on the outcome of Friday's summit. The warning took the sheen off the Franco-German agreement to impose budgetary discipline across the currency area, through European Union treaty changes.
The common currency eased around 0.2 percent to about $1.3370. It has steadily slipped from a peak around $1.3486 on Monday. However, traders were reluctant to sell the Euro down too far at the start of a week heavy on major set-piece events, with the European Central Bank (ECB) holding its final policy meeting of the year on Thursday and economists expecting an interest rate cut.
In addition to a 25-basis-point cut, with hints of further actions, we expect the ECB to provide additional support to banks in the form of a softening of collateral rules and more and longer liquidity operations, said Giuseppe Maraffino, a strategist at BNP Paribas in London. Such moves could support the battered Euro, which has fallen from a 2011 high near $1.50 struck in May.
You can see that the EU leaders are trying to get their act together, but even if their plans are realised, it's not going to improve their dire finances overnight, said Koji Fukaya, chief FX strategist at Credit Suisse in Tokyo.
The risks from Europe were underlined by the Reserve Bank of Australia (RBA), which cited Europe's woes as one of the factors in its decision to cut interest rates by 25 basis points and leave the door open for more easing. The RBA move put perceived riskier currencies under further pressure, with the Australian dollar itself falling by nearly a percent to around $1.0170.
The dollar rose around 0.2 percent against a basket of major currencies, while the yield on 10-year U.S. Treasuries dipped to around 2.06 percent. Commodities, particularly those most sensitive to industrial demand expectations, were mostly lower. U.S. crude oil futures fell 0.5 percent to $100.50 a barrel, while Brent crude fell a similar percentage to around $109.26.
Prices had run up last week because traders have been positioning themselves for a possible resolution to the Eurozone crisis, said Ric Spooner, Chief Market Analyst with CMC Markets in Sydney, And they've arrived at a level where any negative news like the S&P report will result in some tweaking of positions.
Copper lost 1.5 percent to around $7,820 a tonne and gold fell 0.5 percent to around $1,712 an ounce.