World stocks advanced on Friday, partly lifted by firmer commodities as the dollar fell, while Irish and Portuguese bond yields rose after Moody's cut Ireland's rating by five notches.
The cut put Ireland's debt rating at Baa1, the third last investment grade rank, and the ratings agency warned further downgrades could follow if Dublin was unable to stabilize its debt situation.
There was little comfort for markets from a European Union summit that agreed on Thursday to create a permanent financial safety net from 2013 but provided no new measures to deal with the immediate crisis.
Ireland's debt levels have quadrupled since late 2007 on the back of a banking sector meltdown, and it needs solid economic growth to ensure it can meet repayments and fiscal targets set down in the 85 billion euros EU/IMF bailout agreed last month.
While a downgrade had been anticipated, the severity of the downgrade is surprising, Dublin-based Glas Securities said in a note.
Last week, Fitch Ratings became the first ratings agency to strip Ireland of its A credit status, cutting it by three notches to BBB-plus following the bailout.
The premium investors demand to hold 10-year Irish government bonds over German Bunds rose 5 basis points to 547 bps, while spreads on 10-year Portuguese bonds was up 8 bps to 364 bps.
Benchmark 10-year Bund yields fell 2 bps to 3.032 percent as investors took refuge in safer German government debt.
Ireland's stock market <.ISEQ> inched up 0.1 percent, but Europe's FTSEurofirst 300 <.FTEU3> index dipped 0.1 percent and Spain's blue chips <.IBEX> eased 0.1 percent.
The euro pared gains after the downgrade to be up 0.5 percent at $1.3295, off its day's high of $1.3326.
This downgrade will affect Ireland's ability to borrow but is unlikely to lead to a squeeze in investors' euro positions, said Paul Robson, currency strategist at RBS.
Also, its that time when year-end considerations are at play. The real impact on the euro of all these ratings chatter will gradually be felt in January.
On Thursday, Moody's also put the credit rating of Greece, another country that needs EU/IMF bailout, on review for a possible downgrade, citing uncertainty over the country's ability to cut debt to sustainable levels.
The euro zone sovereign debt crisis could derail global recovery and wreck the so far optimistic outlook for stocks in 2011 on the back of more U.S. stimulus and strong China growth.
Driven by the prospects of better U.S. growth and a higher U.S. budget deficit, Treasury yields have risen sharply, with the 10-year benchmark yields up by some 60 bps this month.
On Friday, yields on the 10-year U.S. Treasuries slipped 2 bps to 3.419 percent, off a seven-month high of 3.56 percent hit in the previous session, while the dollar <.DXY> fell 0.5 percent against a basket of major currencies.
WORLD STOCKS UP
World equities measured by MSCI All-Country World Index <.MIWD00000PUS> gained 0.3 percent. The index is up more than 8 percent this year, underperforming a 12.8 percent rise in the emerging market benchmark.
However, the MSCI world index carries a one-year forward price-to-earnings of 12.4 times, versus the emerging market gauge's 11.7, according to Thomson Reuters Datastream.
U.S. stock index futures were flat, while Japan's Nikkei average <.N225> ended 0.1 percent lower.
Copper prices rose 1.2 percent and oil added 0.4 percent to trade at $88 a barrel on the back of a weaker U.S. dollar and cold weather in the United States and Europe.
(Additional reporting by Padraic Halpin in Dublin and Anirban Nag in London; editing by Patrick Graham)