Euro shrugs off Portugal crisis

backdrop, while the euro shrugged off ratings downgrades for Portugal, which is in the grip of a political and debt crisis.
Europe’s single currency wobbled after Standard & Poor’s followed Fitch in cutting Lisbon’s credit rating by two notches. But it soon found its feet.
“The market is treating many of these downgrades as rearguard actions which are already well discounted,”said Todd Elmer, currency strategist at Citi in Singapore.
The euro also got a nudge higher after the closely-watched Ifo survey showed German business sentiment fell less than expected, holding at strong levels.
President Anibal Cavaco Silva will meet the leaders of Portugal’s political parties on Friday to decide whether to call a snap election following the prime minister’s resignation after his latest austerity measures, aimed at avoiding a bailout, were thrown out by parliament. Portugal’s borrowing costs could not escape the fallout.
The yield on 10-year Portuguese government bonds rose to a new euro-era high above 8 percent, well above the level which the government says is sustainable, and the premium to hold its 10-year debt rather than Germany’s widened to 474 basis points.
The cost of insuring Portuguese government debt against default also rose.
Stock markets have remained buoyant despite Japan’s catastrophes, turmoil in the Middle East and North Africa and the euro zone debt crisis roaring back into life.
Wall Street looked set for a higher start, with futures for the S&P 500 up 0,4 percent and Dow Jones futures up 0,3 percent.
The MSCI All-Country index was up
0,1 percent at 340.1 and is higher than
when Japan’s earthquake and tsunami struck.
European shares were also marginally up as bullish macroeconomic and company signals vied for attention with the euro zone debt problems and violence in Libya.
Even emerging market stocks, which tumbled at the start of the year, are at eight-week highs and close to getting into the black for the year to date.
“We have got the European issue . . . and clearly the events in the Middle East are still a tail risk for the markets to deal with,” said Ian Richards, European equity strategist at RBS.
“(But) the global economy is in a pretty good shape and we have valuations which are reasonable to low in the equity market. We are bullish on markets and think that we will make progress from here.”
The euro rose to around rose to around US$1,4170, rebounding from a low around US$1,4050 after S&P’s ratings cut.
With Portugal seen as an inevitable candidate for a bailout, a decision by European leaders to increase their financial rescue fund to its full 440 billion euros only by June could rattle investors.
But with the European Central Bank expected to raise interest rates next month, boosting its yield advantage over the dollar, the single currency should be well underpinned. – Reuters.