Stocks rise as downgrade fears weigh

New York - US and European stocks rebounded on Tuesday and the euro steadied after steep selloffs, but remained vulnerable to further losses as warnings from rating agencies about the euro zone’s outlook preoccupied investors.

Investors awaited the U.S. Federal Reserve’s assessment of the U.S. economy, due after its last policy meeting of the year. No stimulus measures from the central bank are expected as it weighs encouraging signs on the recovery against the risks coming from Europe. Analysts also looked for Fed policymakers would continue talks on clearer communications on policy decisions.

Foreign exchange traders cited a clear bias to sell the euro on any bounce, noting the threat of further sovereign downgrades after European Union leaders failed to move decisively to tackle the region’s debt crisis.

With the risk of more headlines coming out of Europe, analysts expected markets will be stuck in a narrow trading range into year-end.

“We are stuck in a trading channel where it’s hard to see the market really break out on the upside without evidence the European issues are at least halted for now,” said Rick Meckler, president of investment firm LibertyView Capital Management in New York.

Wall Street stocks were higher, despite a smaller-than-expected rise in US retail sales in November. The S&P 500 index was up 0.6 percent after tumbling 1.5 percent on Monday.

Top European shares added 0.6 percent, while the MSCI global stock index was up 0.1 percent.

Tokyo’s Nikkei closed down 1.2 percent.

The euro was flat against the dollar at $1.3199 after touching a two-month low at $1.3160 on trading platform EBS in Asian trading due mainly to traders covering existing short positions.

Europe’s single currency remains vulnerable on fears about a broad downgrades of euro zone sovereign debt.

“The last blow for the euro was the announcement from the ratings agencies last night,” said Niels Christensen, currency strategist at Nordea in Copenhagen.

Fitch Ratings said that last week’s EU summit, where leaders agreed to draft a new treaty for deeper economic integration, failed to provide a “comprehensive” solution to the crisis -- and increased short-term pressure on euro zone sovereign ratings.

Moody’s Investors Service said Monday it intends to review the ratings of all 27 members of the European Union in the first quarter of 2012 after EU leaders offered “few new measures” to resolve the crisis.

The rebound in stocks and a stable euro pared demand for safe-haven U.S. and German government debt.

The yield on benchmark US 10-year Treasury notes was up 4 basis points at 2.06 percent, while German Bund futures were down 38 basis points at 136.16.

In the oil market, Brent and US crude futures both rose about 2 percent.

Spot gold lifted from seven-week lows on appetite for risk assets. It was last bid at $1,671.96 an ounce after posting its biggest one-day drop in nearly three months in the previous session.