The downgrade has both financial and political ramifications.  It is sure to increase the country’s cost of borrowing and may even boost the out-of-favor Conservative Party to victory in the next election, which may come as early as next year.

Even though the agency reaffirmed its ‘AAA’ long-term and ‘A-1+’ short-term credit ratings for the United Kingdom, the downgrade may be cause for alarm among its debt holders and citizens.

“We have revised the outlook on the U.K. to negative due to our view that, even assuming additional fiscal tightening, the net general government debt burden could approach 100% of GDP and remain near that level in the medium term,” Standard & Poor’s credit analyst David Beers said in a statement, according to Reuters.

S&P questions the government’s stance regarding “how quickly the erosion in the government’s revenue base may be repaired, the extent to which the growth in government spending can be curtailed, and consequently the pace at which historically high fiscal deficits are likely to narrow,” Beers said in the statement.

Just minutes before S&P announced the ratings cut, the government released figures that revealed the budget deficit hit $13.4 billion (8.5 billion pounds) in April, the most for that month since records began.

Government bond futures, British share prices and the pound fell sharply after the S&P announcement.

Britain’s finance minister Alistair Darling said the economic future is still not clear and S&P could reverse itself if the United Kingdom is able to make significant progress towards reducing its budget deficit to its stated goal of $276 billion (175 billion pounds) this year.

The government has launched a program of quantitative easing to buy a record $340 billion (220 billion pounds) in government bonds, which has ballooned the deficit.  Some analysts have criticized the program and characterized government projections that deficits would shrink in the future and spark economic growth as unrealistic.

But the government is holding to its view.

“There are significant uncertainties in the global economy at the present time and S&P point out that the outlook could be revised back to stable ‘if fiscal outturns are more benign than (they) currently anticipate’,” a Treasury spokesman said, according to Reuters.

“The Budget set out a clear plan to halve the deficit in five years. That judgment was based on a deliberately cautious view of the public finances,” the Treasury added.

S&P said Britain’s high debt ratings were supported by its wealthy, diversified economy, fiscal and monetary policy flexibility, and relatively flexible product and labor markets, Reuters reported.

But in an ominous warning, S&P said that it would consider lowering the U.K.’s top-tier AAA debt rating if the next Government does not take radical measures to reduce the scale of public debt, according to the Daily Telegraph.

“The rating could be lowered if we conclude that, following the election, the next Government’s fiscal consolidation plans are unlikely to put the U.K. debt burden on a secure downward trajectory,” Beers said.

The specter of a divisive election – now likely in 2010 – is raising political uncertainty about how government policy may affect fiscal matters in the future.
Analysts were unsure if fallout from the economic crisis could convince voters to change parties in order to deal with the deteriorating debt situation.  But S&P’s downgrade is sure to bear on the minds of the victorious party.

“Whoever wins the next election, tax hikes and sharp spending cuts will be the order of the day – but today’s announcement by S&P puts that much more pressure on the next government to act quickly,” Colin Ellis of Daiwa Securities Group Inc. told Reuters.

Source: S&P Lowers U.K. Credit Outlook Putting Election in Flux

Gold swung into the black on Tuesday, rising more than 2 percent to a one-week high of $855.75 an ounce, amid market talk of a large order.

Firm investment demand for gold as a haven from risk is fueling buying of the precious metal, analysts said.

Spot gold was quoted at $853.00/855.00 an ounce at 1228 GMT, up from $834.55 late on Monday. Earlier it touched a low of $822.90, down more than 1 percent.

Standard Chartered analyst Daniel Smith said strong investor flows into products such as exchange-traded funds as investors sought more secure assets were offsetting weaker jewelery demand.

“People are slowly building long positions in gold and commodities more generally,” he said.

Gold managed shrugged off early weakness linked to a strengthening U.S. dollar and weaker oil prices.

The dollar rose to a six-week high against the euro as traders worried about the outlook for the euro zone economy, after the European Commission issued a grim forecast for 2009 and Standard and Poor’s cut Spain’s debt ratings.

A stronger dollar tends to pressure gold, which is often bought as an alternative investment to the U.S. currency.

“With financial institutions struggling in Europe and euro zone government bond spreads widening, weak economic data could see the euro lose ground against the dollar,” noted Standard Bank analyst Walter de Wet.

In Germany, data showed the Mannheim-based ZEW economic think tank’s monthly poll of economic sentiment rose to -31.0 from -45.2 in December.

The other main external driver of gold, crude oil, tumbled almost 10 percent, after Russia and Ukraine agreed on a gas deal that will help secure supplies to Europe and as traders worried over the outlook for demand.

Gold tends to move in line with crude, as it is often used as a hedge against oil-led inflation. Moves in the oil price are also an indicator of interest in commodities as an asset class.

Markets are awaiting the inauguration of new U.S. president Barack Obama. Obama is due to take the oath of office at 1700 GMT.

JEWELERY DEMAND WEAK

Overall, fears over the outlook for the global economy and the financial system are boosting interest in products like exchange-traded funds — which issue securities backed by actual stocks of gold. These are seen as less risky than paper assets.

The world’s largest gold-backed ETF, New York’s SPDR Gold Trust, said its holdings are at a record 795.25 tonnes.

However, demand for consumer products such as gold jewellery is suffering from relatively high gold prices. Jewelery demand in the world’s largest bullion market, India, slowed on Tuesday as buyers waited for prices to fall.

Demand may pick up if prices move below 12,500 rupees locally and $800 on the international markets, Mayank Khemka, managing director of Khemka International in Delhi, said.

Among other precious metals, platinum weakened a touch to $942.50/947.50 an ounce, against $948.50 late on Monday.

Prices have remained in a relatively narrow range below $1,000 an ounce as traders continue to fret about the demand outlook as the economy slows.

Platinum has shed some 60 percent of its value since it hit an all-time high of $2,290 an ounce last March on fears over falling consumption by car makers, who account for around half of global demand for the metal.

Prospects for the economy, and the automotive sector in particular, “remain very worrying” for platinum, Societe Generale said in a weekly report.

Palladium was quoted at $181.50/186.50 an ounce against $183 late on Monday, while silver fell to $11.29/11.36 an ounce from $11.13.

LONDON, Jan 20 (Reuters)

U.S. stocks fell sharply on Friday in response to a grim U.S. jobs report that sent bond prices higher in Europe and pushed the price of crude down to $42 a barrel as prospects for the world’s economies darkened.

European shares extended losses in afternoon trade as investors reeled at U.S. government data showing a loss of 533,000 jobs in November, the weakest performance in 34 years.

Oils and bank stocks led the decline in Europe, while oil and defense stocks pushed the Dow down in the United States.

The dollar fell to a seven-week low against the yen but rose against the euro as investors once again sought shelter in the U.S. currency.

“When you see such a shocking employment number, you realize the devastating effect that can have on household demand,” said Henk Potts, equity strategist at Barclays Stockbrokers in London.

Shortly after opening, the Dow Jones industrial average was down 67.30 points, or 0.80 percent, at 8,308.94. The Standard & Poor’s 500 Index was down 6.59 points, or 0.78 percent, at 838.63. The Nasdaq Composite Index  was down 10.73 points, or 0.74 percent, at 1,434.83.

The pan-European FTSEurofirst 300 index was down 3 percent at 797.26 points.

Euro zone government bond futures extended gains to a fresh session high, pushing the 10-year cash yield below 3 percent after the worse-than-expected U.S. jobs report.

The 10-year Bund yield fell to the session low of 2.988 percent, down 9 basis points on the day.

However, U.S. government debt prices fell after the dismal labor report in a sign investors are reluctant to buy government debt with yields at the lowest in over 50 years.

The benchmark 10-year U.S. Treasury note was down 19/32 in price to yield 2.62 percent. The 2-year U.S. Treasury note fell 3/32 in price to yield 0.86 percent.

“We’re already at (yield) levels we’ve never seen before. It’s just difficult to continue buying Treasuries at these prices,” said Kim Rupert, managing director of global fixed income analysis at Action Economics in San Francisco.

November’s job losses were the steepest since December 1974, when 602,000 jobs were shed, Labor Department data showed, and were much worse than forecast by analysts polled by Reuters who had predicted a reduction of 340,000 jobs.

The dollar rose against a basket of major currencies, with the U.S. Dollar Index up 0.61 percent at 87.142. Against the yen, the dollar fell 0.01 percent at 92.16.

The euro fell 0.66 percent at $1.2686.

U.S. light sweet crude oil was off 54 cents at $43.13 a barrel, after earlier touching $42 at one point.

Many dealers and analysts expect oil to test the psychologically important $40 a barrel level fairly soon as evidence mounts of a significant decline in oil demand in all the major developed economies.

Spot gold prices fell $13.85 to $751.80 an ounce.

Asian shares edged higher overnight, with the MSCI index of Asian shares outside Japan  rose 0.2 percent, but trimmed gains after the U.S. employment report. The Nikkei average slightly lower, down 0.1 percent.

By Herbert Lash
NEW YORK, Dec 5 (Reuters)

A tentative rebound in global stocks spluttered on Wednesday while euro zone government bond yields hit a three-year low as gloomy economic news highlighted the case for more aggressive interest rate cuts in Europe this week.

The euro stayed on the backfoot and oil held near a 3-1/2 year low a day before the European Central Bank, Bank of England and Sweden’s Riksbank are all widely expected to cut borrowing costs.

Supporting those expectations, economic reports on Wednesday showed the euro zone’s services economy fell deeper into recession in November than initially thought and inflationary pressures eased.

“This is a horrible survey across the board, showing that the euro zone service sector is being hit ever harder by the financial crisis, muted consumer spending and markedly weaker activity in key export markets,” said Howard Archer, economist at IHS Global Insight.

Australia’s economy grew at its slowest pace in eight years in the third quarter as gathering recession abroad and evaporating equity wealth at home curbed spending by consumers and businesses.

Central banks worldwide are cutting rates to fight recession. They are also considering more measures to stabilise financial markets and restore battered consumer and investor confidence, including help for struggling U.S. auto makers.

The FTSEurofirst 300 index of top European shares fell 1.5 percent in early trade with Britain’s FTSE 100 index down 0.9 percent and Germany’s DAX  shedding 1.7 percent.

MSCI world equity index eased 0.4 percent.

“The markets are still looking very tender,” said Justin Urquhart Stewart, investment director at Seven Investment Management.

“Markets are not focusing on any of the good news and the good news is rates are being cut, commodity pries are coming down, stimulus packages are being put together and banks are being supported. But the market’s feeling very depressed.”

Japan’s Nikkei managed to eke out a 1.8 percent gain following a rebound on Wall Street on Tuesday, but MSCI’s measure of other Asian stock markets put on just 0.2 percent.

EURO PRESSURED AS ECB CUT EYED

Also under pressure, the euro fell 0.7 percent against the dollar on the day to $1.2626 and was also weaker against the yen , while the dollar climbed 0.6 percent against a basket of major currencies.

But demand for less risky assets continued to mount, helping to push government bond yields lower.

The 10-year euro zone government bond yield plumbed a low of 3.004 percent — a level last seen in Sept. 2005, while the benchmark 10-year yield for U.S. Treasuries was at 2.727 percent, not far off a five-decade low of around 2.651 percent set on Monday.

“Economic indicators are plunging like there is no tomorrow and central banks are gearing up for significant easing,” said Elwin de Groot, a strategist at Rabobank, noting 100 basis point rate cuts from Australia and Thailand this week.

The ECB meets on Thursday and most economists expect an interest rate cut of 50 basis points, while the Bank of England is forecast to cut rates by an aggressive 100 basis points.

Sweden’s central bank is likely to slash rates by a record 100 basis points, or possibly more, on Thursday when it announces the result of its meeting, which it brought forward by almost two weeks.

Meanwhile, U.S. crude edged up 41 cents to $47.37 but was within striking distance of Tuesday’s trough of $46.82 — a low last seen in May 2005.

Gold slipped to $774.80 an ounce, down $6.70 from New York’s notional close on the back of a broadly firmer dollar.

By Ian Chua
LONDON, Dec 3 (Reuters)

A weaker oil price reflecting poor economic demand ahead shut off a rally in world stocks on Friday while government bond yields sank.

Wall Street looked set for a poor start and the dollar recovered from early losses.

Oil fell below $54 a barrel, on course to end the month down more than 20 percent, as OPEC ministers prepared to meet in Cairo to discuss potential further supply cuts to combat a global fall in demand .

Indian stocks were higher as a siege in Mumbai between police and Islamist gunmen continued, but India’s 10 year bond yield fell to its lowest level in three years on expectations that the attacks will an impetus to rate cuts.

Globally, the MSCI all-country world index was flat, although it had gained around 11.6 percent, the first weekly gain in four weeks.

“On a range of measures, there is undoubted value to be found in many of the world’s equity markets,” said Sarah Arkle, chief investment officer with Threadneedle Asset Management.

But economic woes held back an earlier rally.

The pan-European FTSEurofirst 300 was down 0.3 percent, led lower by oil-related companies.

Earlier, Japan’s Nikkei average climbed 1.7 percent for its best week in a month. It gained 138.88 points to 8,512.27, while the broader Topix was up 0.7 percent to 834.82.

A monthly Reuters survey found that Japanese retail investors became slightly less pessimistic about domestic equities in November, fitting with other signs globally that recent market sell offs may be bottoming at least temporarily.

OPEC TO MEET

Oil fell below $53 a barrel for a while before recovering slightly. The Organization of the Petroleum Exporting Countries is to hold an informal meeting on Saturday in Cairo, as it struggles to slice output fast enough to keep pace with a recessionary reduction in fuel demand in the West that has sent crude prices down nearly two-thirds since July.

U.S. light crude for January delivery stood at $53.32 a barrel, down $1.12.

The dollar regained traction against major currencies after early losses.

It was 0.2 percent higher against a basket of six major currencies, while the euro lost 0.4 percent to $1.2838 . The dollar lost 0.1 percent to 95.22 yen .

Euro zone government bonds rose, reflecting concern about the economy and expectations of interest rate cuts. Two-year Schatz yields sank 10 basis points to 2.213 percent.

By Jeremy Gaunt, European Investment Correspondent
LONDON, Nov 28 (Reuters)

Specifically, real estate and the German wage demand has been threatening Europe’s post 2003 boom. But frankly, it’s not just real estate or German wage demand threatening Europe’s post-2003 boom…it’s the high current account deficits.

Most of the European Union’s newest members over the last five years sport dangerously high current-account deficits. These are the same kind of economic imbalances that triggered the Asian Contagion in 1997.

Speculators specifically target countries that have vulnerable economic imbalances, once these countries’ respective trade balances turn decisively negative.

Iceland is the latest casualty this year with its economic imbalances. Hedge fund managers and other speculators are swooping in following a series of margin calls on Iceland’s banking system.

Iceland, by all intents and purposes, has literally been run like a hedge fund since 2002. Banks made huge bets on global stocks, venture capital and other investments with leverage. Now the credit crunch is coming home to roost. Iceland’s current-account deficit as a percentage of GDP is now a staggering 14.8%.

Other countries are in far worse shape than Iceland, but speculators have yet to attack because of their close relationship with the EU. Latvia and Bulgaria harbor wickedly high current-account deficits at 22.8% and 21.6% of GDP, respectively. Other danger spots are Estonia (15.9%), Romania (13.9%), and Lithuania (13.7%).

Italy, a bastion of some of the finest manufactured goods in the world, remains an economic basket case. The stock market has been among the worst performing bourses in Western Europe over the last three years.

Italian government bond yields remain excessively above those of comparable German bonds, indicating investors are worried about sovereign credit risk in 2008. Greece is also in this camp and has recently been joined by Spain and Portugal as yield-spreads or the difference between Eurozone government debt markets, continues to widen. That’s something that shouldn’t happen because all countries share the same currency.

For Europe, the main issues and challenges in 2008 are “bubbles” in several real estate markets; economic overheating and chronic trade deficits in Eastern Europe; rising wage pressure in Germany, and high producer and consumer prices.

All these issues will compel the European Central Bank to stand firm on monetary policy at a time when credit markets are still fragile.

ERIC ROSEMAN, Investment Director