Stocks shrug off Spain downgrade on bailout hopes

LONDON - Financial markets steadied Thursday ahead of another round of U.S. corporate earnings and despite a downgrade of Spain's sovereign credit rating.

Standard & Poor's downgraded Spain's government debt late Wednesday from BBB+ to BBB-, the lowest investment grade level. That's important because it potentially makes it more expensive for the Spanish government to borrow money.

The agency warned of the impact of the deepening economic recession in Spain and rising levels of social discontent, adding that the government's hesitation in requesting help was ``potentially raising the risks to Spain's rating.''

The Spanish government has so far refused to tap a new European Central Bank bond-buying facility that has been largely designed to keep a lid on the country's borrowing rates.

Some analysts think the downgrade will help push the government to finally request the help, despite the political humiliation that would represent.

"Investors appear to be drawing the conclusion that this coupled with increasing yields in recent sessions leaves Spain no option but to formally request a bailout," said Mike McCudden, head of derivatives at Interactive Investor.

The downgrade prompted a retreat across much of Asian financial markets but the mood improved during the European trading session. Spanish shares were still underperforming their counterparts in Europe, trading 0.4 percent lower.

By contrast, Germany's DAX was up 0.6 percent at 7,246 while the CAC-40 in France rose 0.3 percent to 3,377. The FTSE 100 index of leading British shares was up 0.3 percent at 5,795.

The improvement in sentiment supported so-called `riskier' assets, which investors buy in good times in search of higher returns. The euro was up 0.3 percent higher at $1.2883 while the price of a barrel of benchmark oil rose 56 cents to $91.81 a barrel.

Wall Street was poised for a solid opening, with both Dow futures and the broader S&P 500 futures up 0.3 percent.

Though the crisis in the eurozone remains a key focus of attention in the markets, investors are also looking for direction from the third quarter U.S. corporate earnings results season.

Earlier this week, aluminum company Alcoa Inc. kicked off the season with upbeat earnings but warned that its outlook was being hurt by waning demand, particularly in Asia.

"Third quarter earnings season continues to gather steam," said Fawad Razaqzada, market strategist at GFT Markets. Results from U.S. banking group JP Morgan on Friday may be the most closely watched this week, he said.

Earlier in Asia, Japan's Nikkei 225 index fell 0.6 percent to finish at 8,546.78. South Korea's Kospi shed 0.8 percent to 1,933.09 but Hong Kong's Hang Seng, however, rose 0.4 percent to 20,999.05.

Mainland Chinese shares lost ground, with the Shanghai Composite Index shedding 0.8 percent to 2,102.87 while the Shenzhen Composite Index lost 1.5 percent to 867.21.