GLOBAL MARKETS-Stocks drop, euro falls on euro zone worries

by on September 28, 2012 8:13 pm BST

Fri Sep 28, 2012 4:13pm EDT

* Spanish bank audit, French budget add to euro zone
    * U.S. dollar and Treasuries gain on risk aversion

    NEW YORK, Sept 28 (Reuters) - Stocks in the United States
and Europe declined and the euro dipped on Friday after initial
optimism about Madrid's debt-cutting plans gave way to anxiety
over its troubled banks and faltering global economic growth.
   Spain plans to ask for around 40 billion euros ($51.46
billion) in European aid to recapitalize its weak banks, Bank of
Spain Deputy Governor Fernando Restoy said on Friday.
   An independent audit of Spanish banks by consultancy Oliver
Wyman showed the country's troubled lenders would need 59.3
billion euros in extra capital to ride out a serious economic
    Spain will remain in focus, analysts said, with Moody's
Investors Service expected to finish a credit rating review soon
that may cost Madrid its sovereign investment-grade status.
    "At some point that (Spanish) credibility issue is likely to
come back," said Derek Halpenny, European head of FX research at
Bank of Tokyo Mitsubishi in London. "This is the fifth package -
so the history of previous packages is that they weren't enough
and lacked credibility."
    The MSCI index of world stocks was down 0.6
percent. Madrid's IBEX index led the falls, down 1.7
percent as an early lift from Spain's new round of spending cuts
    The Dow Jones industrial average was down 48.96
points, or 0.36 percent, at 13,437.01. The Standard & Poor's 500
Index  was down 6.30 points, or 0.44 percent, at
1,440.85. The Nasdaq Composite Index  was down 20.40
points, or 0.65 percent, at 3,116.20.
    Equities were hit by a report showing business activity in
the U.S. Midwest contracted this month for the first time in
three years, while the dollar strengthened against the euro as
investors shunned risk.  
    "We had been seeing good data recently, but now we seem to
be following the slowdown in China and Europe and we're seeing
weakness," said Paul Nolte, managing director at Dearborn
Partners in Chicago.    
    Still, the S&P 500 index closed out the third quarter with a
gain of around 5.8 percent.
    France was also under the microscope on Friday. President
Francois Hollande's first annual budget, the country's toughest
in 30 years, raised taxes to bring in 30 billion euros ($39
billion) to keep deficit-cutting promises. 
    France announced its public-sector debt rose almost 2.0
percent to 91 percent of gross domestic product. 
    Investors this week have again expressed concern that the
euro zone is failing to gain control over its debt crisis though
spending cuts announced in Spain's budget on Thursday helped the
yield on Madrid's 10-year bond fall back below 6.0 percent.
    However, euro zone inflation data limited any falls in
yields on Friday as a surprise rise in Eurostat's flash
September reading cast doubts over the near-term chances of
another interest rate cut from the European Central Bank.
    The euro fell 0.5 percent to $1.2847 as risk aversion
rose after the U.S. data. The dollar gained 0.6 percent against
the yen, while the euro managed to gain 0.1 percent
against the Japanese currency.
    In other currency markets, China's yuan hit an all-time high
versus the dollar, despite slowing Chinese economic
growth recently. 
    Concerns about progress solving the euro-zone debt crisis
and slowing global economic growth helped to support U.S.
Treasury prices. 
   U.S. Treasury debt prices were higher. The benchmark 10-year
U.S. Treasury note was up 6/32, with the yield at
1.6335 percent
    In commodity markets, gold surrendered gains on Friday as
the U.S. dollar rallied but the metal stayed on track for its
biggest quarterly gain in more than two years on the back of
this month's central bank easing measures. 
    Oil markets were steady with those investors more inclined
to look at tight gasoline supply in the United States.  
    Brent crude futures for November rose 0.1 percent to $112.17
 per barrel. U.S. crude rose 0.2 Percent to