Markets in Europe and the US shrugged off the downgrading of Italy’s credit rating to post solid gains overnight.
That was after markets in Australia and Japan fell on the news yesterday, while other markets in Asia rose.
US markets were up by more than 1% at one stage before a late sell-off cut most of the gains.
The Dow ended up just 8 points, the S&P 500 ended in the red, as did the Nasdaq.
But gold and oil rose and even the Italian stockmarket ended higher, up 1.9%.
Other markets in Europe were also much stronger than Monday.
US investors had eyes on the two day Fed meeting which started overnight.
Gloomy forecasts for US growth from the IMF underscored the importance of the Fed meeting.
Investors also ignored the IMF’s gloomier outlook which cut world economic growth forecasts for this year and next.
The Fund warned in its updated World Economic Outlook that "the global economy is in a dangerous new phase."
The Fund cut its 2011 and 2012 global growth forecast to 4%, shaving projections for almost every region of the world and saying risks remained tilted to the downside.
That modest growth will be driven by emerging markets, especially China.
Just three months ago it had projected a global expansion of 4.3% for 2011 and 4.5% for 2012.
Australia’s growth rate was cut to 1.8% for this year (understandable after the damage done by the Queensland floods), down from 3% in the June forecast and 3.3% for next year, down from 3.5%.
The IMF cut its US growth forecast for this year to 1.5% and to 1.8% next year, which for 2011 is a full percentage point lower than three months ago and 0.9% below its prior forecast for 2012.
And for China, the fund sees growth of 9.5% (9.6% in the June forecast) for this year and 9% for 2012 (9.5% in June), putting itself on the high side of forecasts for next year when many see China’s growth dropping to around 8.5%.
The fund cut its growth forecast for the euro zone by nearly half a percentage point to 1.6% in 2011 and said growth would likely register just 1.1% next year.
Japan’s economy was forecast to shrink 0.5% this year, not quite as severely as previously thought, but to grow just 2.3% in 2012, down from the JUne forecast of 2.9%.
Shares in Tokyo and Sydney all fell yesterday as the downgrade of Italy’s credit rating exacerbated already high levels of concern about Europe’s sovereign-debt crisis.
Standard & Poor’s downgraded Italy by one notch to A with a negative outlook, meaning further downgrades are possible in the next three months.
S&P’s rating on Italy is now three notches below Moody’s which had been expected to cut first. Last Friday, Moody’s said it was extending its review of Italy’s finances until October.
Italy is the euro zone’s third largest economy and its biggest bond market. Italy also owes German banks 116 billion euros, so Germany will not let Rome fail, unlike Greece.
The news saw markets in Europe down by around 1% at the opening.
Japan’s Nikkei Stock Average reopened after a three-day holiday weekend and fell 1.6% by the close as it caught up to the increased fears about Europe, and now Italy.
Australia’s ASX 200 index 41 points or 1% with the losses growing slowly as trading continued during the day.
Other indexes were more unsettled: Hong Kong‘s Hang Seng Index rose 0.5%; Shanghai’s Composite Index rose 0.4%, and South Korea’s Kospi was up 0.8%, with all three markets swinging in both directions in volatile trading.
The Aussie dollar dell in the wake of the, dropping its lowest level in more than five weeks. That announcement saw the dollar dip to as low as $US1.014 before bouncing back over $US1.02.
It then fell back under $US1.02 in late Asian trading.
But it rebounded in the more confident trading overnight to close around $US1.0285 in New York.
But one notable faller was copper, off 6USc to $US3.71 a pound as it ignored the recovery in demand for gold and oil.
Like its downgrade of the US credit rating, S&P noted the political side to the Italian rating, singling out Italy’s “weakening economic growth prospects” and the difficulty of the “fragile governing coalition” being able to “respond decisively” to the crisis.
"Under our recently updated sovereign ratings criteria, the “political” and “debt” scores were the primary contributors to the downgrade.
"The scores relating to the other elements of our methodology–economic structure, external, and monetary–did not contribute to the downgrade.
"More subdued external demand, government austerity measures, and upward pressure on funding costs in both the public and private sectors will, in our opinion, likely result in weaker growth for the Italian economy compared with our May 2011 base-case expectations, when we revised the outlook to negative.
"We believe the reduced pace of Italy’s economic activity to date will make the government’s revised fiscal targets difficult to achieve.
"Furthermore, what we view as the Italian government’s tentative policy response to recent market pressures suggests continuing future political uncertainty about the means of addressing Italy’s economic challenges.
"The downgrade reflects our view of Italy’s weakening economic growth prospects and our view that Italy’s fragile governing coalition and policy differences within
