European Shares Rebound After Selloff

European stocks and the euro eked out modest rises on Tuesday as warnings by credit rating agencies about the region's outlook kept gains in check.

Traders said there was a clear bias to sell the single currency on any bounce after the threat of further imminent sovereign downgrades because EU leaders had failed to come up with decisive steps to tackle the region's debt crisis.

"The only thing that would be enough to restore confidence for now would be aggressive bond buying by the ECB," said Audrey Childe-Freeman, EMEA head of currency strategy at JP Morgan Private Bank.

The region's problems were highlighted when the European Central Bank reported it had seen demand for close to 300 billion euros -- a new 2-1/2 year high -- from banks unable to access open markets at its weekly handout of limit-free cash.

The euro hovered around $1.3220, above a two-month low set in Asia of about $1.3160, and due mainly to traders covering existing short positions.

"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 last week's EU summit, in which leaders agreed to draft a new treaty for deeper economic integration, failed to provide a "comprehensive" solution to the crisis, thus increasing short-term pressure on euro zone sovereign ratings.

While Moody's Investors Service said on 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.

STOCKS RECOVER

The lack of progress on short-term measures to solve the region's debt crisis worried equity investors but stock prices recovered slightly after Monday's sharp sell-off.

The MSCI All Country World Index (ACWI) was barely changed, down 0.2 percent, while Europe's main stock index, FTSEurofirst 300, was up 0.6 percent after falling 1.9 percent on Monday.

U.S. stock index futures pointed to a slight rebound on Wall Street on Tuesday, with futures for the S&P 500 up 0.46 percent, Dow Jones futures up 0.41 percent and Nasdaq 100 futures up 0.34 percent.

U.S. investors are expected to focus on the release of retail sales for November and the FOMC meeting where the Federal Reserve is expected to leave interest rates unchanged.

Investor sentiment in the European banking sector weakened after Moody's Investors Service said it may also cut the ratings of eight Spanish banks but the broader STOXX Europe 600 Banks index was flat.

ZEW SURVEY

A survey of German analysts and investors showed expectations for the economy in the coming six months unexpectedly improved in December, but perceptions of current developments remained on a downward trend.

The result meant Germany was likely to suffer from a bad first quarter next year but avoid a recession, economist Michael Schroeder of the Mannheim-based ZEW economic think tank said.

Prices in the core German debt market dipped slightly after the survey with fixed income investors focused on the Treasury bill market.

Spain and Belgium's short-term borrowing costs dropped sharply at their respective Treasury bill auctions, though yields remained painfully high for Madrid as nervous markets braced for a raft of potential euro zone rating downgrades.

The euro zone rescue fund, the EFSF, sold nearly 2 billion euros of new three-month bills with a bid-to-cover ratio of 3.2, and an average yield of 0.22 percent, in the first auction to kick off its programme of short-term debt issuance.