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After a volatile day of trading, Fitch's downgrade the credit rating of Spain and Italy sapped traders' enthusiasm over a considerably better-than-expected jobs report, halting a powerful three-day rally.
Despite the losses sustained Friday, the markets had a strong showing this week. The Dow jumped 1.7%, the broad S&P 500 leaped 2.1% and the Nasdaq soared 2.7%.
A combination of relatively encouraging economic data and easing tensions over Europe's twin sovereign debt and banking crises led traders to pick up shares that were beaten down last quarter, the worst since the financial crisis in 2008. The gains weren't limited to equities: commodities have surged in recent sessions, and Treasury yields have been rising from record lows.
Fitch slashed the rating of Italy and Spain mid-day Friday. The downgrade is the latest sign of the concerns that Europe's sovereign debt crisis is escalating and that officials may not be moving fast enough to keep the crisis from spilling over.
Indeed, Moody's on Friday slashed the credit rating of Lloyds (NYSE:LYG) and the Royal Bank of Scotland (NYSE:RBS), two big British banks, in a sign of the growing concerns over the banking system on that side of the Atlantic.
German Chancellor Angela Merkel and French President Nicolas Sarkozy are set to meet on Sunday to discuss a European Union summit that takes place in two weeks. The leaders of the currency bloc's two largest economies will likely discuss the bailout of Greece. There has been a growing chasm between the German and French view on the bailout; Merkel has been under political pressure to reduce Germany's roll, while French banks have a particularly high exposure to Greek sovereign debt.
Financials were the worst performing stocks by a wide margin on the back of the downgrades in Europe. Bank of America (NYSE:BAC) and JPMorgan Chase (NYSE:JPM) sustained close to 5% in losses and were the laggards on the Dow. Energy and materials firms struggled on the day as well.
Meanwhile, defensive stocks, such as consumer staples like Wal-Mart (NYSE:WMT) and utilities, posted gains.
The euro fell 0.31% to $1.34, while the greenback fell 0.14% against a basket of world currencies. The benchmark 10-year Treasury note yielded 2.076% from 1.988%.
Jobs Report Tops Expectations, Remains Tepid
The U.S. economy added 103,000 jobs last month, blowing past consensus estimates of 60,000. The jobs gain wasn't enough, however, to put a dent in the 9.1% unemployment rate. A large portion of the gain in payrolls in September came from the 45,000 Verizon workers who went on strike in August, and came back to work in September.
Indeed, the September report can "hardly be described as strong," according to Nigel Gault, chief U.S. economist at IHS Global Insight, noting the distortions caused by the Verizon strike. Gault says the economy remains "perilously close to stall speed" despite the recent pop in the data.
The private sector tacked on 137,000 jobs for the month while the government shed 34,000. In what is seen as an encouraging sign, the labor force participation rate rose by 0.2 percentage points, meaning people are beginning to slowly move back into the labor force. Additionally, average hourly earnings climbed 0.2%. There was also a large upward revision to the August reading, which initially showed no net job growth, but now comes in at a gain of 57,000.
The jobless rate first rose above 8% in February 2009 and has been stuck there ever since, peaking at 10.1% in October of that year. The beleaguered labor market has been a considerable drag on the broader economy as consumers have lacked the confidence to make purchases, weighing on businesses' ability to expand.
Energy futures were mixed. Light, sweet crude rose 39 cents, or 0.47%, to $82.98 a barrel. Wholesale RBOB gasoline slid 4 cents, or 1.4%, $2.65 a gallon.
Gold edged dipped $17.40, or 1.1%, to $1,636 a troy ounce.
The Euro Stoxx 50 rose 0.91% to 2,269, the English FTSE 100 gained 0.23% to 5,303 and the German DAX climbed 0.54% to 5,676.
In Asia, the Japanese Nikkei 225 jumped 0.98% to 8,606 and the Chinese Hang Seng slumped 0.26% to 2,581.