Threat to European ratings deflates rally

Reports that all countries using the euro could get their credit ratings downgraded deflated a morning rally in the stock market Monday. The Dow Jones industrial average closed up 78 points, giving back much of a 167-point gain from earlier.

News reports in the afternoon said Standard & Poor’s would put all nations that use the euro on “creditwatch negative,” meaning there is a 50-50 chance of a downgrade in the coming months.

S&P had warned of possible rating demotions for many of the countries. The inclusion on the list of Germany, Europe’s strongest economy, was the biggest surprise.

After the market closed, S&P confirmed that it had placed 15 nations on notice for possible downgrades. Two countries that use the euro weren’t affected: Cyprus already had that designation and Greece already has ratings low enough to suggest that it’s likely to default soon anyway.

Stocks rose in the morning after the leaders of France and Germany called for a new treaty to impose greater fiscal discipline on European countries. Yields on Italian government bonds receded sharply after the new government of Mario Monti introduced sweeping austerity measures over the weekend. That suggests traders believe Italy is less likely to default.

The Dow Jones industrial average rose 78.41 points, or 0.7 percent, to 12,097.83.

The gains were broad. All 10 industry groups in the Standard & Poor’s 500 index rose. Financials stocks were among the biggest winners. Investors have feared that U.S. banks might be dragged down by their close connections to the unstable European financial system.

JPMorgan Chase & Co. jumped 3.7 percent, the most in the Dow. Bank of America was the second-biggest gainer, 2.7 percent. Citigroup Inc. rose 5.9 percent, Morgan Stanley 6.8 percent.

The S&P 500 rose 12.8, or 1 percent, to 1,257.1. The Nasdaq rose 28.83, or 1.1 percent, to 2,655.76.

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