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updated: 10/1/2012 7:21 AM

European markets rise but Spain downgrade looms

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Associated Press

LONDON -- European stocks edged higher on Monday as investors cautiously welcomed the result of stress tests of Spain's banks. But the threat that Moody's might downgrade the country's debt rating to junk status limited gains.

The results of an independent audit of 14 Spanish banks were released after the market close on Friday and showed the lenders need an extra (euro) 60 billion ($77.6 billion) in capital. The figure is roughly as expected and well within the (euro) 100 billion in rescue loans that Madrid can get from fellow eurozone countries to help the banks.

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Also helping stocks was a slight improvement in a survey of the eurozone's manufacturing sector. The so-called purchasing managers' index for September was revised up slightly from its preliminary estimate released a week ago, but remains at a historically weak level.

By late morning in Europe, Germany's DAX stock index rose 1.3 percent to 7,307.27 and France's CAC-40 was up 1.5 percent to 3,405.43. Britain's FTSE 100 rose 1 percent to 5,800.63 while Spain's Ibex was up 0.6 percent at 7,752.10

Wall Street was expected to open higher -- Dow futures were up 0.6 percent and the wider S&P 500 futures were 0.5 percent higher. Meanwhile, Asian indexes were mixed by the close.

Casting a shadow over markets was a possible downgrade by credit rating agency Moody's of Spain's debt rating to junk status. The agency has the debt on review and is due to release its findings any day this week. Any cut in the rating would make Spain's debt non-investment grade.

That would hurt Spanish markets because many pension funds and banks would have to sell them from their portfolios and desist from buying them at auction. That, in turn, would force Spain to pay higher rates to borrow money, further hurting its finances.

In corporate news, shares in mining company Xstrata Plc rose over 3 percent after it recommended to shareholders the merger with Glencore Plc. The deal would create an industry behemoth with revenues of around $175 billion.

In Asia, markets in China, Hong Kong and South Korea were closed for public holidays. In Tokyo, Japan's benchmark Nikkei 225 index fell after a closely watched survey showed confidence in the economy weakening.

The Bank of Japan's "tankan" confidence index was minus 3, a worsening from the previous quarter's minus 1. The index is a percentage of the companies with a positive outlook versus those who see unfavorable conditions ahead, so a minus number means there are more pessimistic companies than optimistic ones.

The Nikkei 225 index shed 0.8 percent to 8,796.51. Toyota Motor Corp. lost 1.7 percent and Nishimatsu Construction Co. slid 4.2 percent.

Australia's S&P/ASX 200 was marginally higher at 4,388.60, with losses in some sectors offset by solid gains among big banks and resource shares. Trading was light due to a public holiday in parts of the country.

Benchmarks in Thailand, Taiwan and Indonesia fell. India rose.

Benchmark oil for November delivery was down 16 cents to $92.03 per barrel in electronic trading on the New York Mercantile Exchange. The contract rose 34 cents to finish at $92.19 per barrel on the Nymex on Friday.

In currencies, the euro rose to $1.2897 from $1.2855 late Friday in New York. The dollar was flat at 77.99 yen.

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