Spain hit hard by downgrade as Burberry lifts FTSE

• Standard & Poor’s downgrades Spain again, bond yields near 6%
• European markets rise following falls in Asia and the US
• Burberry rises on stronger sales, leading FTSE 100 higher
• Direct Line shares gain in first day of trading
• Morrison drops on analyst downgrade, Greggs falls on weak outlook

Spanish shares and bonds were punished on Thursday morning after Standard & Poor’s cut the country’s credit rating to near junk status – but Britain’s FTSE 100 and other European indices stood firm, with fashion brand Burberry (BRBY.L) leading small gains in London after a slightly improved trading update.

Spain's 'mounting economic and political risks'

Ratings agency S&P cited growing social discontent in Spain, and uncertainty over policy in both the eurozone and from a hemmed-in Spanish government – which faces tensions with regional governments – in downgrading its rating on the country to BBB- with a negative outlook.

Fitch reduced Spain’s rating to BBB in June, while markets are still waiting on Moody’s to deliver the results of its own review.

The cut, announced last night, comes after International Monetary Fund chief Christine Lagarde indicated that she was willing to give troubled countries including Spain more time to reduce their deficits.

Spain’s benchmark share index dropped around 1%, underperforming the rest of Europe, while its borrowing costs rose, with yields on 10-year government bonds creeping back up towards 6%. The euro dropped by 0.1% against the dollar to $1.286.

Europe firm after Asian and US losses

Having dropped so far this week – amid warnings over the global economic outlook from the IMF – markets in Europe were holding up, with the eurofirst 300 flat and the FTSE 100 slightly higher at 5,781.

Overnight US markets fell after Chevron said third-quarter profits would be 'substantially lower' than the previous quarter. The Federal Reserve's Beige Book showed the overall economy had expanded modestly, with most districts seeing strengthened home sales in the last month.

In Asia too, stocks declined. Weak August machinery orders in Japan – where G7 finance ministers meet today – were interpreted as pointing towards economic contraction in the third quarter of the year. Nomura said earlier this week that they expect hard-hit Japanese shares to rally as soon as the Chinese economy looks like turning round.

Central banks in both South Korea and Brazil cut interest rates, to 2.75% and 7.25% respectively, as countries around the world attempt to protect themselves from any worsening of the global economy.

Burberry 'oversold'

Burberry was the star performer among London blue chips, with shares rising nearly 7% to 1072p. Although the luxury fashion brand reported quarterly sales growth of just 1%, its update marked an improvement after last month’s profit warning led to a sharp sell-off in the company’s shares.

Kate Calvert of Seymour Pierce said although uncertainty remained, ‘we are reassured that demand has not fallen off a cliff and so believe the shares have been oversold’. She upgraded the shares from a ‘hold’ to ‘buy’.

Direct Line rises in first day of trading

Shares in Direct Line rose on their stock market debut after Royal Bank of Scotland (RBS.L) announced that it had placed 450 million shares in the insurer at 175p, valuing the group at £2.6 billion. Direct Line was trading at 183p, while RBS sat 1% higher 265p, matching gains on other banking shares Lloyds (LLOY.L) (38.9p) and Barclays (BARC.L) (223p).

Insurance analyst Eamonn Flanagan of Shore Capital noted: ‘We would BUY RSA, with its c8.3% prospective forward yield, its greater geographical spread and the better quality of management.’

Greggs and Morrison sold

Of the losers, Morrison (MRW.L) was down 1.3% to 270p after Credit Suisse marked the shares down to ‘neutral’ from ‘outperform’.

FTSE 250-listed Greggs (GRG.L) was down 4% to 493p after the bakery chain announced that sales would remain negative for the rest of the year. Total sales growth for the 14 weeks to 6 October was, however, ahead of expectations at 5.9%

Blow for Smiths

Investors in WH Smith (SMWH.L) received a blow as the mid-cap company announced that chief executive Kate Swann – who is credited with turning around the high street chain – is leaving after nine years at the company. She departs in July 2013.

Though Swann’s departure will dominate news headlines, the group announced a 10% rise in pre-tax profits for the year to the end of August and ‘all the levers for growth remain in place’ according to Panmure analyst Philip Dorgan.