Europe midday: China, rates, Moody's US warning hit sentiment

(Sharecast News) - European shares were lower at midday on Tuesday as persistent fears over higher interest rates and a warning from Moody's that a looming US government shutdown would threaten America's triple-A credit rating. The pan-European Stoxx 600 index was down 0.52% with all major regional bourses lower. Moody's overnight warned that a shutdown would be "credit negative for the US sovereign".

"In particular, it would demonstrate the significant constraints that intensifying political polarisation put on fiscal policymaking at a time of declining fiscal strength, driven by widening fiscal deficits and deteriorating debt affordability," it added.

Hard-right Republican members of the House of Representatives are refusing to reach a compromise with their own party's leadership over a spending bill, leaving just a few days left for Capitol Hill to avert a shutdown, by passing a spending bill by October 1 or see hundreds of thousands of federal workers laid off.

Meanwhile central bankers repeated the message that a cut in interest rates was not coming anytime soon. European Central Bank chief Christine Lagarde said they would need to stay restrictive for as long as necessary.

Federal Reserve member Neel Kashkari said "rates probably have to go a little higher, and then be held higher for longer".

Susannah Streeter head of money and markets at Hargreaves Lansdown, said: "With little data expected to blow away worries about the impact on high interest rates, concerns are set to linger, holding back gains for stocks.

"Nervousness is setting in about restrictive monetary policy in major economies, particularly the US, reducing appetite for goods and services, as consumers and companies keep their belts tightened."

China's economic woes were also in focus after Evergrande shares plunged for the second day in a row, as the real estate groups' mainland unit missed a debt payment.

In equity news, banks were up on the prospect of higher profits on the back of elevated interest rates, with Barclays, Bankinter and CaixaBank shares rising 2% in a weak market. Barclays also benefited after an upgrade to 'overweight' by Morgan Stanley.

Reporting by Frank Prenesti for Sharecast.com