China rate hike fuels retreat in stock markets

“China’s announcement isn’t helping investor spirits,’’ said Sal Guatieri, an analyst at BMO Capital Markets.

Guatieri said investors were already “smarting’’ from Moody’s four-notch downgrade of Portugal’s credit rating to junk status on Tuesday.

The agency said Portugal will find it difficult to meet its targets and that like Greece it may need a second bailout.

Portugal needed a euro78 billion ($112 billion) bailout from its European partners and the International Monetary Fund earlier this year after markets began charging it unsustainably high interest on loans as investors deemed the country a risk.

“This will weaken hopes that the recently agreed aid for Portugal will put a line under the nation’s woes and could trigger worries that Portugal could follow Greece down the path of possible default,’’ said Jane Foley, an analyst at Rabobank International.

The combination of the China rate hike and the Portuguese rating downgrade sent already-depressed stocks in Europe even lower and added to the pessimism over Wall Street’s open.

In Europe, the FTSE 100 index of leading British shares was down 0.7 percent at 5,981 while Germany’s DAX fell 0.3 percent to 7,419. The CAC-40 in France was 0.5 percent lower at 3,959.

Portuguese stocks were hit hardest by the Moody’s warning, with Lisbon’s stock market down 2.5 percent. Bank shares took the brunt of the sell-off, with Banco Comercial Portugues losing more than 5 percent.

The euro was also hit hard, trading 0.7 percent lower on the day at $1.4326.

In the U.S., Dow futures were down 0.3 percent at 12,493 while the Standard & Poor’s 500 futures fell 0.5 percent to 1,330.

Over the past week or so, stocks have risen as concerns over an imminent debt default in Greece waned following Parliament’s approval of austerity measures demanded by international creditors. A positive U.S. manufacturing survey last Friday also helped sentiment recover ahead of a raft of economic news this week.