European shares, the euro and oil fell on Friday as hopes for more global monetary easing dwindled despite the prospect of slower economic growth in Germany and China, and expectations of a bailout for Spanish banks failed to stop the rot.
A credit rating cut for Madrid forced investors to confront the reality of the euro zone crisis after Fed Chairman Ben Bernanke damped recent hopes that the central bank would announce new moves to stimulate the U.S. economy later this month.
Top European shares <.fteu3> were down 0.6 percent around midday, the euro had retreated to below $1.25 after a two-week high on Thursday, and Brent crude slid $1.62 to $98.25 a barrel. U.S. stock index futures pointed to a lower open on Wall Street on Friday.<.n>
"With the negative news on Spain's rating cut, it's back to reality for the market. The recovery we saw in the last few days was not a sustainable one," said Lutz Karpowitz, currency strategist at Commerzbank, who forecast the euro would be around $1.20 by the end of June.
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The lack of a clear signal on Thursday from Bernanke that the Federal Reserve's June 19-20 meeting would bring in a new round of quantitative easing overshadowed what had been a positive reaction in world markets to a Chinese interest rate cut.
Instead markets worried about how Madrid can solve the crisis at many of its banks caused by a property crash and recession, a job complicated when Fitch cut its sovereign credit rating by three notches to BBB from A on Thursday.
EU and German sources said Spain was set to request European aid for its banks this weekend to forestall worsening market turmoil, making it the fourth and largest country to seek assistance since the euro zone debt crisis began.
One senior German official said an agreement had to be reached before a Greek general election on June 17 that could cause market panic and lead to Athens leaving the euro zone if parties opposed to the terms of an EU/IMF bailout win.
"Comments by Bernanke poured cold water on market expectations that central banks would offer more to revive their economies," said Victor Shum, senior partner at oil consultancy Purvin & Gertz. "The focus of the market has shifted since worries about Greece and Europe have returned."
BANK AUDIT
A Spanish government spokeswoman said she was unaware of any pending announcement on a bank rescue, referring to Prime Minister Mariano Rajoy's statement on Thursday that he was awaiting results of an audit of the banks.
An International Monetary Fund report on Spanish banks due for release on Monday will show the lenders need a cash injection of at least 40 billion euros ($50 billion), sources in the financial sector said on Thursday.
MSCI's world equity index <.miwd00000pus> was down 0.67 percent at 299.14, but is still set to post its best week since late January, due largely to the belief that central banks will be forced into action sooner or later by slowing growth.
Flagging demand from the euro zone caused a big drop in German exports and imports in April, trade figures on Friday showed, while a deluge of May Chinese data due over the weekend is expected to paint a grim picture.
Germany's Bundesbank raised its 2012 growth outlook for Europe's largest economy on Friday, saying it expected global and domestic demand to make up for slowing business with debt-strained euro zone member states.
Germany has driven growth in the euro zone, but recent data showed it was not immune to the crisis as slowing demand from abroad drove down industrial orders and output.
"Provided that the sovereign debt crisis in the euro area does not escalate, I assume that expansionary forces will keep the upper hand," said Bundesbank President Jens Weidmann.
In the debt market, Spanish government bond yields and prices of safe-haven German debt rose after Fitch cut Spain's credit rating by three notches.
"The downgrade was not totally out of the blue. It's been on the cards," one trader said. "But with this talk about bailouts, it could still get nasty."
Spanish 10-year government bond yields traded 5 basis points higher on the day at 6.16 percent, having fallen to 6 percent on Thursday after a bond sale went better than expected.
Bund futures were 68 ticks higher on the day at 143.74, with 10-year cash yields 7 basis points lower at 1.314 percent.
The euro fell 0.75 percent to $1.2461, retreating from a two-week high of $1.2625 hit on Thursday after the surprise interest rate cut by the Chinese central bank.
"Some people had high expectations of Bernanke, which he didn't match. The shock would have been much larger if it had not been for the Chinese rate cut," said Ayako Sera, market economist at Sumitomo Mitsui Trust Bank.
The euro fell 1.2 percent against the yen to 98.80 yen. The safe-haven Japanese currency gained broadly as market sentiment soured, with the dollar falling 0.5 percent to 79.22 yen.
Japanese authorities conducted "rate checks" in the market shortly after last week's weak U.S. payrolls data triggered a sharp yen rise, according to sources with direct knowledge of the matter, a sign they were gearing up for intervention to shield the economy from the damage of a yen spike.
(Reporting by Richard Hubbard and David Stamp; Editing by Will Waterman)
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