World shares drift overnight

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Without a fresh catalyst to propel equities higher or lower, share prices have drifted overnight ahead of the European Central Bank's meeting later this week and the latest US payrolls report.

In afternoon trading, the Dow Jones Industrial Average was down 0.14 per cent and the Standard & Poor's 500 Index was off 0.19 per cent. The Nasdaq eked out a 0.13 per cent gain.

"Markets are in a highly volatile state right now, making this a difficult market to make a lot of progress in," Hayes Miller, the Boston-based head of asset allocation in North America at Baring Asset Management, which oversees about US$50.6 billion, told Reuters.

"We're going to go back and forth with strong weeks like last week and weak ones like what we had before that."

It's not as if there's any panic. The Chicago Board Options Exchange volatility index bumped up 2.3 per cent today to 16.2, a still relatively low level that suggests investors aren't wary of much of anything.

And the latest news out of Europe on the debt front has had little impact. Today Moody's Investors Service downgraded Portugal's ratings to junk status, saying the country may be headed in the same direction as Greece. In other words, European Union and International Monetary Fund negotiators will need to rethink the bailout package for Portugal.

"Portugal was on thin ice as well as Greece," Sean Murphy, a Treasury trader at Societe Generale in New York, told Bloomberg.

The euro extended declines following the downgrade, weakening as much as 0.9 per cent to US$1.4404.

While equities and the euro slid, US Treasuries snapped a five-day losing streak. The yield on the 10-year Treasury note dropped six basis points to 3.13 per cent.

"If you're looking to park cash right now, then the (US) dollar is looking quite cheap and Treasuries are always the safehaven of choice," Alex Tedder, who helps manage about US$13 billion in global stocks at American Century Investments in New York, told Bloomberg.

US government bonds also got a boost from reports of rising debt issues for local governments in China and speculation that Chinese authorities might increase interest rates yet again to curb lending activity.

Credit markets are signalling growing concerns that bad loans in China will force the government to bail out banks owed more than 10 trillion yuan by local authorities, Bloomberg reported.

Five-year credit-default swaps on the People's Republic of China surged by the most in seven months in June, faster than advances in the other so-called BRIC nations of India, Brazil and Russia.

It was proving a positive session for both oil and gold as investors sought out some safer haven assets.

In addition, Barclays Capital has boosted its forecast for crude for 2012. It raised its 2012 forecast for Brent by US$10 to US$115 per barrel, and upgraded its 2012 forecast for US crude by US$4 to US$110. The bank left its Brent forecast for 2011 at US$112 but cut its 2011 forecast for US crude by US$6 to US$100.

Brent futures for August rose US$2.95 to US$114.34 a barrel by 1748 GMT, having moved above the 20- and 40-day moving averages, according to Reuters.

US crude gained US$2.40 to US$97.34 a barrel, pushing above the 20-day moving average and with the US$97.44 intraday peak nearing the 40-day moving average of US$97.71.