GLOBAL MARKETS-Euro up after S&P Japan rating cut, ECB warning

                                
  
                                
 * S&P cuts Japan's long-term debt rating
                                
 * Bini Smaghi expresses inflation concern
                                
 * Euro rises, yen falls
                                
 * Global share prices slightly stronger
                                
 By Daniel Bases
                                
 NEW YORK, Jan 27 (Reuters) - The euro hit two-month highs
on Thursday against the U.S. dollar and yen after a credit
rating downgrade for debt-ridden Japan and more hawkish policy
talk in Europe, while global share prices edged higher.
                                
 Wall Street stock indexes held near 29-month highs as
strong results from heavy equipment maker Caterpillar Inc
<CAT.N> counterbalanced a surprising rise to 454,000 in new
claims for weekly U.S. jobless benefits, the highest level
since late October. For details, see [ID:nN27280337]
                                
 Standard & Poor's surprised markets by downgrading Japan's
long-term sovereign debt one notch from AA to AA minus, citing
the country's ballooning deficit, which it said will further
reduce Tokyo's already restricted fiscal flexibility.
                                
 The move will have a limited impact on Japan's ability to
raise money on financial markets, but it raised a red flag with
investors about other leading countries' fiscal imbalances.
                                
 "It is not a big a deal as a downgrade of a major European
country or the U.S. as most of Japan's debt is financed
internally, but still, it's a big story," said Omer Esiner,
chief market analyst at Commonwealth Foreign Exchange in
Washington.
                                
 Among the Group of Seven industrial countries, the United
States, Britain, Italy and France are all carrying large
deficits. Only Germany is looking sound and even it felt an
impact as the cost of insuring its debt against default over
five years hit its highest since March 2009.
                                
 Commodity prices were mostly lower as the prospect of
rising interest rates in Europe grew after European Central
Bank member Lorenzo Bini Smaghi said an expected rise in
imported goods inflation could not be ignored. [ID:nFLARCE7IJ]
                                
 "The ECB has started to show more concern about secondary
price pressures, and the market has acknowledged that," said
Gavin Friend, currency strategist at nabCapital.
                                
 The euro rose 0.13 percent at $1.3715 <EUR=>, off the
earlier two-month high of $1.3759, while it traded up 1 percent
against the yen at 113.76 <EURJPY=>.
                                
 Bini Smaghi's comments went to the heart of current
investor concerns, highlighting the potential for inflation to
prompt central banks to raise interest rates at a time when low
rates are seen as key to boosting renewed economic growth.
                                
 His comments also further highlighted a policy divergence
with the United States, which on Wednesday left in place
rock-bottom interest rates and gave no indication of backing
away from its loose policies. [ID:nN25283937]
                                
 STOCKS EDGE UP
                                
 Global stock markets were mostly higher but only just.
                                
 In New York trade, the major indexes were mixed but also
little changed on the day.
                                
 The Dow Jones industrial average <.DJI> rose 6.85 points,
or 0.06 percent, at 11,992.29. The Standard & Poor's 500 Index
<.SPX> however fell 0.43 points, or 0.03 percent, at 1,296.20.
The Nasdaq Composite Index <.IXIC> gained 5.14 points, or 0.19
percent, at 2,744.64  
                                
 Companies including Caterpillar, Tyco International Ltd
<TYC.N> and Eaton Corp <ETN.N> posted strong sales and
earnings, and investors were looking ahead to their full-year
forecasts for signs that industrial demand would begin to
affect the wider economy.
                                
 Also, contracts for pending sales of previously owned homes
rose faster than expected in December, data from a real estate
trade group indicated.
                                
 World stocks as measured by MSCI <.MIWD00000PUS> were up
around 0.03 percent. The pan-European FTSEurofirst 300 <.FTEU3>
index of top shares was up 0.26 percent, led by strength in
mining stocks.
                                
 Before the S&P announcement, Japan's Nikkei average <.N225>
gained 0.7 percent.
                                
 Euro zone government debt yields rose as investors sold
bonds, and the premium investors demand to hold paper from
peripheral euro zone nations rather than German debt also
widened.
                                
 Benchmark 10-year U.S. Treasuries fell 10/32 of a point in
price to yield 3.45 percent <US10YT=RR>.
                                
 U.S. light sweet crude oil <CLc1> fell $1.08 to $86.25 per
barrel, and spot gold prices <XAU=> fell $21.79 to $1323.70.
                                
(Additional reporting by Nick Zieminski, Ryan Vlastelica,
James B. Kelleher, Marc Jones, James MacKenzie, Jeremy Gaunt,
Joanne Frearson and William James; Editing by Padraic Cassidy)