European Shares Rally Despite Spain Downgrade

European shares and the euro rose on Friday, boosted by hopes of progress towards a solution to the euro zone's debt crisis later this month, shrugging off a credit rating downgrade for Spain.

Tamer inflation figures from top metal consumer China lifted some worries over Chinese demand, boosting metal prices as well as Europe-listed mining shares and adding further upward momentum to the broader equity markets.

G20 finance chiefs and central banks heads from the world's biggest economies meet in Paris on Friday in search for a solution to a deepening crisis that has fanned fears of a global recession.

Financial markets have been more buoyant since a pledge by French and German leaders to come up with a comprehensive plan for ending two years of turmoil, including a programme to recapitalise banks, by an Oct. 23 summit.

The euro was up 0.1 percent at $1.3788 and on track for its best weekly gain in nine months. The common currency dipped overnight on the move by Standard and Poor's to cut Spain by one notch AA-minus, although that only brought its rating into line with rival agency Fitch .

"We see a lot of optimism in the market, there are a lot of promises to develop a global, sustainable solution to the European debt crisis. We saw overnight when Spain was downgraded, there was no lasting impact on euro/dollar," said Lutz Karpowitz, currency analyst at Commerzbank.

Europe's FTSEurofirst 300 advanced 0.6 percent, though Spain's benchmark underperformed, down 0.2 percent.

Yields on 10-year benchmark Spanish government bonds rose 3.5 basis points to 5.251 percent, and the cost of insuring its debt against default rose 10 bps to 389 bps.

BANKS

European bank shares also underperformed the broader market, down 0.4 percent after Fitch cut the credit rating of UBS and may downgrade seven other U.S. European banks because of challenges in the economy and financial markets.

Those European banks include Deutsche Bank , BNP Paribas , Societe Generale and Credit Suisse .

Credit Suisse analysts said European policymakers' plan to shore up confidence in banks needed to be undertaken quickly.

"If those stresses are not relieved soon, it's likely that credit conditions for firms will tighten severely, raising the prospect of a deep euro area recession," they said in a note.

World stocks measured by the MSCI All-Country World Index added 0.2 percent. The index is up 4.3 percent this week, heading for its best weekly gain in more than three months though it is still down 9.9 percent this year.

Copper rose 3.2 percent as the Chinese inflation data lend support to views that Beijing will keep interest rates on hold, sustaining demand from the giant Asian economy.

Brent crude added 1 percent to trade above $112 a barrel and was set for its best weekly rise since early July.

Gold was also in demand, up 0.6 percent and heading for its biggest weekly gain in more than a month.