A look at the day ahead in U.S. and global markets from Mike Dolan

As the S&P500 stalled on Monday at its high for the year, taking a breather from last week's 'peak rates' rally, smaller U.S. stocks picked up the baton and are playing catchup into the yearend.

Global stock markets were off somewhat again on Tuesday, with Moody's decision to cut the outlook for China's sovereign credit rating on Tuesday adding even more pressure to the year's alarming market underperformance there and clocking a five-year closing low for its benchmark stock index.

Monday proved to be a step back for the main U.S. stock indices and bond markets as they consolidated last week's surge on hopes the Federal Reserve is finally done tightening and ready to ease in 2024.

But while some suspect the rates market ebullience may have jumped the gun - and two Fed cuts by June are still more than fully priced - the emphasis merely shifted to small caps that have underperformed all year due to a disproportionate hit from higher borrowing costs.

As the S&P500 fell back about 0.5% from Friday's 2023 closing peak, the Russell 2000 raced 1% higher to its highest in three months - and is now clocking annual gains of close to 7%.

While that's still less than half the main benchmark, a late year rotation in search of value seems to be on - with the year's megacap tech winners scaling back a bit.

The New York FANG+TM index of tech and digital giants has now fallen back for four sessions in a row, shaving about 3% off its peaks since the start of the month but still sustaining eye-popping 82% year-to-date gains.

The likes of Microsoft, Apple, Nvidia and Amazon fell back over 1%, pressured by a modest bounceback in U.S. Treasury yields.

And despite some concerns in Treasuries about a heavy investment grade corporate bond sale diary this week, yields fell back again ahead of Tuesday's bell as attention turned to this week's series of critical U.S. jobs market updates.

October job openings are reported later in the day, before a private sector hiring update for November tomorrow, weekly jobless on Thursday and the national payrolls report Friday.

Oil prices hovered just above 5-month lows, with global demand concerns outweighing some output cuts.#

And demand worries are front and centre for the world's second biggest economy.

China's blue-chip stocks slumped to their lowest since February 2019 amid fears of a possible cut to China's sovereign credit rating cut after Moody's outlook reduction.

Moody's said the downgrade reflected growing evidence that authorities will have to provide more financial support for debt-laden local governments and state firms, posing broad risks to China's fiscal, economic and institutional strength.

"The outlook change also reflects the increased risks related to structurally and persistently lower medium-term economic growth and the ongoing downsizing of the property sector," Moody's said.

The yuan weakened slightly against a broadly softer dollar

The ratings news overshadowed a private-sector survey that China's services activity expanded at a quicker pace in November - confusing a picture where official surveys show the sector contracting for the first time since December.

Elsewhere, the Reserve Bank of Australia held interest rates steady as expected - buying it more time to assess the state of the economy and decide whether to tighten further next year even as the U.S. and Europe are expected to ease. The Aussie dollar fell back.

In Europe, hawkish European Central Bank board member Isabel Schnabel told Reuters the ECB can take further interest rate hikes off the table given a "remarkable" fall in inflation.

Deep annual producer price deflation eased somewhat last month.

And Barclays shares opened 4.5% lower, eventually paring some of the losses, after one of its largest shareholders Qatar Holding moved to sell around 510 million pound ($644 million) of its stock.

U.S. stock futures were marginally in the red before Tuesday's open.

Key developments that should provide more direction to U.S. markets later on Tuesday: * U.S. Oct JOLTS data on job openings, U.S. Nov S&P Global service sector survey * Federal Reserve Division of Supervision and Regulation Director Michael Gibson testifies to Congress on Financial Innovation. European Central Bank President Christine Laggard speaks * U.S. Treasury auctions 3-, 6-month bills * U.S. corporate earnings: JAM Smacker, Auto zone, Descartes Systems, Health, Apportionment, Rent the Runway, Mongo, Stitch Fix, Powell Industries, Dave & Buster's Entertainment, Patronymics, G-III Apparel. Zero Fox, D Market Electronics Lands End, America's CAR-MART.

(By Mike Dolan, Editing by Bernadette Baum; mike.dolan@thomsonreuters.com)