By Jamie Chisholm, Global Markets Commentator
Last updated: September 30 2010 15:45
Thursday 16:35 BST. The eurozone’s debt crisis was the early focus of investor attention after Dublin gave details of its bail-out of Anglo Irish Bank and Moody’s downgraded Spain’s credit rating.
However, traders’ initial caution gave way to optimism following better than expected reports on US unemployment claims and business activity in the Midwest.
The S&P 500 on Wall Street was up 0.8 per cent, pushing above the 1,150 level at the bell. If the rally had held it would have left US stocks up nearly 10 per cent this month and would mean that a decidedly mixed, though improving, few weeks of economic data and the prospect of US Federal Reserve support had helped deliver the best September since 1939.
But clearly such swift gains were too tempting for some, and profit-taking has pushed the S&P down 0.5 per cent.
This has forced the FTSE All-World equity index lower by 0.4 per cent, with further pressure coming from a poor performance in Asia as concerns about eurozone sovereign debt risk hurt financials in the region and a soft close on Wall Street on Wednesday also encouraged end of quarter profit taking.
Many major Asian exchanges were finished for the day by the time the statement on Anglo Irish was released. The reaction in Europe to Ireland’s central bank putting a €34bn tab on the cost of rescuing beleaguered Anglo Irish bank has been fairly phlegmatic, however.
Even though the news comes at a time of heightened anxiety about the eurozone's fiscal position following Wednesday’s rash of anti-austerity protests, the figures revealed provided clarity and were in line with expectations, and this has allowed some easing of market stress gauges.
Irish government bond prices are edging higher, while the cost of insuring Ireland's’ sovereign debt against default – as measured by credit default swaps – has dropped 7 basis points to 467 basis points. Meanwhile, the euro has reversed early losses, and Bunds are edging lower as their haven attraction diminishes.
Even Spanish bonds are gaining ground as investors considered the Moody’s downgrade to have been already discounted by the market.
Factors to Watch. Mainland China and Hong Kong markets will be closed on Friday for the National Day holiday. This will thin trading in the region – a perfect time for the Japanese Ministry of Finance to try a spot of yen intervention just before the European day gets going, perhaps.
Europe. Bourses quickly pared initial losses and forged higher after the US jobless claims were released.
However, Wall Street’s subsequent relapse has left major exchanges in retreat. The FTSE Eurofirst 300 is now down 0.2 per cent, while London’s FTSE 100 lost 0.4 per cent. Dublin stocks rose 0.6 per cent, though Allied Irish Banks shares fell 7 per cent to €0.52 on news of a fresh recapitalisation. The FTSE Global Banks index, is down 0.8 per cent.
Asia-Pacific. Shares retreated as renewed concerns about Europe’s debt crisis hammered financial shares in early trading.
The FTSE Asia-Pacific index is down 0.6 per cent, with Japan’s Nikkei 225 1.9 per cent lower as a strengthening yen hurt exporters and a profit warning from Nintendo spooked techs.
Australia’s SP/ASX 200 off 1.3 per cent. South Korea’s Kospi rose 0.3 per cent and New Zealand’s NZX-50 lost 1.5 per cent.
The Shanghai composite rose 1.7 per cent as property stocks shrugged off new real estate lending restrictions. This left the mainland benchmark up 11 per cent for the third quarter, but it is still one of the worst performing exchanges so far this year, with a drop of nearly 21 per cent as concerns about the central bank’s clampdown on speculative activity continue to nag domestic investors. Hong Kong fell 0.1 per cent on Thursday
Forex. The single currency fell swiftly as traders first absorbed the statement out of Dublin on Anglo Irish Bank, losing 0.5 per cent to $1.3560. However, the single currency soon rebounded when investors realised the news contained no shocks, and as a fall in Germany’s unemployment rate to 7.5 per cent in September improved the mood.
But the switches in Wall Street sentiment also jerked the forex complex around and the euro is now down 0.3 per cent at $1.3584.
The euro’s slide helped a rally in the US dollar index – which tracks the buck against a basket of its peers. The DXY, as it is known, is up 0.2 per cent to 78.97, earlier hitting a fresh eight-month low as the prospect of more Federal Reserve quantitative easing weighs on the currency.
Beijing responded to the US House of Representatives voting for measures to penalise China for keeping its currency weak by allowing the renminbi to fall 0.1 per cent from its recent highs to Rmb6.6903 versus the dollar on Thursday. China warned that the House bill could damage relations between the two nations.
Meanwhile, the yen hit its strongest level relative to the greenback since Tokyo intervened to hobble its ascent two weeks ago. The Japanese unit is up 0.2 per cent to Y83.60 versus the dollar and up 0.5 per cent to Y113.58 against the euro.
Rates. Eurozone peripheral sovereigns are rallying following the Irish statement. Ireland’s benchmark 10-year yields are down 15 basis points to 6.45 per cent; Portugal’s benchmark’s are off 15 basis points to 6.20 per cent; and Spain’s 10-years are down 7 basis points to 4.11 per cent.
Even though equities liked the US jobs data, Treasury yields were initially still lower on expectations for further monetary easing and following a successful batch of auctions during the week. However, bonds finally succumbed once the Chicago activity report hit the tape and the 10-year benchmark yield is now up 3 basis points at 2.53 per cent.
Commodities. Industrial metals are softer, with copper down 0.8 per cent at $8,007 a tonne. Oil is adding to the previous session’s strong gains following a report that US refiners had cut activity back to April levels, rising 1.4 per cent to $78.91 a barrel on Thursday’s better economic data.
Gold has slipped 0.6 per cent to $1,301 an ounce, having hit a new nominal record of $1,315.80. Silver is at $21.67 having touched a new 30-year high of $22.02 an ounce.
The Market Eye
The wholesale “risk-on/risk-off” trade has been less reliable of late, but one of its components, the dollar’s inverse correlation to equities, is making a stirring comeback, writes Jamie Chisholm. Traders have noted that a dip in the dollar index coincides closely with a move higher for the S&P 500. There is some sense to this. A falling dollar is good for US exporters, and a declining buck may also be a sign that investors are not scrambling for perceived currency havens, which they tend to do in times of stress. However, an important factor behind the dollar’s recent decline to 8-month lows is a falling yield differential with major currency peers as markets price in further QE. That’s a symptom of a struggling economy, which is not good for stocks unless one believes the extra liquidity will flow into equities regardless.
Whatever one’s view, according to 4Cast, the one-month correlation between the dollar index and the S&P 500 is a negative 0.92 – with minus 1 showing perfect negative correlation – and these trends have a habit of intensifying as more market participants track and act on them.
Copyright The Financial Times Limited 2010
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