14/09/2011 16:36
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Worries about the eurozone debt crisis and its impact on the region’s banking system remain the primary focus of investors.
Trading has again been volatile. Investors switched to “risk off” early in the European session following another poor showing out of Asia.
But appetite appears to have been revived by comments from Jose Manuel Barroso, in which the European Commission head said it would soon deliver proposals for the issue of eurozone bonds.
No matter that such bonds face significant political hurdles; traders welcomed the possibility of a product that some consider an important tool for salving the bloc’s sovereign debt stress, as it should provide fiscally-strapped nations easier access to funding. The euro and European bank stocks have rallied.
The FTSE Eurofirst 300 has turned a loss into a gain of 1.5 per cent, while S&P 500 futures, which at one point suggested a 1 per cent drop for the Wall Street open, are now up 0.5 per cent.
The overall mood remains cautious, however, as softer-than-expected US retail sales in August remind dealers that concerns about the outlook for the world’s biggest economy are never far from the surface. The FTSE All-World equity index is up just 0.1 per cent while US Treasury yields are higher but still just shy of multi-decade lows.
The underlying indecisive mood reflects a market parsing the downgrade of two big French banks and as dealers harbour little confidence – “eurobonds” aside – that the bloc’s politicians can prevent sovereign debt contagion.
With that in mind, the prime catalyst for the day is likely to be the outcome of a conference call between Greek prime minister George Papandreou, German chancellor Angela Merkel, and French president Nicolas Sarkozy in which the trio will discuss Greece’s funding difficulties.
Credit markets are all but predicting Athens will be forced to default and it is arguably likely that the outcome has been discounted by the majority of investors. It is thus the form of any such action and its contagious properties which are most exercising traders, with pessimists saying it could trigger another banking crisis, just three years after the turmoil delivered by Lehman Brothers’ demise.
Marco Buti, European Commission director general for economic and monetary affairs, was quoted by Reuters on Wednesday as saying that the orderly restructuring of Greek debt is an illusion, and that “risk of contagion is enormous”.
These issues are being expressed in Moody’s cutting of Credit Agricole’s and Societe Generale’s credit ratings, in which the agency cited the banks’ exposure to the Greek economy. But Europe’s banking sub-index has turned a 2 per cent loss into a small advance, as analysts consider Moody’s accompanying comments were nowhere near as downbeat as some had feared.
Indeed, Moody’s move had been expected and this, coupled with the spark provided by Mr Barroso’s announcement, has helped the euro move back into the black with a gain of 0.2 per cent to $1.3704.
However, elsewhere in the forex space growth-linked currencies are struggling on continued worries about the global economic outlook, with the Korean won, down 2.6 per cent, bearing the brunt.
Little surprise, then, that commodities are also feeling the downdraft. Copper is off 0.5 per cent to $3.94 a pound and Brent crude is struggling to gain traction with a rise of just 0.4 per cent to $112.32 after the International Energy Agency cut its demand forecast.
The Barroso “eurobond” comments and more talk of global investment into the eurozone have helped ease stresses in the bloc’s debt complex. Italian benchmark yields initially hit 5.77 per cent but are now down 7 basis points to 5.65 per cent. News that the Italian government has won a confidence vote on its austerity package is encouraging buying.
Consequently, havens are losing some of their early lustre. The yield on the US 10-year notes is up 3 basis points to 2.02 per cent, and the equivalent Bund is higher by 6bp to 1.84 per cent after touching 1.76 per cent.
Trading Post.
When the US sells $13bn of 30-year bonds?on?Wednesday, it will do so with market yields near their lowest levels since January 2009.
Benchmark 10-year yields are providing the most miserly pay-outs in several decades. The lower yields go, the closer the time comes when investors will shift their perception of risk/reward regarding US paper. At some stage, alternatives will become attractive again.
The chart shows the dividend yield on the S&P 500 minus the US 10-year bond yield.
This is a clumsy comparison: equity pay-outs reflect inflation; bond yields are nominal. But many like to use such calculations as a guide for where value may be found.
The last time the gauge went positive was in late 2008, the time of Lehman’s demise. But equities did not trough until March 2009, so the chart’s recent move higher does not necessarily indicate an imminent rebound for shares.
After all, the upcoming third-quarter earnings season may show dividend pay-outs under pressure as the economy struggles.
But it does suggest traders could at least prepare for a relative?change in the?fortunes of bonds and shares.
Worries about the eurozone debt crisis and its impact on the region’s banking system remain the primary focus of investors.
Trading has again been volatile. Investors switched to “risk off” early in the European session following another poor showing out of Asia.
But appetite appears to have been revived by comments from Jose Manuel Barroso, in which the European Commission head said it would soon deliver proposals for the issue of eurozone bonds.
No matter that such bonds face significant political hurdles; traders welcomed the possibility of a product that some consider an important tool for salving the bloc’s sovereign debt stress, as it should provide fiscally-strapped nations easier access to funding. The euro and European bank stocks have rallied.
The FTSE Eurofirst 300 has turned a loss into a gain of 1.5 per cent, while S&P 500 futures, which at one point suggested a 1 per cent drop for the Wall Street open, are now up 0.5 per cent.
The overall mood remains cautious, however, as softer-than-expected US retail sales in August remind dealers that concerns about the outlook for the world’s biggest economy are never far from the surface. The FTSE All-World equity index is up just 0.1 per cent while US Treasury yields are higher but still just shy of multi-decade lows.
The underlying indecisive mood reflects a market parsing the downgrade of two big French banks and as dealers harbour little confidence – “eurobonds” aside – that the bloc’s politicians can prevent sovereign debt contagion.
With that in mind, the prime catalyst for the day is likely to be the outcome of a conference call between Greek prime minister George Papandreou, German chancellor Angela Merkel, and French president Nicolas Sarkozy in which the trio will discuss Greece’s funding difficulties.
Credit markets are all but predicting Athens will be forced to default and it is arguably likely that the outcome has been discounted by the majority of investors. It is thus the form of any such action and its contagious properties which are most exercising traders, with pessimists saying it could trigger another banking crisis, just three years after the turmoil delivered by Lehman Brothers’ demise.
Marco Buti, European Commission director general for economic and monetary affairs, was quoted by Reuters on Wednesday as saying that the orderly restructuring of Greek debt is an illusion, and that “risk of contagion is enormous”.
These issues are being expressed in Moody’s cutting of Credit Agricole’s and Societe Generale’s credit ratings, in which the agency cited the banks’ exposure to the Greek economy. But Europe’s banking sub-index has turned a 2 per cent loss into a small advance, as analysts consider Moody’s accompanying comments were nowhere near as downbeat as some had feared.
Indeed, Moody’s move had been expected and this, coupled with the spark provided by Mr Barroso’s announcement, has helped the euro move back into the black with a gain of 0.2 per cent to $1.3704.
However, elsewhere in the forex space growth-linked currencies are struggling on continued worries about the global economic outlook, with the Korean won, down 2.6 per cent, bearing the brunt.
Little surprise, then, that commodities are also feeling the downdraft. Copper is off 0.5 per cent to $3.94 a pound and Brent crude is struggling to gain traction with a rise of just 0.4 per cent to $112.32 after the International Energy Agency cut its demand forecast.
The Barroso “eurobond” comments and more talk of global investment into the eurozone have helped ease stresses in the bloc’s debt complex. Italian benchmark yields initially hit 5.77 per cent but are now down 7 basis points to 5.65 per cent. News that the Italian government has won a confidence vote on its austerity package is encouraging buying.
Consequently, havens are losing some of their early lustre. The yield on the US 10-year notes is up 3 basis points to 2.02 per cent, and the equivalent Bund is higher by 6bp to 1.84 per cent after touching 1.76 per cent.
Trading Post.
When the US sells $13bn of 30-year bonds?on?Wednesday, it will do so with market yields near their lowest levels since January 2009.
Benchmark 10-year yields are providing the most miserly pay-outs in several decades. The lower yields go, the closer the time comes when investors will shift their perception of risk/reward regarding US paper. At some stage, alternatives will become attractive again.
The chart shows the dividend yield on the S&P 500 minus the US 10-year bond yield.
This is a clumsy comparison: equity pay-outs reflect inflation; bond yields are nominal. But many like to use such calculations as a guide for where value may be found.
The last time the gauge went positive was in late 2008, the time of Lehman’s demise. But equities did not trough until March 2009, so the chart’s recent move higher does not necessarily indicate an imminent rebound for shares.
After all, the upcoming third-quarter earnings season may show dividend pay-outs under pressure as the economy struggles.
But it does suggest traders could at least prepare for a relative?change in the?fortunes of bonds and shares.
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