Moratorium NOW! Coalition conference held at UAW Local 22 on "How the Banks Destroyed Detroit." The event took place on June 11, 2011. (Photo: Abayomi Azikiwe), a photo by Pan-African News Wire File Photos on Flickr.
Last updated: August 4, 2011 9:34 pm
Global stock sell-off accelerates
By Telis Demos in New York
Thursday 21.30 BST.
The S&P 500 index and US Treasuy yields experienced their biggest decline since the financial crisis, as global investors shunned risk after central bankers failed to stem fears of rapidly slowing growth.
The day’s move was kicked off by a steep fall in the yen after Tokyo intervened to weaken the currency in the latest move by a central bank to combat the impact of market turmoil. It was accelerated by news that the European Central Bank would return to the market to buy bonds issued by troubled debtor nations.
Despite the extra liquidity those moves provided to markets, traders refused to break their focus on economic hopes that have been lowered by a combination of western government austerity, slowing global industrial production and a looming US jobs report.
“The ECB’s action may have helped solve short-term funding concerns but it offers no real solution to the debt crisis or the economy. That is pushing Treasuries higher and higher, and equities are cratering,” said Christian Cooper, head of dollar derivatives at Jefferies.
The FTSE All-World equity index fell by 4.2 per cent, to its lowest level since December, while crude oil gave up six months of gains. Many of the major indicies were in technical corrections, off more than 10 per cent from their 2011 peaks, including the S&P 500 index.
The S&P 500 index, led lower by a sharp fall in energy shares, dropped more than it did the first trading day after Lehman’s collapse, 4.8 per cent. It was the steepest one-day drop since February 2009, before the market bottomed in March of that year.
The decline was spearheaded by energy shares, who were responding to a 6 per cent drop in crude oil prices. The twin central bank actions have driven up the value of the US dollar, putting sharp pressure on crude prices and industrial commodities, as well as the companies that rely on those prices to meet their earnings expectations.
The sell-off in energy groups dragged down Brazil’s Bovespa index, which fell the most globally, more than 6 per cent at one point. The FTSE Eurofirst 300 fell 3.3 per cent as resource groups in particular endured heavy selling.
“We’re looking at a very weak economy that’s already had so much stimulus,” said Adam Parker, US equity strategist at Morgan Stanley. “When you sell energy and materials, you’re saying the chances of recession are going up.”
The dollar has risen 1.7 per cent on a trade-weighted basis, while the yen has dropped 2.7 per cent to Y79.07 – although it has fallen back from Y80, suggesting the strength of flows into “safe haven” currencies.
Gold’s drop is perhaps the best news of the day, if only because it offers some counterpoint to a sharp fall in inflation expectations. The key measures of inflationary hopes, the so-called “break-even” rates measuring the spread between nominal and inflation-protected bonds, are falling a lot today.
The one-year break-even is at its lowest since last October, and the two-year is at its lowest since December. These measures are critical to the Federal Reserve’s thinking about a possible “QE3” or “QE2.5”, given that it was deflationary fears that they were targeting.
Notably, they are not below where they were before last August, when Ben Bernanke started the easing round in his Jackson Hole speech.
The especially important five-year rate checked by the Fed has held up best of all, although it too is moving toward lows for the year.
Michael Pond, strategist at Barclays Capital, also points out that some of the decline is due to a flight to safety in nominal bonds, rather than changing views of inflation.
But, given that Jackson Hole is looming again on August 26, and the direction of economic data, these will be watched closely in the days ahead.Industrial commodities’ benchmark copper has fallen 2.1 per cent. The sharpest decline in energy is in US WTI crude, down 6.1 per cent to $86.42 a barrel, its lowest since February. Brent crude is down 5 per cent to $107.60 a barrel.
Only gold is sitting out the rally, having already hit a new record of $1,681. It is now trading at $1,645, down 1 per cent on the session, although part of its weakness may be due to selling pressure from people funding margin positions in energy.
Core bond yields continue to soften, with the 10-year Treasury yield falling to its lowest point since October 2010, at 2.41 per cent, a decline of more than 20 basis points. It was the biggest one-day drop in yields since February 2009. Ten-year Bunds offer just 2.31 per cent, a dip of 10 basis points.
Meanwhile, short-term rates went negative, as measured by one-month Treasury bills, thanks in part to an announcement by Bank of New York Mellon that it would begin charging fees for cash deposits, sending hundreds of billions of dollars into the market. US two-year yields have fallen to 25 basis points, a record low.
Intervention by the BoJ comes a day after the Swiss National Bank tried to push its currency down from record levels by cutting interest rates and implying that it stood ready to intervene if necessary.
The impact of the SNB’s actions initially also proved shortlived, and the swift paring of the Swissie’s declines on the day speaks to the weight of fear in the market that has driven funds into perceived havens such as the Swiss franc and yen.
Investors are becoming increasingly concerned about the health of the global economy and worried that governments’ attempts to tackle fiscal difficulties – particularly in Europe as sovereign debt contagion spreads to Italy and Spain – will only exacerbate the slowdown.
This week’s worldwide manufacturing and service sector surveys have shown waning activity and hopes are not high that Friday’s sentiment-setting US non-farm payrolls numbers will break the cycle of disappointing data.
Many investors are thus looking to central banks to pick up the stimulatory baton once again. As part of its package to weaken the yen, the Bank of Japan also announced more quantitative easing, increasing its asset buying programme from Y10,000bn to Y15,000bn, a move that helped the Nikkei 225 gain 0.2 per cent when the rest of Asia fell 1.5 per cent.
Jean-Claude Trichet, ECB president, implied in the post-decision press conference that further debt purchases would be made but did not say whether this would include the likes of Italian paper, which has been under pressure of late. Rome’s bond yields vacillated sharply and benchmark’s are now 6.15 per cent. The euro is down 1.4 per cent versus the dollar to trade at $1.4133 after the ECB said it would boost liquidity in the bloc.
In one relative bright spot, Madrid was able to sell €3.31bn of three and four-year paper, against a maximum target of €3.5bn. The result was relatively well received by the market and Spanish benchmark 10-year yields fell 15 basis points to 6.1 per cent, reflecting a slight easing of tensions for some in the sector. The general market malaise has seen yields return to 6.3 per cent, however.
Additional reporting by Jamie Chisholm in London
Copyright The Financial Times Limited 2011.
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