Tuesday, June 08, 2010

Fiscal worries pull rug from under timid rally

Fiscal worries pull rug from under timid rally
By Jamie Chisholm, Global Markets Commentator
Copyright The Financial Times Limited 2010
Published: June 8 2010 08:36 | Last updated: June 8 2010 15:04

Tuesday 14:50 BST. An early positive response to Federal Reserve chairman Ben Bernanke’s remarks that the US economy is improving has been challenged by the resurgence of fiscal worries, hurting stocks and helping to push gold to a new nominal high above $1,250 an ounce.

US equity futures were early in the session suggesting a 1 per cent advance but this has turned into a fall of 0.1 per cent for the S&P 500 after comments from Fitch regarding the budgetary difficulties facing the UK reminded investors about the fiscal headwinds facing the global economy.

Sterling is also lower on the report, while the FTSE All-World equity index is down 0.3 per cent.

An initial bounce in the euro – after Mr Bernanke also made soothing comments about the eurozone’s debt woes – has also faded somewhat, with a public sector strike in Spain illustrating the difficulty governments face in delivering austerity packages.

It had all seemed so different towards the end of the Asian trading session. Mr Bernanke’s calming words, delivered late on Monday, were just what cowed bulls thought they wanted to hear. The S&P 500 has fallen nearly 14 per cent since its cyclical peak at the end of April – the latest leg lower being the result of fears that weak jobs data suggest the US economic recovery is not as robust as hoped.

In addition, concerns about a slowdown in Chinese demand has hurt many industrial commodity prices. Copper, considered the best commodity gauge of construction and industrial activity, has lost almost a quarter of its price in two months.

But copper is again struggling to make much headway on Tuesday, while its precious cousin, gold, hits fresh nominal all-time highs. Some will argue this signals deflation concerns and possibly also is a function of gold finding its haven mojo once again.

Either way, clearly investors are becoming increasingly concerned about global economic prospects given the restriction of the developed world’s fiscal straitjacket. And Mr Bernanke saying things aren’t so bad was unlikely to have a lasting impact in that regard. After all, part of his job is to soothe and to calm, so what else was he going to say?

● Forex. The Fed chairman’s comments aside, the euro also found some early support from confirmation that eurozone finance ministers had agreed the mechanism for operating the bloc’s €750bn stabilisation facility. But a chunk of its advance has been lost. The euro is now up 0.1 per cent at $1.1933, still less than a cent above the previous session’s four-year low.

The US dollar is down 0.2 per cent on a trade-weighted basis at 88.36. Sterling is down 0.5 per cent to $1.4397. It had earlier been helped by some better-than-expected retail sales data, but the report from Fitch, the ratings agency, swiftly pushed the pound lower.

● Asia. The FTSE Asia-Pacific index is up 0.4 per cent, with the region also apparently welcoming Mr Bernanke’s comments and a period of grace for the euro. Sydney rose 1.3 per cent after Rio Tinto and BHP Billiton said they would be able to raise iron ore prices, giving a boost to the recently battered mining sector.

However, gains elsewhere were meagre. The Nikkei 225 in Tokyo has risen 0.2 per cent, and Shanghai added 0.1 per cent. Hong Kong rose 0.6 per cent as some property stocks staged a rebound.

● Europe. Bourses tracked the improvement in US futures to record gains at the open, but these soon faded as banks and retailers stumbled. The FTSE Eurofirst 300 is down 1.3 per cent and London’s FTSE 100 is off 1.3 per cent, having at one point breached the 5,000 level, as the Fitch note and global growth concerns weighed on sentiment. A 6 per cent fall in BP is acting as a dead weight.

Madrid is down 1.6 per cent as the country copes with the public sector strike.

● Debt. Highly-rated sovereign debt is seeing some selling despite the flight from risk elsewhere. The yield on the US 10-year note is up 3 basis points at 3.18 per cent. The US Treasury will auction $36bn of new 3-year notes later on Tuesday.

The debt of some of the so-called eurozone peripheral economies is seeing demand as the rescue package backstops the complex. Yields for Greek 10 years are down 6 basis points at 8.26 per cent, while those of Portugal are lower by 5 basis points at 5.30 per cent.

Spanish sovereigns were under early pressure, but have lately attracted buyers. The yield on Madrid’s 10-year note is down 5 basis points at 4.63 per cent, having earlier hit 4.72 per cent, the highest since September 2008.

● Commodities. Oil is up 0.9 per cent at $72.10. Copper is down 0.6 per cent to $6,097a tonne, having earlier hit a fresh 8-month low of $6,065.

Gold is up 0.6 per cent at $1,246, having earlier hit a new high of $1.251 an ounce.

Follow Jamie Chisholm’s market comments on Twitter: @JamieAChisholm

What’s affecting risk appetite

Risk off

● Fiscal: Fitch reminds UK of tough times ahead, Spanish strikes.

● Copper: global demand proxy hits 8-month low.

● Gold: global haven proxy hits all-time nominal high.

Risk on

● Bernanke balm: a soothing compound for the naive and risk-timid.

● Macro: German April industrial output better than forecast.

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