Plunging Greek bonds spook investors

Plunging Greek bonds spook investors
By Jamie Chisholm, Global Markets Commentator
Copyright The Financial Times Limited 2010
Published: April 8 2010 08:48 | Last updated: April 8 2010 16:38
http://www.ft.com/cms/s/0/dc51fa08-42ce-11df-85d6-00144feabdc0.html


16:35 BST: The eurozone’s festering fiscal woes and uncertainty over the speed of US monetary tightening provided investors with an excuse to reduce riskier bets on Thursday.

The FTSE All World index fell 0.6 per cent and commodities pulled back from multi-month peaks as another plunge in Greek sovereign bonds raised concerns that the nation’s debt crisis was spiralling out of control. Worse than expected US weekly jobless claims further dented optimism.

“Investors raised the question over whether the [Greek] situation might cascade into something worse at a time when perceptions of a rosy economic scenario remain vulnerable to a reversal of favorable factors,” said Andrew Wilkinson, senior market analyst at Interactive Brokers.

Traders also had an eye on the latest decisions on interest rates from the European Central Bank and the Bank of England.

Neither altered its main rate, but the ECB reiterated it would extend the relaxed rules for accepting Greek debt as collateral - a confirmation that will be welcomed in Athens, where the position of the banking system appears increasingly precarious.

Though apparently contained – the bonds of other so-called peripheral eurozone nations have held up relatively well of late – the Greek crisis clearly still has the capacity to rattle investors.

In addition, the prospects for a shift in US monetary policy are also once again exercising minds. A sell-off on Wall Street on Wednesday was partly blamed on some forceful comments from Thomas Hoenig, president of the Kansas City Federal Reserve.

Mr Hoenig, a known hawk, said he thought the Fed should consider raising US rates “some time soon” in order to prevent asset bubbles. He even specified a move to 1 per cent from the current 0-0.25 per cent.

Around the same time, however, Fed chairman Ben Bernanke was playing down the improvement in the US labour market and striking a generally downbeat tone. The latest consumer credit data in the US certainly supports the view that the consumer remains reticent.

But whether traders gave greater weight to Mr Hoenig or were in fact worried by Mr Bernanke’s cautious assessment, the end reaction suggests investors recognised the time was ripe for a sell-off after recent gains.

● Greek sovereign debt came under further pressure, with traders apparently unconvinced Greece can manage its budget needs without recourse to its eurozone colleagues. The yield on the 10-year note jumped 25 basis points to 7.38 per cent - it had gone as high as 7.58 per cent, the highest since November 1998. The spread with Bunds, which indicates the premium Athens must provide to sell its debt, rose to 428 basis points.

The cost of insuring Greek debt against default, as measured via credit default swaps, rose more than 10 per cent to a record high of 448.5 basis points. The yield on 2-year bonds, which reflects Athens’ ability to access shorter term funding, jumped 73 basis points to 7.29 per cent, having at one point breached 8 per cent.

● Wall Street added to the previous session’s 0.6 per cent decline, retreating further from cyclical highs with a drop of 0.3 per cent, despite stronger-than-expected retail sales reports.

Bourses in Europe followed the trend lower, the FTSE Eurofirst 300 dropping 0.9 per cent, and London’s FTSE 100 off 0.9 per cent, with industrial metal and mining shares, and also banks, under the cosh.

Worries over Greece were a considerable drag, and the Athens stock market lost 3.1 per cent as the country’s banks lost nearly 7 per cent in early trading.

● Asian stock markets also felt the force of Wall Street’s late slide, the FTSE Asia-Pacific index retreating from an 18-month high to drop 0.5 per cent. An unexpected fall in machinery orders added extra impetus to the profit-taking in Tokyo, and the Nikkei 225 fell 1.1 per cent.

Hong Kong fell 0.3 per cent and Shanghai lost 0.9 per cent as Beijing continued to drain liquidity from the market.

The Bangkok stock market finally cracked in the face of rising tensions in the Thai capital. The SET index tumbled 3.5 per cent after a state of emergency was declared by the government.

● The euro managed to bounce back from early declines as forex players - though noticeably not their debt-trading cousins - took heart from Jean-Claude Trichet, ECB president, telling a news conference that “default is not an issue for Greece”. The single currency rose 0.1 per cent versus the dollar to $1.3349, but remained close to multi-month lows.

The euro’s meagre revival left the dollar 0.1 per cent lower on a trade-weighted basis at 81.54.

● More highly rated government bonds took advantage of the cautious mood stalking the rest of the market – usually a boon for such perceived havens. The US 10-year benchmark note built on the bounce it received overnight following a successful $21bn auction, and its yield fell 2 basis points to 3.84 per cent. The yield had breached 4 per cent on Monday. The Treasury will auction $13bn of 30-year bonds later.

● Gold consolidated above the $1,140 an ounce level that has proved something of a ceiling for much of 2010. Gold bugs will be particularly pleased that the precious metal has made its recent advance during a period of dollar strength, suggesting store of value and haven status characteristics are carrying greater weight. The bullion was again firmer on Thursday, adding 0.2 per cent to $1,150, close to a three-month intraday high.

● The broader commodity complex struggled as risk appetite waned. Copper, the industrial bellwether, lost 1.1 per cent to $7,863 a tonne.

Oil, which had briefly breached $87 a barrel on Wednesday before succumbing to a late “risk-off” reversal, dipped another 1.2 per cent to $84.84.


What’s affecting risk appetite

Risk off

● Greece: debt spiral accelerates.

● Hoenig : Kansas chief highlights need for asset bubble pinprick.

● Geopolitics: Thailand and Kyrgyzstan situations deteriorate.

Risk on

● Auction: US 10-year sale went well, calms fears of spiking bond yields.

● Renminbi: hopes China will allow appreciation soon.