While you were sleeping: Risk aversion rises on EU woes

Thursday 31st May 2012

Anxiety about the euro zone's outlook sent investors piling into the safety of German bunds, pushing the yield on Germany's two-year note to zero for the first time. US Treasuries also received a lift.

"It's just panic," David Keeble, head of fixed-income strategy at Credit Agricole CIB in New York, told Bloomberg News. "We have so few safe assets in the world that just a small move in risk sentiment causes quite strange and outsized reactions. Until we've got the Greek election out of the way we're just going to be in this horrible world."

In afternoon trading in New York, the Dow Jones Industrial Average fell 1.09 percent, the Standard & Poor's 500 Index dropped 1.21 percent and the Nasdaq Composite Index shed 1.10 percent. The shares pared some earlier losses.

Confidence about Europe's economic outlook is sliding. An index of executive and consumer sentiment in the euro zone fell to 90.6 in May from a revised 92.9 in April, according to the European Commission. The larger-than-expected drop puts it at the weakest level since October 2009.

"We're being held hostage by Europe, by the increasing tensions in Spain," John Kattar, chief investment officer at Eastern Investment Advisors in Boston, told Reuters. "We're back to a risk-off mode, with cyclical sectors getting hit really hard."

Europe's Stoxx 600 Index ended the day with a 1.5 percent drop for the session. Spain's IBEX 35 Index sank 2.6 percent; Greece's ASE Index slumped 3.2 percent.

The euro fell 0.9 percent to US$1.2394 and shed 1.6 percent to 97.87 yen. This month, the single currency has weakened more than 6 percent against the greenback and more than 7 percent against the yen.

The Greeks, who are voting in elections on June 17 after a May 6 election failed to produce a new government amid disagreement over the country's international bailout, are looking to change the severity of the austerity measures required to access the rescue funds. The latest opinion poll shows the radical left party in the lead.

A separate poll showed today that 77 percent of Greeks say the terms of the bailout should be revised.

Meanwhile, Italian 10-year yields climbed above 6 percent for the first time since January at a bond sale, while those of Spain moved closer to the 7 percent level that is widely considered unsustainable.

US economic data failed to provide respite today. Contracts to purchase previously owned homes unexpectedly dropped last month, according to National Association of Realtors data. The Pending Home Sales Index, based on contracts signed last month, declined 5.5 percent to 95.5, following a downwardly revised 3.8 percent gain in March.

"The drop in pending home sales is clearly disappointing," Pierre Ellis, an economist at Decision Economics in New York, told Reuters. "It remains to be seen whether this is the beginning of a real downturn."

Another disappointment was Research In Motion's warning it would probably post an operating loss for the first quarter. The company also said it enlisted bankers to review their strategic options. Shares of the company sank both in Canada and in the US.

BusinessDesk.co.nz

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