While you were sleeping: Euro worry deepens

Wednesday 1st December 2010

Concern about Europe's fiscal crisis was at the forefront of investors' minds today again as they sold equities, the euro and the government debt of Belgium, Hungary, Italy and Spain.

The weekend bailout of Ireland and its banks has done nothing to ease the threat of contagion, in fact it appears to have had the opposite effect.

"We are starting to see many warning signs of global contagion, including lower US stock prices," Zach Pandl, economist at Nomura Securities International in New York, said.

In morning trading, the Dow Jones Industrial Average slid 0.44%, the Standard & Poor's 500 Index declined 0.62% and the Nasdaq Composite dropped 1.11%.

The CBOE Volatility index, Wall Street's so-called fear gauge, jumped 5.76% to 22.77.

"The idea of a contagion is being taken more seriously both in the European Union and how it might affect [US] markets," David Katz, principal & senior portfolio strategist at Weiser Capital Management LLC, said.

The 85 billion euro emergency loan package for Ireland and plans for a permanent system to resolve debt crises announced on Sunday seems only to have renewed investors’ focus on how deeply in debt some European governments are.

In Europe, the Stoxx 600 ended the session 0.1% lower. Two stocks fell for each one that rose.

The euro fell 0.7% to US$1.3035, a fresh two-month low with more losses forecast.

As a sign of the increasing premium investors are demanding to hold European debt, the difference in yield between Italian 10-year bonds and German bunds widened to as much as 212 basis points.

The Dollar Index, which measures the greenback against a basket of six major currencies, rose 0.38% to 81.15. The greenback is rising in a safe-haven bid and it received an added boost overnight from a report confirming a rebound in US consumer confidence, as the holiday shopping season gets into full swing.

European Central Bank President Jean-Claude Trichet said investors were underestimating policy makers' determination to bolster the euro zone's stability.

"I don't believe that financial stability in the euro zone could really be called into question," Trichet told lawmakers in Brussels today. Observers “are tending to underestimate the determination of governments.”

The deepening worry about Europe's spreading fiscal problems drew investors to the relative safety of US Treasuries, pushing 30-year bond yields to their lowest in three weeks.

Today, the US Federal Reserve bought US$6.8 billion of notes due from 2014 to 2016 after purchasing US$9.4 billion of debt yesterday. The central bank is buying Treasuries every day this week as part of its efforts to continue to bolster the world's biggest economy.

The iTraxx SovX index of Western European credit default swap prices rose to an all-time high.

"Credit markets dismissed news of a definite bailout for Dublin, with the broader market still reluctant to turn positive on the monetary union," said VTB Capital in a note.

Spot gold was trading at US$1,385.50 an ounce at 1643 GMT against US$1,368.09 late in New York on Monday. US gold futures for December delivery advanced US$20.70 an ounce to US$1,386.70.

"Even the strong US dollar could not push gold in dollar terms lower," Eugen Weinberg, an analyst at Commerzbank, said. "This suggests that the US dollar is not perceived as the primary safe haven right now, but rather gold."

Spot gold was heading for a fourth consecutive month of gains, matching a similar winning run from November 2008. Bullion is up around 26.4% in the year to date.

BusinessDesk.co.nz

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