While you were sleeping: There was a flight to safety

Friday 18th December 2009

Lingering concerns about credit quality and mixed economic news led investors to park money in a safe-haven move in the U.S. dollar, pushing it to a three-month high against the euro and taking the wind out of equities and commodities.

Shares in Europe slid in the wake of S&P’s second downgrade on Greece and worries about government debt in Spain and the U.K. took their toll on the financial sector.

The pound fell against the dollar on news of an unexpected drop in retail sales in Britain in November. Copper, crude oil and gold all declined.

On Wall Street, shares were paced lower by an analyst’s lowered profit forecasts for both Goldman Sachs and Morgan Stanley and by Citigroup’s decision to sell shares at a discount to help repay financial aid from the U.S. government.

In another sign of the stop and start economic recovery in the U.S., jobless claims unexpectedly rose last week. However, that report was countered in part by an increase in the index of U.S. leading indicators and data showing that manufacturing in the Philadelphia region accelerated for a fifth month.

Harvard University economics professor Martin Feldstein cast doubt on the outlook for the U.S. economy, saying in a Bloomberg Radio interview that: “It will be a while before we have enough information to know if the recession ended.”

In a separate interview with Bloomberg News, Alan Greenspan said the rally in U.S. equities in particular since March was reducing the need for more stimulus efforts by the government, saying capital gains in shares was proving a far greater boost to the economy than what the U.S. government had spent so far.

In early afternoon trading, the Dow Jones Industrial Average slid 0.94% to 10,342.80, the S&P 500 Index shed 0.89% to 1099.36 and the Nasdaq Composite Index dropped 1% to 2184.81.

The Chicago Board Options Exchange Volatility Index, or VIX, which is known as Wall Street’s ‘fear gauge’ rose 7.9% to 22.16.

The Dow Jones Stoxx 600 Index fell 1.1% to 247.63, snapping its longest winning streak since September. The FTSE 100 Index dropped 1.9% to 5217.61, Germany’s DAX Index shed 1% to 5844.44 and France’s CAC 40 Index lost 1.2% to 3830.82.

Banks paced equities lower in Europe led by Pireaus Bank and Alpha Bank in Greece, Lloyds in the U.K. dropped 7.3% and Commerzbank in Germany fell 4.1%.

Shares in mining stocks also fell, alongside commodities prices. Xstrata fell 5% and Antofagasta fell 4%.

U.S. crude for January delivery fell 39 cents to US$72.27 a barrel by 1502 GMT after falling more than US$1 earlier. ICE Brent futures shed 86 cents to US$73.43 a barrel.

The oil market could get a boost from the forecast for unseasonably cold early winter weather along the U.S. east coast.

Spot gold was bid at US$1114.40 an ounce at 1353 GMT, against US$1137.80 late in New York on Wednesday. Earlier it touched a low of US$1112.50.

U.S. gold futures for February delivery on the COMEX division of the New York Mercantile Exchange fell US$21.00 to US$1115.12 an ounce.

Copper for March delivery dropped 6.4 cents, or 2%, to US$3.1415 a pound at 10:49 a.m. on the New York Mercantile Exchange’s Comex unit. A close at that price would be the biggest loss for a most-active contract since November 27.

The Reuters/Jefferies CRB Index, which tracks 19 raw materials, fell 1.28% to 275.18.

The U.S. Dollar Index, a gauge of the U.S. currency against six counterparts, rose as much as 1.2% to 77.89, its highest since early September. The advance was linked to a closing out of bets against the greenback.

The dollar appreciated to US$1.4316 per euro before trading at US$1.4318 at 11:58 a.m. in New York, from $1.4531 yesterday. The U.S. currency was at 90.35 yen, from 89.78 yen, after earlier rising to 90.26, the strongest level since December 7. The euro weakened to as low as 130.68 yen, before trading at 129.37 yen, from 130.46 yen.

The euro’s decline accelerated after breaking a series of “option barriers” around US$1.45 and US$1.44, according to analysts at BNP Paribas. The drop is becoming “stretched” from a technical standpoint, and the next support comes in around US$1.4235, currency strategists at Credit Suisse Group AG led by Ray Farris in London wrote in a note to clients today.

U.S. Treasuries were held in check by the Philly Fed report. The price on benchmark 10-year Treasury notes was last up 18/32, compared with a 20/32 gain shortly before the data. Their yield, which moves inversely to their price, was last at 3.53 percent, nearly the same level before the data and lower than the 3.60 percent late on Wednesday.

Businesswire.co.nz

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