Tuesday 21:15 GMT. Markets showed signs of stabilising after resurgent eurozone debt angst sparked a broad sell-off in risk assets on Monday, pushing global investors out of stocks and into US Treasuries.
Moves in equities, commodities and currencies were less frenetic on Tuesday than those seen in the previous session, with a strong set of consumer-focused US data helping Wall Street hold its ground as investors absorbed comments from Fed chairman Ben Bernanke.
Stock indices were mixed, leaving the FTSE All-World index, which last week closed at a new four-and-a-half year high, down for a second day at 230.33.
Better than expected US consumer sentiment, house price and sales data gave support to the S&P 500, which rose 9 points to 1,496. But this was only a portion of Monday’s 28-point stumble, its biggest fall since November, which came just a week after the benchmark hit a five-year high of 1,530.
The dollar index rose 0.2 per cent and growth-focused products were muddled, with copper up 0.2 per cent to $3.55 a pound and Brent crude down 1.5 per cent to $112.75 a barrel.
The inconclusive Italian general election has sparked concerns that one of Europe’s largest economies will have difficulty tackling its budget problems, triggering a cascade of interlinked moves as traders try to pare long “risk” positions following several months of gains.
Italy’s FTSE MIB stock index slid 4.9 per cent, while Rome’s implied borrowing costs have surged 38 basis points to a three-month high of 4.87 per cent as the prospect of another election loomed.
The euro stabilised, however, and was little changed at $1.3058, though still close to a seven-week low, as the contagion spread to Spain.
Madrid’s 10-year bond yields rose 17bp to 5.34 per cent. They earlier hit a two-month peak of nearly 5.6 per cent, but such levels should be put in context. Just last summer, Rome and Madrid’s yields were easily more than 150bp higher before the European Central Bank implied it stood ready as a bond market backstop.
Nevertheless, the tension among dealers was palpable.
“We expect risky assets to remain under pressure until the picture in Italy becomes clearer. Safe-haven assets, such as the US dollar, US Treasuries and German Bunds, will likely be the beneficiaries,” said analysts at Barclays in a note.
Indeed, much of the previous day’s rush into perceived fixed income bolt-holes seemed to remain in place. But US Treasuries erased earlier losses and traded slightly higher, pushing 10-year yields up 2 basis points at 1.88 per cent. Bunds rose, pushing yields down 11bp to 1.47 per cent, near a seven-week low.
But gains in Treasuries were limited as they came on the back of fairly dovish comments on prospects for the US economy from Ben Bernanke, as the Fed chairman testified before Congress.
As well as warning about the possible negative impact of the upcoming sequestration, Mr Bernanke stressed that he thought the benefits of the Fed’s ongoing asset purchase programme outweighed the costs – potentially salving some market fears that the Fed was due to end its $85bn-a-month QE scheme sooner than thought.
Paul Ashworth, chief US economist at Capital Economics said: “The FOMC is paying a lot more attention to the potential costs of continuing with its quantitative easing this year. In particular, the FOMC is worried that a further expansion of its balance sheet could trigger a rapid rise in actual or expected inflation.”
The asset that seemed to be most energised by Mr Bernanke’s comments was gold, which turned an initial decline into a $22 gain, taking the bullion to $1,616 an ounce.
Earlier in Asia, a stronger yen hit Japanese export-orientated stocks, pushing the Nikkei 225 down 2.3 per cent. The Shanghai Composite index lost 1.4 per cent and Hong Kong’s Hang Seng shed 1.3 per cent.
Additional reporting by Jamie Chisholm in London
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