Global Market Overview

Last updated: August 17, 2012 8:07 pm

Investors cheer Merkel’s support for euro

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A trader gestures while working in the ring at the London Metal Exchange©Bloomberg

Friday 21:30 BST. Most global stocks extended this week’s gains and touched multi-month highs, while demand for top-tier government bonds waned as hopes for more support for the eurozone and signs of improvement in economic data is boosting market sentiment.

The FTSE All-World equity index rose slightly, shy of its best level since the start of May, having gained more than 9 per cent in just 11 weeks.

Other risk asset gauges were mixed. The dollar index added 0.2 per cent, yet copper, which tends to follow a negative correlation to the buck, rose 1 per cent at $3.42 a pound. Gold was little changed at $1,615 an ounce.

The latest boost for the summer “risk asset” rally came from signs that the US economy is gaining some traction, particularly with regard to the country’s long-beleaguered housing market, where building permits rose to a four-year high.

In addition, investors welcomed comments from German chancellor Angela Merkel in which she said the pledge by the European Central Bank to do whatever it takes to support the euro project was “completely in line” with the views of the bloc’s leaders.

The statement appears to have salved fears among some traders that Germany was not on board with the ECB’s strategy of using possible intervention to reduce the borrowing costs of heavily indebted nations such as Spain and Italy.

Madrid’s bond yields, which have become a de facto eurozone stress gauge, remain well below levels of just a few weeks ago.

Towards the end of June, as fretting about Spain’s debt position was at its peak, the country’s two-year borrowing costs jumped to more than 7 per cent. On Friday they were at 3.6 per cent, down 19 basis points on the day. Similarly, 10-year yields, which hit a euro-era record of 7.6 per cent fell to 6.38 per cent, off 9bp according to Bloomberg data.

The euro fell 0.2 per cent to $1.2324 – though its decline is mainly the result of broad dollar strength after US consumer sentiment rose to a 3-month high in August.

Thus, with US recovery hopes and easing eurozone stresses joined by a lingering belief that central banks stand ready to provide additional stimulus if required, the bulls have been in the ascendancy of late.

Wall Street’s S&P 500 index rose slightly, edging 0.2 per cent higher to 1,418, within whisker from its best close since May 2008.

The desire for perceived havens waned lately, pushing yields up from record lows. The US 10-year note saw a bit of demand on Friday, with yields off 1 basis point to 1.81 per cent, but less than four weeks ago the yield was below 1.4 per cent.

The FTSE Eurofirst 300 on Friday gained 0.4 per cent, a 13-month high, while the FTSE Asia Pacific index was up 0.3 per cent, close to the best level in four months.

The session was also marked by a sharp drop in implied equity volatility. The CBOE’s Vix index, which measures expectations of short-term volatility, fell to less than 14, a level that is generally seen as an indicator of calm among investors.

Brent crude oil fell to trade at $113.67 a barrel, but it was still headed for a third successive weekly gain. Meanwhile, the firmer tone in the US dollar weighed on gold prices, which ended the week little changed at $1,615 a troy ounce.

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