Global Market Overview

Last updated: December 28, 2010 10:36 pm

Haven demand for Swiss francs and gold

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Investors play safe after mixed US economic indicators

Global stocks struggled to establish a clear direction in the face of a mixed bag of US economic indicators, lingering concerns about Chinese interest rates and extremely thin trading conditions.

Signs that investors were seeking havens came from a record high for the Swiss franc against the dollar and gold’s return above the $1,400 an ounce mark, although US Treasuries suffered substantial losses.

Elsewhere on the currency markets , the dollar dipped to a six-week low against the Japanese yen, although it recovered from an early drop against the euro.

Andrew Wilkinson, senior markets analyst at Interactive Brokers, said the dollar had lost some recent momentum as investors wondered whether a recent improvement in US economic figures was bullish for the currency, or whether they would lend themselves to a more favourable environment for riskier propositions.

“Thin trading conditions created a vacuum across most currency pairs, causing a sharp upward move against the dollar once stops were triggered,” he said.

However, Geoffrey Yu, currency strategist at UBS, noted that, since 1980, the dollar had tended to outperform in January.

“Given our positive outlook for the US economy, and problems elsewhere in the G10, we believe January 2011 will continue the trend,” he said.

Chart: European automobiles and parts

“Improving US data and rising yields are already proving to be supportive for the dollar, but this will mean very little unless capital flows materialise.

“We find that January also tends to be a very good month for the US in attracting overseas funding, especially into Treasuries, and the current lack of demand for eurozone securities suggests little competition for US government paper.”

On Tuesday, however, the 10-year US government bond yield was up 15 basis points at 3.48 per cent at the end of the day in New York – not far from a recent seven-month high above 3.5 per cent. The two-year yield was 8bp higher at 0.74 per cent.

Hopes that this week’s series of Treasury debt auctions would attract robust demand were supported by a relatively strong result at Monday’s sale of two-year bonds.

In Europe, the 10-year German Bund remained stuck in its recent range, with the yield falling 4bp to 2.99 per cent.

Equities drew little support from the day’s US economic releases. Home prices fell for a fourth successive month in October and consumer confidence unexpectedly declined in December.

However, reports on retail sales suggested shoppers had been on a pre-Christmas spending spree.

The S&P 500 closed up just 0.1 per cent, while the FTSE Eurofirst 300 managed to edge 0.3 per cent higher as European stocks recouped some of the previous session’s losses.

Alec Young, strategist at S&P Equity Research, offered a bullish outlook for the US market next year.

“Better than expected US economic data and the extension of the Bush tax cuts have bolstered investor confidence in the 2011 domestic economic and earnings outlook, helping offset ongoing sovereign and inflation-related jitters emanating from Europe and Asia,” he said.

“Our 12-month forward S&P 500 target is 1,315.”

Asian stocks had a grim session as the markets continued to weigh up the implications of China’s weekend interest rate rise.

In Shanghai, the Composite index shed 1.7 per cent, extending Monday’s fall and leaving the benchmark at its lowest level since the end of September.

Hong Kong reopened after the holiday break in negative mood, with the Hang Seng index dropping 0.9 per cent, while in Japan the Nikkei 225 Average fell 0.6 per cent. However, the Nikkei’s drop was limited by an encouraging set of Japanese industrial production data.

Industrial commodity prices see-sawed in line with the dollar’s fluctuations against the euro.

But the broad trend was bullish, with oil above $91 a barrel for most of the session and nearing a 26-month high. US copper reached a record for a second straight day, while gold pushed above $1,406 an ounce, within sight of its record high.

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