Global Market Overview

Last updated: July 30, 2011 2:11 pm

US growth and budget standoff woes hurt markets

Friday 21.30 BST. Bulls have been rattled at the end of a torrid week after worries about the pace of US economic growth joined Washington and eurozone fiscal woes to batter risk-weary investors.

The FTSE All-World index is down 0.5 per cent – well off its lows – benchmark bond yields have hit an 8 month trough and gold reached a record high. The Swiss franc has jumped 1.8 per cent to a record versus the dollar of $0.7874, a clear signal of market nervousness.

A major hit for stocks has come after data showed the US economy grew by less than expected in the second quarter and the previous quarter’s growth was also revised lower.

Concerns about growth are overpowering any worries over the US credit profile and forcing benchmark Treasury yields lower by 16bp to 2.79 per cent in a risk averse environment that is also hurting commodity prices. US-traded oil has stumbled 1.6 per cent to $95.91 a barrel. The prospect of the weekend and end of the trading month has also compelled investors to the sidelines and safe havens.

Risk aversion is being driven primarily by the impasse in Washington over raising the $14,300bn debt ceiling by the August 2 deadline. A meeting between bond dealers and the US Treasury on Friday discussed the possibility of delaying bond sales in August and helped extend a hefty drop in government bond yields.

With July behind the markets, the S&P 500 has recorded its third successive down month, a streak not seen since the period of September to November of 2008 during the depths of the financial crisis.

Still, bears have gained the upper hand this week as the US budget standoff has shown little sign of resolution.

Even if a deal is struck in Washington and the debt ceiling raised, a lack of a meaningful long-term solution to reduce the budget deficit may result in the downgrading of US debt – and investors are unsure how this may affect markets.

Furthermore, while an inability to agree to raise the debt ceiling may result in only a technical default – meaning the decision not to pay some interest on debt is a political rather than insolvency issue – many now recognise that the brinkmanship in Washington is having an impact beyond the financial markets.

Anecdotal evidence has already emerged of businesses and consumers pulling in their horns because of the debt ceiling uncertainty, and this may exacerbate the soft patch in the US economy.

And although the current earnings season has been generally positive, the tone of corporate forecasts for the second half of the year has raised concerns that activity is again slowing.

Across the Atlantic, renewed concerns over the eurozone rattled sentiment when Moody’s said it had put Spain’s credit rating on review for a possible downgrade, citing continued funding pressure facing the Madrid government as the economy struggles for traction.

Prime minister Zapatero on Friday called an election for November, and the country’s 10-year bond yield rose 4 basis points to 6.08 per cent, only about 25bp below euro-era highs. Moody’s move has revived eurozone sovereign credit angst, forcing “peripheral” spreads wider. The FTSE Eurofirst 300 has dropped 0.7 per cent as financial stocks suffer on debt exposure fears.

Euro weakness was the trend in forex trading as the Moody’s warning on Spain made its mark.

The single currency is off 0.6 per cent to Y110.63, although it has reversed losses versus the dollar following the weak US GDP data. The dollar index is down 0.5 per cent in response.

There has been a shift of late in perceptions of what constitutes a haven, with traditional bolt holes such as the Swiss franc and yen being joined by those normally growth-focused units – such as the Canadian and Australian dollars – that are now considered attractive because of their relatively healthy budget positions.

That trend is not so much in evidence on Friday, however, and the traditionalists have made a comeback. The yen for example is up 1 per cent to Y76.95 versus the buck, a four-month high.

Meanwhile, the world’s current favourite “currency”, gold, was putting in a surprisingly lacklustre performance given the heightened anxiety.

The yellow metal was flat for much of the early part of the session, around $1,613 an ounce, with some analysts arguing that its inability to push on as worries about the US debt ceiling increase point to a tired rally for the bullion. The US GDP data has sparked some life into gold however, and after hitting a new record of $1,632, it is now up 0.6 per cent at $1,625.

Earlier, Asian stocks remained under pressure from the US budget wrangling and from poor earnings, putting extra weight on Japanese technology shares.

The FTSE Asia Pacific index is off 0.9 per cent. Sony and Nintendo were the biggest drags on the regional index as investors vented disappointment over their earnings reports.

Nintendo was down nearly 20 per cent in Osaka trade, the most in 20 years, after it cut the price of its 3DS handheld game console by up to 40 per cent as poor sales led to a Y25bn quarterly loss. The maker of the Wii computer games also slashed its profit forecast on Thursday. Sony also lost ground after reporting a net loss in the fiscal first quarter and slashing its full-year earnings target.

Japan’s Nikkei 225 Stock Average declined 0.7 per cent and South Korea’s Kospi Composite index slipped 1.1 per cent after figures showing the country’s industrial output rose by a slower-than-expected 0.7 per cent in June disappointed traders.

Hong Kong’s Hang Seng index slipped 0.6 per cent as Li & Fung, a leading supplier of toys and clothes to US retail giants such as Walmart, fell back on worries about the US economy.

China’s Shanghai Composite index lost 0.3 per cent even as banks outperformed on a media report that regulators said lenders can bear a 30-50 per cent drop in property prices under a worst-case scenario.

Reporting by Jamie Chisholm in London, Michael Mackenzie in New York and Song Jung-a in Seoul

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