Overview: Housing data cast shadow over financial markets

Bleak housing data in the UK and US cast an early shadow on markets yesterday but Wall Street rebounded as the Federal Reserve began a two-day policy meeting.

US home prices in 20 big cities fell a record 15.3 per cent for the year to April, slightly better than a forecast 16 per cent decline and stocks gained slightly. The S&P/Case-Shiller home-price index has fallen every month since January 2007 and is down 18 per cent from its peak.

Alan Ruskin, strategist at RBS Greenwich Capital said: “Talk will persist of peak to trough declines of at least 25 per cent, and quite possibly larger, given that asset price overshooting on the upside is often followed by overshooting on the downside as the psychology behind demand and supply shifts into reverse.”

In the UK, mortgage approvals dropped to a 11-year low of 28,000 in May, while mortgage lending also fell sharply.

Michael Saunders, economist at Citigroup, said: “These figures highlight again the extreme weakness of the housing market, caught between over-inflated values, high household debts, erosion of real incomes via high inflation, and the credit crunch.”

There were further poor US data when consumer sentiment dropped to 50.4 in June from an upwardly revised 58.1 in May, while expectations plumbed a record low.

Lynn Franco, director of the Conference Board’s Consumer Research Center said: ”Consumers’ assessment of present-day conditions continues to grow more negative and suggests the economy remains stuck in low gear.”

Mr Ruskin said: “The tax rebates are clearly having no impact on confidence, even if they have contributed to retail sales holding up remarkably well.”

Earlier, German and Italian consumer confidence fell more than expected, although French consumption of manufacturing goods rebounded in May.

Markets were generally in a holding pattern as the Fed began its policy meeting. It is expected to announce no change in the current Fed funds rate of 2 per cent, when it ends later today. That leaves the accompanying policy statement on the outlook for growth and inflation as the main focus of interest for investors who are wary of rate rises later this summer.

Tom di Galoma, head of Treasury trading at Jefferies & Co said: “We find it hard to believe the Fed is close to tightening given the problems in the banking sector.”

Interest rate futures price in a funds rate around 2.60 per cent by the end of the year, with the first 25 basis point rise possibly coming in August.The January Fed funds contract, however has eased back from pricing in a funds rate of nearly 3 per cent back in mid-June.

Ted Wieseman, economist at Morgan Stanley, said the statement was likely to feature “some tweaking of the language” to raise inflation concerns a bit. He expected the Fed would not confirm market fears of a rate rise as early as August.

European equity markets were weaker. The FTSE Eurofirst 300 index fell 0.7 per cent, while in London the FTSE 100 lost 0.6 per cent.

In New York, the S&P 500 closed 0.3 per cent lower with financials a particularly bright spot as the sector rebounded from a run of losses.

Asian stock markets were mixed, with Pakistan the outstanding performer with a rise of 8.6 per cent after stock exchange moves to stabilise the market.

Steel makers were roiled on Tuesday after Australian miner Rio Tinto pushed through a near-doubling in the price of iron ore, sending steel groups tumbling while miners were buoyed.Japan’s Nikkei 225 index fell 0.1 per cent, whileTaiwan rose 0.1 per cent and South Korea lost 0.3 per cent. In Hong Kong, stocks fell 1.1 per cent while on the mainland, Shanghai rebounded 1.5 per cent after a slide on Monday.

Government bond prices were firmer in the US after the weak housing and confidence data. The yield on the two-year US Treasury fell 8 basis points to 2.85 per cent after a strongly received sale of of $30bn in new notes. In Europe, bond prices were mixed, as yields in the two-year sector were lower, while longer-dated yields were steady to higher.

Emerging-market bond prices fell and pushed yields to their widest over Treasury yields in six weeks as inflation and global growth worries hurt sentiment.

The US municipal bond market has also seen a wave of selling after MBIA and Ambac, the bond insurers, were recently downgraded.

Lyle Fitterer, portfolio manager at Wells Capital Management said: “Some investors did not expect a downgrade and now there are money market funds selling paper that was insured.”

The dollar lost steam in the currency market after the data releases, but the proximity of the Fed meeting limited losses. The yen touched an 11-month low against the euro. Meanwhile, the near doubling in iron ore prices for steelmakers posed another challenge for Asian currencies said analysts.

Barclays said the iron ore price hike “is bad news for Asian currencies and comes on top of oil price rises. Both are adding to already significant inflation pressures and will see large declines in Asia’s trade surpluses.”

Among commodities, crude oil was a touch firmer at $137 a barrel, while spot gold also rallied, but failed to hold above $890 an ounce.

The Reuters CRB index of commodity prices reversed an early rally that pushed it back towards last week’s record high. Over the past year the index has risen 45 per cent

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