Equity markets struggled to make headway on Thursday as further signs of economic weakness in the US and persistent worries about the outlook for central and eastern Europe compounded fears of a deepening global recession.
Fresh efforts by several countries to revive their struggling economies had only limited impact in the markets.
The Bank of Japan unveiled plans to buy up to Y1,000bn ($10.6bn) of corporate bonds and extend purchases of other assets and China widened its attempts to stimulate domestic demand. South Korea’s central bank insisted that its banks could cope with foreign debt in a bid to quell recent fears about the sliding won.
Germany, meanwhile, signalled that it would back action to protect the eurozone if a member country found itself in serious difficulty
Analysts at Barclays Capital noted that the past few months had been characterised by equities swinging between hope and fear as investors responded to a multitude of financial and economic stimulus announcements. But they warned that the impact of policy announcements appeared to have faded over recent weeks. “Each policy-fuelled rally has been smaller than the last,” said Sreekala Kochugovindan. “Concerns over the exposure of western European banks to eastern and central European markets add further potential risks to equity performance.”
However, Marco Annunziata, chief economist at UniCredit, said concerns about the central and eastern Europe (CEE) region were running well ahead of fundamentals.
“The CEE’s vulnerabilities are undeniable,” he said. “However, the region is no monolith, and much of the recent analysis seems simplistic and broad-brush given the significant dispersion within the area.”
Some of the recent fears about CEE economies appeared to dissipate as the euro rallied off a three-month low against the dollar. The single currency has been hurt recently by fears about the exposure of western European banks to the region.
Elsewhere, on the foreign exchanges, the yen weakened broadly as investors continued to question its status as a haven currency in the wake of dire Japanese growth data earlier this week. “The yen is seriously misaligned with economic reality,” said Albert Edwards, global strategist at Société Générale. “I believe the phase of yen strength has now ended and it will begin a pronounced slide.”
US equities declined as further grim economic news emerged. The Philadelphia Fed’s index of factory activity in the mid-Atlantic region tumbled to an 18-year low in February and continued claims for jobless benefit hit a record high in the first week of this month.
Analysts said that a bigger-than-forecast rise in the index of leading US economic indicators in January was down to a jump in money supply that masked continued deterioration elsewhere.
“In total, it was an ugly day for US economic reports that suggests a slew of weak reports are in store for February, with big GDP declines in the first quarter and, possibly, the second quarter as well,” said Mike Englund at Action Economics.
By midday in New York, the S&P 500 was down 0.6 per cent at a three-month low. The pan-European FTSE Eurofirst 300 index managed a gain of less than 0.1 per cent while in Tokyo, the Nikkei 225 Average edged up 0.3 per cent from Wednesday’s four-month low.
In commodities, there was better news for oil prices as weekly US inventories data triggered hopes that a trough in US demand might have passed.
ICE April Brent broke back above the $40 a barrel to stand $1.75 at $41.30 a barrel. Base metals prices staged a moderate rebound, but the price of gold fell back after touching a fresh seven-month high of $985.95.
Government bonds staged a broad retreat as supply concerns continued to dominate sentiment after the Treasury said a record $94bn of two-, five- and seven-year notes and $61bn of three- and six-month bills would be sold next week.
At midday, the yield on the 10-year Treasury was up 6 basis points at 2.82 per cent. The 10-year German Bund yield was 9bp higher at 3.09 per cent after France and Spain sold €11.5bn of securities,
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