Thursday 21:15 BST. Worries about the eurozone’s fiscal difficulties, impending ground-shifting reform and geopolitical concerns have sparked yet another market plunge.
The FTSE All-World equity index fell 2.9 per cent and oil was at a 12-month low. US and German government bonds and the Japanese yen enjoyed heavy haven flows.
Whatever soothing impact the $1,000bn bail-out package for Greece had – for which actual disbursement of monies is up for a vote in Germany (where a move to ban naked shorting was received as a sign that the unity to bring the deal to completion was in peril) – is over.
Daniel Tarullo, a Federal Reserve governor, said on Thursday: “Investors are aware that this package cannot ultimately relieve the need for real, and likely painful, fiscal reforms in the euro area.”
On Wall Street the S&P 500 plunged 3.9 per cent, a sharper drop than the day of the “flash crash”, and its worst decline since April 2009. A worse-than-expected report on weekly US jobless claims did not help matters.
The US benchmark is now in “correction” territory, having fallen more than 10 per cent since its cyclical high hit in April.
The Vix index, a measure of expected market volatility, is up 26 per cent to 44, its highest in more than a year as investors scramble to protect their portfolios.
A gain for the euro was, perversely, received as a negative indicator, as investors covered their short positions to raise cash to fund plunging positions elsewhere. Oil, for example, dropped 8 per cent at its worst point on the day, to less than $65 a barrel.
The impact on market sentiment of financial regulation, particularly regarding Wall Street, cannot be altogether dismissed. Markets accelerated their losses in the US afternoon, after the Senate – along party lines – sent the bill to a final vote.
In addition, Greece faced a 24-hour strike. Two weeks ago, scenes of violence in Athens coincided with the “flash crash” on Wall Street as the problems facing the eurozone finally seemed to hit home to investors across the pond.
“It was moving deck chairs on the Titanic. None of these measure are addressing the real issues,” said Bruce Bittles, chief investment officer at Robert W. Baird & Co.
Mr Bittles said that global markets were still struggling to assess the extent of the spillover from the eurozone crisis, causing investors to simply pull back from risk.
“All the bail-out did was take weak debt off books of weak countries, and put debt on books of strong countries,” he said. “Europe will be exporting deflation in the form of a higher dollar, which hurts US exports and multinational profits.”
● Asian stocks closed at their lowest level since September, with the FTSE Asia-Pacific index off 1.7 per cent. Wall Street’s 0.5 per cent slide overnight did not help, nor did weaker-than-expected economic growth out of Japan or the potential for conflict between North and South Korea.
The FTSE 100 in London lost 1.7 per cent and the FTSE Eurofirst 300 dropped 2.2 per cent, with miners proving a severe drag. The VStoxx, an index that gauges European investor anxiety, jumped 14 per cent to a 52-week high.
● The euro relapsed, following its stellar performance in the previous session, as television news programmes broadcast pictures of gathering demonstrations in Athens.
Traders seemed somehow shocked by the phenomenon, causing a bizarre reaction. The single currency briefly touched $1.2240 versus the dollar, triggering stop-loss levels, according to traders. Investors losing money in commodities and stocks also took gains by covering their record short positions – over $17,000bn worth, according to MF Global – in the euro.
The euro bounced to $1.2487, or 0.6 per cent higher for the session.
“This is not Lehman exactly, but this is a process of liquidity destruction,” said Sebastien Galy, currency strategist at BNP Paribas in New York. “You have a lot of people getting wrong-footed, and not willing to keep adding risk.”
The Aussie dollar is now bearing the brunt of a shift in strategy by funds. The Aussie has long been favoured as a geared play on growth, given the country’s exposure to Chinese demand for resources, and has therefore often been treated as the bellwether of risk appetite.
Now it seems traders are scrambling to close long Aussie positions and the currency is down another 2.4 per cent against the greenback to $0.8270, taking its losses over the week to 10 per cent.
In contrast, the yen is soaring as carry trades are being unwound. At one point the Japanese unit was up 3 per cent versus the euro, for example. The US dollar is down 0.9 per cent to 86.39 on a trade-weighted basis, thanks to a 2.2 per cent dip versus the yen, as the greenback crossed below Y90 for the first time in two months.
The South Korean won fell 3.9 per cent against the dollar to Won1,226, taking its fall for the week to date to 5.3 per cent as tensions with North Korea escalated.
● Perceived haven sovereign debt is seeing a surge of buying as investors shun risk. US benchmark bond yields are down 16 basis point to 3.21 per cent as deflation worries also permeate following the 0.1 per cent fall in US consumer prices in April. The bond was nearing its November 2009 low point of 3.15 per cent.
German 2-year “Schatz” bonds jumped, pushing their yield down 13 basis points to a new low of 0.37 per cent at one stage
Spanish 10-year yields are 19 basis points lower at 4.09 per cent after the successful auction of €3.5bn of new, same duration notes. The sale has calmed fears that “peripheral” eurozone economies will have trouble getting funding, and credit default swap indices for the region’s sovereign and corporate entities – which measure the cost of insuring against a debt default – are tighter on the session.
Greek 10-year bond yields are down 15 basis points to 8.04 per cent, although desks said trading had all but dried up in the “peripheral” debt complex.
● Commodities initially bounced across the spectrum after several days of heavy falls. But selling had kicked in again as risk appetite waned. Oil is down 3.7 per cent at $69.75 a barrel – after touching its lowest point in a year earlier in the session, below $65.
Gold initially retreated further from last week’s nominal high of $1,249, dipping below $1,180. However, it is now down 1 per cent at $1,182 an ounce.
Follow Jamie Chisholm’s market comments on Twitter: @JamieAChisholm
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