Global equity markets diverged on Thursday, as weakness in Asia was offset by modest gains in Europe and the US.
Government bonds, safe havens in times of crisis, were under pressure as concerns about contagion from the debt woes of Dubai and Greece eased.
UK gilt yields rose sharply as investors digested the Government’s pre-budget report from Wednesday.
Traders said gilts had broken key support levels and the yield on 10-year paper rose 15bps to 3.81 per cent, and has climbed from 3.52 per cent since the start of the month.
Elsewhere in government debt trading, the spread between Greek government bonds and German Bunds eased to 226 basis points, having hit 250bps at one stage on Wednesday. The yield on 10-year Greek debt dropped 16bps to 5.43 per cent, while the 10-year Bund yield was up 4bps at 3.17 per cent.
As the UK and US government debt markets struggled, the outlook for risky assets heading into year end remained cautious.
“Financial markets are at standstill after the big rallies we have seen in equities and credit,” said Mark Kiesel, portfolio manager at Pimco.
“It is unclear to many people, where markets move from here, markets are waiting to see whether we can transition from government support to a self sustaining economic recovery,” he said.
That sense of uncertainty about when private sector growth will move beyond the helping hand of government spending and easy monetary policy was reflected in the stance taken by a number of central banks, which held policy meetings on Thursday.
The Swiss National Bank left its target rate unchanged at 0.25 per cent and said it planned to halt purchases of Swiss corporate bonds. The Bank of England left its target rate unchanged at 0.5 per cent and said it would not increase its planned asset purchase programme of £200bn ($325bn).
Highlighting the emerging split between the exit strategies of central banks, the Reserve Bank of New Zealand left its target rate steady, but signalled it would lift rates in 2010, possibly by next April. The Bank of Korea left rates steady at 2 per cent, but suggested a rate rise was due next year.
In economic news, US weekly jobless claims rose more than expected, up 17,000 to 474,000, while the October trade deficit narrowed unexpectedly to $32.9bn from $35.7bn in September.
While the narrower deficit will boost US growth for the fourth quarter by about 0.5 per cent, economists at RDQ Economics noted: “The real story is the continued recovery in global trade.” Over the past three months US exports have risen 31.4 per cent at an annual rate, while imports are up 17.4 per cent on the same basis, they said.
Across big equity markets, Wall Street and Europe rallied with the S&P 500 gaining 0.6 per cent. London’s FTSE 100 closed up 0.8 per cent, while the FTSE Eurofirst 300 added 1 per cent, amid some upbeat earnings and analyst upgrades for stocks.
Greece’s ASE index rose 5.2 per cent, after a drop of 14 per cent in the prior three days.
Earlier, shares in Asia were on the defensive, with Tokyo’s Nikkei 225 index falling for the third straight day, down 1.4 per cent as the yen continued to rally, weighing on exporters.
Shares in Hong Kong slipped 0.2 per cent, but the Shanghai Composite held on to a gain of 0.5 per cent. Korea’s Kospi rallied 1.1 per cent as investors cheered steady rates.
Expectations of further rate rises in Australia as employment in November rose more than expected, pulled the S&P ASX 200 down 0.7 per cent.
In currency trading , the Australian and New Zealand dollars rallied 1 per cent against the dollar and were stronger versus the yen as investors priced in rate rises for 2010. The dollar index was trapped in a narrow range and late in New York was a fraction lower.
Among commodities, US crude oil prices briefly fell below $70 a barrel, a level last seen in early October. Spot gold in New York trimmed early gains and was a touch higher at $1,131 an ounce late on Thursday.