GLOBAL MARKETS-Euro slips on Spain warning, stocks gain(update)

  • Business
  • Wednesday, 06 Jun 2012

NEW YORK: The euro fell and German bond prices gained o n Tuesday as the euro zone's debt crisis showed signs of escalating after Spain said it was being shut out of credit markets.

World stocks advanced, with the major U.S. stock indexes bolstered by data showing the U.S. services sector grew at a slightly faster pace in May as new orders improved.

The treasury minister of Spain, the euro zone's fourth-largest economy, said high borrowing costs meant credit markets were closing to his country, and he made an appeal to the European Union to help Madrid recapitalize its debt-laden banks.

Finance ministers from the Group of Seven major economies discussed progress toward financial and fiscal union in Europe after an emergency call but made no joint statement.

"None of these meetings have produced anything meaningful, and with debt burdens piling up across the globe, I remain highly doubtful that anything substantive will be implemented, and anything that falls short of fiscal union in Europe will allow the crisis to proliferate," said Christopher Vecchio, currency analyst at DailyFX in New York.

The euro, which early in the day hit a one-week high of $1.2542, fell 0.3 percent to $1.2452.

German debt futures rallied to a high of 146.34, before easing to trade flat on the day.

The risk premium that investors demand to hold Spanish 10-year debt rather than safe-haven German bonds hit a euro-era high of 548 basis points on Friday on concerns that Spain will eventually be forced to seek a Greek-style bailout.

Despite the concern over Europe, world and U.S. stocks recovered some ground from their recent swoons. The MSCI world equity index rose 0.6 percent to 292.91.

The Dow Jones industrial average gained 26.49 points, or 0.22 percent, at 12,127.95. The Standard & Poor's 500 Index was up 7.32 points, or 0.57 percent, at 1,285.50. The Nasdaq Composite Index was up 18.10 points, or 0.66 percent, at 2,778.11.

"Europe's obviously a concern, but we've been selling off for weeks on that," said Peter Boockvar, equity strategist at Miller Tabak & Co in New York. "A slightly better-than-expected services number, which makes up the majority of the U.S. economy, is a sigh of relief in the face of a lot of bearishness."

In Europe, stocks advanced in a nervous, choppy session as investors bought beaten-down shares on hopes for global central bank policy action to revive the economic recovery.

The euro zone's blue-chip Euro STOXX 50 index closed up 0.4 percent, with volumes thinned by a second day of UK public holidays.

After Tuesday's G7 finance ministers' conference call, investors are waiting for a European Central Bank policy meeting on Wednesday, Federal Reserve Chairman Ben Bernanke's testimony before the U.S. congressional Joint Economic Committee on Thursday, and the Greek elections and G20 meeting in Mexico, which are both on the weekend of June 17.

Funding options are narrowing for companies across the globe, as issuers are shut out of markets due to risk aversion for weaker credits and demand for spread that is driving costs sharply higher.


Spain will test the market on Thursday by issuing between 1 billion euros ($1.24 billion) and 2 billion euros in medium- and long-term bonds at auction.

Adding to the bearish sentiment, all of the euro zone's major economies are now in various states of decline, according to business surveys that heaped more pressure on Europe's leaders to stop the region from becoming the center of a new global crisis.

The dollar rose 0.5 percent to 78.73 yen, hitting a session high after Japan's finance minister, Jun Azumi, said a strong yen is damaging Japan's economy.

The price of Brent July crude settled near flat at $98.84 a barrel after a choppy session, coming back from a 16-month low of $95.63 on Monday. U.S. July crude gained 31 cents to settle at $84.29 a barrel.

Spot gold eased slightly to $1,618 an ounce.

The benchmark 10-year U.S. Treasury note shed 13/32 in price with the yield at 1.57 percent as traders booked profits on a rally that pushed yields to historic lows. The benchmark 10-year note's yield touched an all-time low of 1.44 percent on Friday.

The 30-year bond led the way down, falling 1-17/32 in price to yield 2.63 percent.

"Treasuries had rallied so much over the last week and last month that we are just seeing some of that taken back yesterday and today," said Eric Stein, vice president and portfolio manager at Eaton Vance Investment Managers in Boston.

Meanwhile in New York stocks rose on Tuesday, recovering some ground from last week's sharp selloff as investor angst about the euro zone's fiscal crisis was offset by data showing the U.S. economy's services sector grew slightly faster than expected in May.

But the technical rebound was expected to be temporary and weak as market sentiment remained bearish in the face of the euro zone's debt crisis as well as a slew of economic data recently that showed the world's largest economy is experiencing slower-than-expected growth.

The pace of growth in the U.S. services sector picked up in May as a gauge of new orders improved, according to an industry report released on Tuesday. The Institute for Supply Management's services index edged up to 53.7 in May from 53.5 in April, a touch above economists' forecast for it to hold steady.

The ISM data let investors breathe a brief sigh of relief from recent economic reports, which coupled with concerns about the euro zone, drove the S&P 500 down more than 6 percent for May.

"Banging around here, flat to down, flat to up - it feels like a little bit of a home run, to be honest," said Mark Lehmann, director of equities at JMP Securities in San Francisco.

"The facts are telling you what we all know. There are a lot of places where there is weakness in our economy and others. With most things financially related, confidence is the game ... and if you can restore confidence, things get better quickly."

Last Friday, the three major U.S. stock indexes slid more than 2 percent and the Dow industrials turned negative for the year after U.S. data showed much weaker-than-expected growth in nonfarm payrolls in May.

Spain's Treasury Minister Cristobal Montoro said the nation's high borrowing costs has effectively shut the euro zone's fourth-largest economy out of the bond market and the European Union should help Madrid recapitalize its debt-laden banks.

Statements on the outcome of emergency talks among the Group of Seven industrialized nations as they tackle the euro zone's deepening crisis offered little clarity to investors. The Treasury Department said G7 finance ministers "reviewed developments in the global economy and financial markets and the policy response under consideration.

Japan's finance minister said he told G7 members that Japan is confident in Europe's response to its problems, but indicated Tokyo was prepared to intervene in order to curb its currency.

In the euro zone, most major economies are now in various states of decline, according to business surveys that suggested even Germany is no longer immune to the crisis.

An analysis says charts say Wall Street due for further dips

NEW YORK: Sometimes "oversold" means "sell more."

Both, according to chart-watchers, are ominous signs for those hoping that the recent sell-off was going to be brief.

The S&P 500 Index, which closed on Tuesday at 1,285.50, has now given up most of its gains this year. With the two recent bearish signals, investors are not willing to actively snap up beaten-down shares just yet.

Strategists who look at technical yardsticks, including moving averages and momentum indicators, mostly see a tough road ahead for U.S. equities.

Fears that the euro-zone debt crisis is worsening, dragging on growth in the United States and Asia, have set U.S. and global markets on a downtrend.

Friday's fall below that key 200-day moving average - a gauge of the long-term trend in the market - was a trigger for further declines. Global stocks dropped, with Japanese and Chinese equity averages tumbling into bear-market territory, and European investor confidence hit a three-year low.

"I think what's going on here is fear. Fear about an additional fall, and that is what's driving the prices down even if fundamentals may start to improve," said Tony David, managing director and ETF portfolio strategist at Guggenheim Investments in New York.

Further accelerating the sell-off, various sectors in the S&P 500 - from financials to transports to technology - also dipped below their 200-day moving averages, which technical analysts view as a harbinger of more selling.

"The 200-day average is a level that a lot of people look at to see if the market is on an up or down trend," said Joe Bell, senior equity analyst at Schaefer's Investment Research. "The uncertainty in Europe and weak fundamentals here and overseas, especially in the absence of corporate earnings, have been confirmed by falling below that technical level."


Other technical indicators are also showing signs of weakness. The S&P's weekly moving average convergence-divergence, or MACD, an internal measure of performance which had been bullish since mid-January, turned bearish last week.

MACD essentially compares different moving averages against each other to determine the short-term trend in markets. The weekly MACD's "sell" signal, confirmed by weak readings in mid- and short-term momentum and relative strength, suggests a bleak summer ahead.

The more volatile daily MACD has for the most part been bearish since late March.

The market is clearly showing technical signs of stress, according to Richard Ross, Auerbach Grayson's global technical strategist based in New York, who cited the dip below the 200-day average as example.

However, he said, "the fact it comes at the tail end of a 10 percent correction is more likely to be a contrarian indication that the decline is over."

The relative strength index - a momentum indicator that attempts to determine when any financial instrument is overbought or oversold - shows the S&P 500 hovering at an oversold level, suggesting a rebound could be in the cards.

The market's risk aversion drove U.S. treasury bond yields to historic lows, which could make the possibility of a rebound in stocks more attractive to yield-hungry investors.

"Treasury bond yields are extremely low," Ross said, "which speaks to a band of risk aversion that has been stretched to its limits. It should snap back ... or snap."

Sentiment is similarly pessimistic, but it has reached a point that has in the past been associated with near-term rebounds. Rick Bensignor, chief market strategist at Merlin Securities, said market sentiment has declined to almost record levels in S&P futures.

Citing Jake Bernstein's Daily Sentiment Index, a popular gauge used by institutional investors, Bensignor said only about 5 percent of market participants were bullish, the third-lowest level ever

On Wednesday Reuters reported from TOKYO:

GLOBAL MARKETS-Shares rise as Spanish woes stoke stimulus hopes

TOKYO: Asian shares rose on Wednesday as concerns that Europe's financial strains could intensify following a warning from Spain that it was being shut out of credit markets fuelled hopes that policy makers will unveil fresh monetary stimulus measures.

Data showing Australian economy grew a surprisingly strong 1.3 percent in the first quarter lifted the Australian dollar 1 percent to $0.9840 and pushed shares there up 0.3 percent from negative territory.

MSCI's broadest index of Asia-Pacific shares outside Japan rose 1 percent, while Tuesday's data showing the U.S. services sector improved in May underpinned Japan's Nikkei average, which climbed 1.3 percent.

"Asian equities markets are moving on various expectations but the strongest driver is growing hopes for monetary policy stimulus to fend off contagion from Europe," said Hirokazu Yuihama, a senior strategist at Daiwa Securities in Tokyo.

Spain sent a distress signal on Tuesday about the impact of the country's banking crisis on government borrowing, saying Madrid was losing access to funding from markets at current rates and urged Europe to help revive its troubled banks.

However, sources told Reuters that no decisions can be made on how to help Madrid recapitalise its banks until the first phase of an independent banking audit is completed this month.

Market players are now eyeing central bank action to help support fragile global growth and stabilise markets, after finance ministers from the Group of Seven major economies held inconclusive emergency talks on the euro zone on Tuesday.

The move by the Reserve Bank of Australia on Tuesday to cut interest rates for a second month running by 25 basis points to 3.5 percent, partly due to a darkening global outlook, fed expectations that others such as South Korea, which kept rates steady at 3.25 percent for the 11th consecutive month in May, could follow suit, Daiwa Securities' Yuihama said.

"Such expectations are prompting investors to look for bargains as valuations for Asian equities now suggest they are more than oversold to levels that reflect an extremely pessimistic scenario," he said, taking particular note of the China Enterprises index of top Hong Kong-listed mainland firms, or H-shares.


European shares managed to eke out gains on Tuesday, also on hopes of global central bank policy action to revive the economic recovery, but prospects were less than certain.

The European Central Bank (ECB) holds its monthly rate-setting meeting later on Wednesday, and U.S. Federal Reserve Chairman Ben Bernanke will testify before a congressional panel on Thursday.

"Bleak as the euro area outlook is, it could easily get worse after the Greek election on 17 June and there may be an argument for the ECB keeping its powder dry," said James Nixon, chief European economist at Societe Generale.

"More substantively, we believe the ECB is increasingly concerned by the moral hazard actions. Each time it intervenes it merely eases the pressure on Europe's political leaders."

James Bullard, president of the St. Louis Federal Reserve Bank, and Dallas Fed President Richard Fisher on Tuesday suggested the U.S. central bank was not preparing to ease monetary policy at a meeting later this month, saying the economic outlook had not deteriorated to the point where action was warranted.

The euro added 0.4 percent to $1.2492, off Tuesday's one-week peak of $1.2543 but still above a near two-year trough of $1.2288 hit on Friday.

The euro was likely to be capped below $1.25, with Tuesday's purchasing managers indexes showing the euro area's vast private economy shrank in May at the fastest pace in nearly three years, with company order books collapsing, suggesting even Germany is no longer immune to the crisis.

Sentiment was hardly helped by Moody's Investors Service downgrading the credit ratings of several German banks on Wednesday, citing increased risk of further shocks emanating from the euro zone debt crisis and their limited loss-absorption capacity.

The yen eased against the dollar to 78.78 after Japan on Tuesday signalled it was prepared to intervene to curb its currency. The Japanese currency even fell against the euro and traded down 0.4 percent at 98.42 yen on Wednesday.

U.S. crude futures rose 0.7 percent to $84.87 a barrel and Brent gained 0.5 percent to $99.30 a barrel.

The cost of insuring against corporate and sovereign defaults in Asia eased on Wednesday, with the spread on the iTraxx Asia ex-Japan investment-grade index narrowing by 4 basis points. - Reuters

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