Weak US data unsettle investors

Weak US data unsettle investors
By Jamie Chisholm, Global Markets Commentator
Copyright The Financial Times Limited 2010
Published: June 17 2010 08:23 | Last updated: June 17 2010 18:01
http://www.ft.com/cms/s/0/e7a78eca-79d0-11df-9871-00144feabdc0.html


Thursday 17:55 BST. Another batch of disappointing US economic data is counteracting an early surge in risk appetite which had come from a further bounce in the euro.

The FTSE All-World equity index looked set to add to a seven-day winning streak, during which it had risen 6.6 per cent, but is now flat, only marginally higher. Industrial commodity prices are falling, while havens such as US Treasuries and German Bunds are in demand.

Equity markets had initially reverted to their ultra-tight correlation with the euro as investors appeared to trade on the view that prospects for the eurozone hold the key to global growth.

Indeed, the euro remains higher following a well-received Spanish bond auction. It is also being supported by hopes that Madrid and Berlin’s move to publish details of the “stress tests” carried out on banks signals the start of a trend that may heal the single currency by reducing uncertainty surrounding the bloc’s financial sector.

But stocks are on the slide. Europe struggled at the end of the session, and Wall Street is lower following weekly initial jobless claims. The Philly Fed factory activity index joined recent poor news on housing starts and retail sales to paint a picture of a US economy struggling to gain traction.

A fall in May consumer prices also raised fears of a deflationary trend – though it should be noted the Conference Board’s measure of Leading Indicators provided a more positive slant on economic activity.

It should also be noted that the dip in shares comes in spite of investor relief following BP’s dividend cut. The price of five-year credit default swaps on BP fell by 149bps, and also for Anadarko, Transocean and Halliburton, according to Markit.

Meanwhile, it’s possible that the euro’s firmness is stopping the sell-off from accelerating. But, if the euro should once again fail to hold $1.2350, identified as resistance by some technicians, this could leave riskier assets, particularly stocks, looking increasingly vulnerable following their good run over the past week or so.

The S&P 500 will also need to hold near its 200-day moving average around the 1,112 mark, according to Thomson Reuters, lest analysts start to warn of another leg down.

At the moment, however, the S&P 500 is down 0.4 per cent at 1,109.

● Europe. A mixed start, turned more bullish as the euro rallied, but trailed off as Wall Street fell back. The FTSE Eurofirst 300 was up 0.3 per cent while London’s FTSE 100 rose 0.3 per cent, boosted by a jump in BP stock. Madrid climbed 0.7 per cent.

● Forex. The euro has turned a 0.3 per cent fall against the dollar into a 0.4 per cent gain and is trading at $1.2356. However it is down 0.3 per cent against the yen at Y112.21 as the Japanese currency benefits from the weak US data. The dollar index, which measures the buck against a basket of its peers, is down 0.4 per cent.

Sterling was little affected by news that UK retail sales grew in May by more than forecast. The pound is up 0.5 per cent versus the euro at 83.51p.

● Debt. Spanish sovereign bonds hailed the successful auction of €3bn of ten-year notes and €479m of 30-year debt, with yields on the benchmark dropping 14 basis points to 4.83 per cent. The yields remain close to two-year highs, however.

The cost of insuring European corporate and sovereign debt – as measured by credit default swaps – is dropping.

The yield on US 10-year Treasuries has reversed an early move higher after traders noted the inflation and labour market data. The benchmark is currently down 7 basis points at 3.19 per cent. German Bund yields are down 2 basis points to 2.66 per cent.

● Commodities. The industrial sector of the complex is seeing selling after the strong performance over the past six or seven days. Copper is off 3 per cent at $2.92 a pound as the weak US housing starts data points to falling demand from builders. Nymex oil is down 1.2 per cent at $76.73 a barrel.

However, firm prices in many agricultural commodities are helping the Reuters-Jefferies CRB index restrict its loss to 0.2 per cent.

Gold is up 1.7 per cent at $1,251 an ounce, less than 2 bucks shy of its nominal high.

● Asia. The FTSE Asia-Pacific index closed up just 0.01 per cent, held back by the slide in US futures and the more wary tone as worries about the economic health of the US and particularly Europe returned. The Nikkei 225 in Tokyo and the S&P/ASX 200 in Sydney both lost 0.7 per cent.

Shanghai lost 0.4 per cent while Hong Kong finished up 0.4 per cent after returning from public holidays on Wednesday.

Follow Jamie Chisholm’s market comments on Twitter: @JamieAChisholm

Risk on

● Euro: regains risk proxy status, and its a 3 week high.

● Stress Tests: light is the best disinfectant.

● Eurozone auctions: confirm anything can be sold at a price.

Risk off

● US data: domestic macro-metrics soft.

● Slaves to the rhythm: robotic risk correlations suggests no lessons learnt.