Global risk assets are set to end a miserable quarter in lacklustre fashion as the previous session’s rare pieces of good news on the US economy and eurozone debt crisis are submerged by the strong undercurrent of investor nervousness.
The FTSE All-World equity index is down 1.1 per cent, and commodities are lower, with Brent crude off 1 per cent to $102.97 a barrel. “Core” sovereign debt is in favour, softening yields.
The Asia-Pacific region has had a weak day, dipping 0.8 per cent; the FTSE Eurofirst 300 is suffering a loss of 1.6 per cent; and S&P 500 futures suggest Wall Street will open with a decline of 0.9 per cent.
Traders can be excused a moment of reflection given the torrid time they have endured over the past three months. Worries about a slowing global economy and headlines relating to festering eurozone fiscal woes have regularly caused sharp lurches in sentiment.
Thursday saw some bright spots, with better than expected US data joining a German “yes” vote for the expansion of the European bail-out fund to provide hope to optimists.
But the underlying mood remains broadly downbeat. Many traders recognise that the danger of a destabilising Greek default is still a possibility, while other evidence of economic weakness has emerged with news on Friday that German retail sales in August experienced their biggest monthly decline in four years.
In addition, investors are noting building concerns about prospects for the Chinese economy after the country’s property and banking shares were hit on worries over a housing market correction.
The Shanghai Composite index, which will be closed next week for the Golden Week holiday, fell 0.3 per cent. Hong Kong’s Hang Seng, which is more heavily exposed to sentiment on such stocks, slid 2.3 per cent, leaving it nursing a loss for the quarter of 21 per cent, its worst 3-month slide in 10 years.
The cost of insuring Beijing’s debt against default, as measured by 5-year credit default swaps, is up 23 basis points to 197 basis points, the highest since March 2009.
Risk aversion can be seen in the dollar index gaining 0.6 per cent and the German retail data helping push the euro down 0.8 per per cent to $1.3478. Gold is up 0.4 per cent to $1,621 an ounce.
The dour tone is expressed vividly by the FTSE All-World index, which is sitting on a loss for the quarter of 17 per cent.
Similarly, the Reuters-Jefferies CRB index, a commodities basket, is down 9 per cent, though this fails to reflect the battering afforded some important constituents. Copper, considered a global economic barometer and currently trading at $3.27 a pound, is down 24 per cent since the start of July.
As racier plays lost their charm, so perceived havens have benefited. An auction of 7-year US notes on Thursday was as sturdy as the five-year auction on Wednesday, again setting a record low yield – at 1.496 per cent for the seven-year – with strong demand from investors.
US 10-year Treasuries and German Bunds have had a solid quarter. Yields on the former are currently down 6 basis points to 1.94 per cent, a fall of 122 basis points over the period. Bund yields, which breached 1.7 per cent for the first time, are currently down 11bp at 1.90 per cent.
However, the quarter can perhaps best be summed up by one word: volatility. The Chicago Board Option Exchange’s Vix index, which measures market expectations of future equity vacillations, is up 135 per cent as investors scramble to protect portfolios, or indeed trade the volatility itself.
The “fear gauge” as the Vix is also known, has averaged 21.5 over the past 12 months but currently sits at 38.8, having averaged 30.2 since the start of July. Meanwhile, at the beginning of this week the CBOE extended the trading hours of the Vix future to give “market participants more time to establish or offset Vix futures positions surrounding potential market-moving events — overnight news, banking actions or key economic reports — before the general market opens”. Quite.
With the market’s attention focused on the eurozone, many traders seem to have forgotten about the yen.
The Japanese unit has sat for eight weeks in a 2-yen range just above its record high to the dollar of Y75.93. On Friday it is weaker by 0.1 per cent at Y76.87.
The chart evokes a standoff between the irresistible force (yen appreciation) and an immovable object (the interventionist Bank of Japan).
Is something about to pop?
Possibly. Japanese bank Mizuho, in comments likely to give the BoJ palpitations, reckons the US dollar could fall to Y60.
Chief technical analyst Hiroyuki Tanaka, according to a Bloomberg report, says the US dollar has bottomed out around 30 per cent below the preceding low on four occasions since 1971.
With the previous trough of Y79.75 the yen may hit Y60 in 2013, he concludes.
A more fundamental approach from Capital Economics plumps for a weaker yen, however. The research boutique argues that Japan’s oft-cited and interlinked debt and demographic burden will finally take their toll.
“We continue to expect the yen to depreciate gradually against the dollar, to Y85 by the end of this year and to Y90 by end-2012.”
(Source: Financial Times)