Tuesday, 23 May 2006

Markets turn risk-averse again

Yesterday was another bad Monday for risky assets. From Bloomberg:

Emerging-market stocks declined for a 10th day, the longest losing streak in almost eight years, as investors fled riskier assets because of sliding commodity prices and rising interest rates...

The Morgan Stanley Capital International Emerging Markets Index, which tracks shares in 26 developing nations globally, slumped 4.6 percent to 750.01. The measure has tumbled 15 percent from a record close set May 8...

Government bonds in developing countries from the Philippines to Turkey and Brazil also fell today...

The yield gap between emerging-market dollar-denominated bonds and U.S. Treasuries widened 8 basis points, or 0.08 percentage point, today to 2.16 percentage points, according to JPMorgan Chase & Co.'s EMBI+ index. The spread is 43 basis points above a record low of 1.73 percentage points reached May 1.

European stock markets were not spared. From Reuters:

European shares tumbled nearly 3 percent on Monday to their lowest close in five months, hit by weakness in oil and mining shares as some commodity prices fell but persistent concerns about inflation hit global markets.

The pan-European FTSEurofirst index of 300 leading shares closed down 2.7 percent at 1,271.4 points, its lowest since Dec. 20 and dropping to negative territory for 2006...

The FTSEurofirst index has lost more than 10 percent from a near-five-year high of 1,407.5 points struck on May 11 and is now off 0.3 percent so far this year.

Safer assets -- namely government notes and bonds -- gained. From Bloomberg:

U.S. Treasuries, European bonds and Japan's debt rallied as a slide in stocks and commodities spurred investors to buy government-guaranteed securities...

Investors' tolerance for risk is the lowest since the U.S.- led invasion of Iraq in 2003, according to a measure calculated by UBS AG, the world's largest money manager. Yields on 10-year U.S. notes, German bunds and Japanese government securities with the same maturity dropped at least 5 basis points today, for the first time since July 2004.

The yield on the benchmark 10-year Treasury fell to 5.02 percent at 2:17 p.m. in New York, after dipping below 5 percent. The 5 1/8 note due May 2016 rose 5/16 to 100 13/16. Germany's 4 percent bund yield closed 7 basis points lower at 3.91 percent. Japan's 10-year bonds posted their biggest rally since October 2004, sending yields down 8.6 basis points to 1.83 percent.

But by late Monday US time, some of the movements had been reversed. From Reuters:

Gold prices fell 3.5 percent early as a stronger dollar prompted selling. But late in New York, spot gold was at $655.60/656.40, down only slightly from $659.20/660.00 late on Friday...

Other metals also gyrated, with silver slipping 4 percent to a one-month low before rebounding, while platinum and palladium lost ground on fund and speculative selling...

A rally in the dollar fizzled late on Monday and the euro rose, buoyed by comments from euro zone finance ministers who said they were not worried about the single currency's recent gain.

And US stocks were relatively resilient compared to other stock markets.

The Dow Jones industrial average was down 18.73 points, or 0.17 percent, to end at 11,125.33. The Standard & Poor's 500 Index was down 4.96 points, or 0.39 percent, to finish at 1,262.07. The Nasdaq Composite Index was down 21.02 points, or 0.96 percent, to close at 2,172.86...

Blue-chip stocks trimmed earlier losses as oil futures recovered from a sell-off to settle higher, pushing up heavily weighted energy shares like Exxon Mobil Corp.

And US Treasuries trimmed earlier gains.

U.S. Treasury bond prices rose on Monday as traders pulling out of tumbling equities and commodities markets sought out the relative safety of fixed-income.

Gains were trimmed late in the day though after some hawkish comments from a Federal Reserve official and a rebound off the day's lows by major U.S. stock indices and some commodities prices.

The benchmark 10-year Treasury note , whose yield briefly traded below 5 percent for the first time in a month, rose 6/32 in price for a yield of 5.04 percent, down from 5.06 percent late on Friday.

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