Wednesday, 8 September 2010

Stocks fall as European yield spreads widen

With the Bank of Japan and the Reserve Bank of Australia leaving interest rates unchanged on Tuesday, the focus in markets shifted back to Europe.

From Bloomberg:

Stocks slid, while Greek, Portuguese and Irish bonds tumbled, gold rose to a record and the yen surged to a 15-year high versus the dollar on concern Europe’s debt crisis will worsen. U.S. and German bonds rallied.

The MSCI World Index slid 1.1 percent and the Standard & Poor’s 500 Index lost 1.2 percent at 4 p.m. in New York. The gaps between 10-year German bond yields and Irish and Portuguese debt grew to all-time highs, while the German-Greek yield spread increased to the widest since May. The yen rose to as little as 83.52 per dollar as the Bank of Japan refrained from increasing bank loans. Ten-year Treasury yields lost 10 basis points to 2.6 percent. Gold futures closed at $1,259.30 an ounce.

Banks led stocks lower on concern European lenders will require more capital to compensate for holdings of bonds in the region’s weakest economies. Germany’s banking association said yesterday that the nation’s banks need to raise $135 billion and Pacific Investment Management Co. said Greece still faces “substantial” default risk.

Helping to keep German bund yields down was a report on Tuesday showing that German factory orders unexpectedly fell in July. From Bloomberg:

Orders, adjusted for seasonal swings and inflation, declined 2.2 percent from June, when they surged a revised 3.6 percent, the Economy Ministry in Berlin said today. That’s the biggest drop since February 2009. Economists forecast a 0.5 percent gain, according to the median of 40 estimates in a Bloomberg News survey. From a year earlier, orders climbed 18 percent, when adjusted for working days.

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