U.S. Debt Talks, Euro-zone Worries Weigh on Markets; Gold at $1,600

Nigel Thomas
18 Jul, 2011
New York City

The U.S. indexes traded lower as debt talks stall and lawmakers prepare to pass stop-gap bills that may lead to a partial solution. In addition, the stress in the euro-zone sovereign debt rose as the yields on Spanish and Italian bonds inched toward danger zone. Gold traded above $1,600.

[R]1:00 PM New York – The U.S. indexes traded lower as debt talks stall and lawmakers prepare to pass stop-gap bills that may lead to a partial solution. In addition, the stress in the euro-zone sovereign debt rose as the yields on Spanish and Italian bonds inched toward danger zone. Gold traded above $1,600.[/R]

U.S. indexes declined as market focused turned to debt talks and rising tensions in the euro-zone sovereign bond markets. Gold rose to a record high in euro, UK pound, South African rand and Canadian dollar.

Markets sentiment was weak on the first day of trading as U.S. lawmakers struggle to finalize debt talks before the final deadline set by the U.S. President Barack Obama and ahead of the euro-zone ministers meeting on July 22.

European indexes turned lower as investors digested the details of the recently completed bank stress test that many considered were not stressful enough. Insurers and banks led the decliners in the region.

The euro declined against the Swiss franc to a record low and gold traded briefly above $1,600 an ounce and traded at a record high in at least six major currencies.

Gold gained 3% for the second week in a row last week and silver added 15% in the period.

The worries related to the euro-zone sovereign debt stress dragged markets indexes in the region lower more than 1%. The yields on German bunds increased and the Spanish bond yields spreads rose to the record wide levels since the creation of the euro.

German 10-year bond yields rose to 2.64% still lower than the yield on similar U.S. government bonds of 2.9%. The spread between the two widened to 24 basis points.

Italy regained the focus of investors as bond yields rose 25 basis points to a post-euro record of 6.05% and Spanish bond yields gained 26% to a record of 6.36%.

Bond yields above 7% for Italy and Spain are not sustainable according to most economists and may force both nations to seek as much as €100 billion of bailout.

Investors were disappointed after the release of the bank stress test results and worried that a Greek default or another round of bond market sell-off may weaken the banks further.

European Banking Authority said of the ninety banks stress tested, eight failed and 16 more will need to raise capital immediately. In all, eight banks are required to raise €2.5 billion.

Private estimates suggest banks may need as much as €90 billion of new capital if Greece defaults and Italy and Spain needs bailouts.

Europe’s 100 largest banks have as much as €680 billion of exposure to the sovereign bonds of Portugal, Italy, Ireland, Greece and Spain and the stress test assumed trading losses of €10 billion only.

Stock Movers

Banks declined in New York trading after sovereign debt stress mount in the euro-zone. Private estimates suggest trading losses linked to Portugal, Italy, Ireland, Greece and Spain could surge as much as $100 billion in the next nine months.

Yields on Italian and Spanish bonds are inching near the tipping point of 7%.

Bank of America fell 0.9% and Citigroup declined 0.8% on the worries that rising bond yields in the euro-region may generate more loan losses.

Bank of America may need as much as $50 billion to bolster its balance sheet to cover losses linked to U.S. housing market securities alone.

Stocks of technology companies traded cautiously ahead of busy earnings calendar this week. More than 100 companies are expected to release earnings including IBM, Philips Morris, Caterpillar, CA Inc, Texas Instruments and Wynn Resorts.