Global Markets Yield to the Euro Zone Bonds Worries

Bikram Pandey
17 Nov, 2011
New York City

Stocks in New York opened flat and dived as bond yields persisted at elevated levels. Jobless claims at the end of last week dropped to a 7-month low and housing market data showed a mixed snapshot. Eight largest stock markets in the world are down between 3.3% and 21% in the year so far.

[R]5:20 PM New York – Stocks in New York opened flat and dived as bond yields persisted at elevated levels. Jobless claims at the end of last week dropped to a 7-month low and housing market data showed a mixed snapshot. Eight largest stock markets in the world are down between 3.3% and 21% in the year so far.[/R]

U.S. stocks declined after investors focused on the linkages between the U.S. banks, U.S. economy and the persistent high yields in the bond markets of the euro zone.

Short memory driven traders and investors focused on the rising yields as the new prime minister assumes control of the austerity agenda in Italy and populous anger resurface in Greece.

Investors swing between the hope that the European debt contagion is restricted to the region and the fear that U.S. banks may be entwined more than disclosed. The risk-on and risk-off trades have driven market volatility in the last five months.

France led the world stock markets with a decline of 21% followed by losses of 20% in India, 18% in Hong Kong, 17% in Japan, 15% in Germany and 11% in Canada.

For the year, the UK benchmark index has lost 8% and the U.S. index is down 3.3%.

Investors were unnerved today after Spain sold its bonds at a record high interest cost and Italy’s yield also rose near record high. The Spanish Treasury issued €3.56 billion in 10-year bonds at a yield of 6.975% compared to 5.433% auction held on October 20.

Spain's risk premium to German bunds surged to a record high of 490 basis points since the creation of the euro.

In addition, German Finance Minister Wolfgang Schauble warned that the financial crisis is beginning to impact the real economy and urged the euro zone to prevent contagion from spreading to banks. Separately, Moody’s downgraded 12 state controlled banks in Germany and said they are less likely to receive government support.

Fitch predicted that U.S. banks could be affected if the debt contagion continues to spread beyond the stressed European markets of Greece, Ireland, Italy, Portugal, and Spain.

Private estimates suggest that the U.S. banks and insurance companies have exposure of as much as $690 billion to the European sovereign debts and credit derivatives.

""Unless the euro-zone debt crisis is resolved in a timely and orderly manner, the broad outlook for U.S. banks could worsen,"" the agency said.

In domestic U.S. economic news, weekly jobless claims fell unexpectedly by 5,000 to 388,000 and housing starts fell in October. The improvement in the jobs market and statistics surprised economists but long term trends are weak.

The gross domestic product in the OECD area and German employment rose in the third quarter. Construction output in the euro zone increased 0.4% annually in September. Dutch jobless rate rose in October. Swiss economic expectations declined in November. The UK retail sales and auto production rose, but consumer confidence slumped in October.

The UK government sold Northern Rock to Virgin Money for £747 million and SABMiller first-half sales and net rose.

Stocks in Japan rose fractionally in a cautious trading and Asian markets focused on the volatility in the euro zone. Olympus remained the most actively traded stock on the Tokyo Stock Exchange and Nippon Life lowered its stake in the camera maker.

Stocks in Sydney trading gained and the dollar traded near parity with the U.S. currency. BHP Billiton struck a cautious note at the annual general meeting and said recent iron ore price softness is temporary, however mood at the meeting of the largest mining conglomerate was sombre compared to a year ago meeting.

The mining giant also confirmed the $80 billion capital expenditure plan to 2015.

Commodities, Bonds and Currencies

Commodities sold off between 3% and 6%.

U.S. bonds yield on 10-year U.S. bond closed down at 1.96% and 30-year bond decreased to 2.98%.

The U.S. dollar rose 0.05% at $1.345 to one euro and closed lower against the Japanese yen to 76.96.

Immediate delivery futures of Texas crude oil decreased $3.63 to $98.96 a barrel and futures of natural gas increased 10 cents to $3.45 per mbtu and gasoline prices decreased 11.83 cents to 250.90 cents a gallon.

In metals trading, copper decreased 12.65 cents to $3.37 per pound, gold fell $54.40 to $1,719.90 per ounce and silver decreased $2.24 to $31.57.