Global Markets Falter as Euro Stress Seeks Next Targets

Bikram Pandey
24 Nov, 2011
New York City

Global markets declined as the debt stress in the euro zone extended to Germany and fears mount that the deepening contagion may soon engulf the UK and the U.S. where bond yields do not reflect economic realities. The euro edged lower and commodities declined in a quiet trading in Europe.

[R]5:05 PM New York – Global markets declined as the debt stress in the euro zone extended to Germany and fears mount that the deepening contagion may soon engulf the UK and the U.S. where bond yields do not reflect economic realities. The euro edged lower and commodities declined in a quiet trading in Europe.[/R]

The attention in the European bonds markets shifted to the evolving scenario surrounding the euro bonds.

The euro zone wide bonds are increasingly favoured by smaller member nations and promoted by the European Commission President Jose Barroso but resisted by the largest and most influential member, Germany.

With growing stress in the debt market and widening debt contagion reaching to core nations France and Germany, investors are wondering what it will take to stop the fast rising interest rates.

Spain and Italy are now paying close to 7% interest rate and German auction failed to sell all of its bonds yesterday. The failed auction was a surprise but the tensions have been building since the summer of this year and the large 35% margin of failure was not expected. The two summer auctions failed with 10% and 15% margins.

At least in trading today, European indexes gained after German business confidence unexpectedly improved in November. Greek opposition leader signed a conditional pledge backing austerity measures and Portuguese workers strike paralyzed the nation.

A rating agency lowered debt rating of Portugal by one notch to below investment grade or junk. Fitch Ratings lowered the long term rating by one level to BB+ from BBB- with a negative outlook.

The move surprised the market and the accompanying note also highlighted growing imbalances in the budget and rising total debt of the nation just above 100% of GDP at the end of this year.

Portuguese 10-year bond fell to yield 12.13% in Lisbon trading and investors worried how long it will be before Italian and Spanish yield soar near double digits.

With the rise in the bond yields, Barroso is push for euro zone bonds. That prompted German Chancellor Angela Merkel to reject the idea one more time today at a press conference but her comments left the door open conditionally.

The EC sought more powers to toughen the economic governance and fiscal discipline as most members in the euro zone have budget deficits that are at least 50% higher than mandated.

The lax fiscal supervision in the last decade has led the euro zone to the brink of collapse and six governments have fallen in the last one year as interest rates soar to a decade-high and member nations struggle to implement austerity measures.

The approvals of the latest tranche of the bail out to Greece is still not final as the leading opposition leader refused to provide written guarantees to implement austerity measures regardless of the outcome of the elections next year.

Spanish 10-year bonds yields jumped seven basis points to 6.58%, French 10-year yields declined six basis points to 3.63% and Italian yields were static at 6.98%. The yield on the benchmark 10-year German bonds increased to 2.16%.

The euro declined 0.3% to $1.3324 at close in London trading and futures of WTI crude oil delivery climbed 0.7% to $96.83 a barrel.

In economic news, German economy expanded 0.5% in the third quarter and business confidence improved unexpectedly in November. Spanish home loans approvals plunged 42% in September and Hungarian retail sales eased in September as the nation girds for a higher sales tax.

The UK indexes rose after the second estimate of third quarter economic growth was held at 0.5% but business investment declined. The UK services index rose in September and Ireland's annualized wholesale prices increased in October.

James Murdoch, the deputy chief operating officer of News Corp. resigned as the director of the company's UK newspaper operations.

Murdochs have been under pressure from the UK lawmakers and a recent body of evidence suggested that James and his father Rupert Murdoch knew more than they admitted at the Parliament inquiry held earlier in the year.

Murdochs have steadfastly insisted that hacking scandal was limited to only one rogue reporter and is not systemic at News Corp.

In Asian trading, most markets declined and the indexes in Japan, India, Indonesia and Australia declined to a new low in November. Indexes in Hong Kong, Tokyo and Mumbai are down more than 20% in the year.

In addition, rates in government bonds markets have been on the rise in Australia, Indonesia and in India.

The benchmark index in Japan declined to the lowest in the year and dropped to the low last seen in April 2009. Failed German debt auction highlighted the deepening stress in the euro zone that may extend to UK and U.S.

Exporters to Europe led the decliners and freight ship liners plunged to a new 10-year low.

India’s ruling coalition approved the reform that are sought by foreign retailers and opposed by most labor organizations and political parties. The newly approved measure by the cabinet will permit foreign retailers to hold 51% stake in multi-brand stores and permit shareholding to increase to 100% in single-brand supermarkets.

Consumers fear that foreign stores will only jack up prices of food items that are already galloping at the fastest pace in the last three years and much of the food production will be diverted from smaller towns to larger cities.

Food prices in India are rising at more than 11% a year for the third year in a row.