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While you were sleeping: Ban rekindles risk aversion

Thursday 20th May 2010

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Stocks in the US and Europe declined as Germany’s efforts to curb speculative activity prompted investors to pare their exposure to risky assets.

A jump in US mortgage foreclosures also weighed on US stock markets. The inventory of homes in foreclosure rose to 4.63% in the first quarter of 2010 from 4.58% in the fourth quarter of 2009, the Mortgage Bankers Association said.

In late trading, the Dow Jones Industrial Average fell 0.69%, the Standard & Poor’s 500 Index declined 0.60% and the Nasdaq Composite lost 0.98%.

"We really don't know how far things can spread, so basically you see a continuation in the contraction of risk spreads," Steve Goldman, market strategist at Weeden in Greenwich, Connecticut, told Reuters.

Among the most active stocks on Wall Street were Boeing Co, United Technologies Corp and 3M Co.

American Apparel Inc slumped 24% after the operator of about 280 retail stores in 20 countries said it anticipated it wouldn’t be in compliance with debt covenants.

The Chicago Board Options Exchange Volatility Index, or VIX, which is known as Wall Street’s ‘fear gauge’, jumped 6.74% to 35.81.

The Stoxx Europe 600 Index dropped 3% to 243.71, the lowest close since May 7.

The UK’s FTSE 100 fell 2.81%, France’s CAC 40 dropped 2.92% and Germany’s DAX lost 2.72%.

Germany’s BaFin financial-services regulator yesterday said it would introduce a temporary ban on naked short-selling and naked credit-default swaps of euro-area government bonds.

Among the most actives were Deutsche Bank AG, Banco Santander SA, Bayerische Motoren Werke AG and Rio Tinto Group.

“Financial regulation definitely is coming, it’s just a matter of the politicians and bureaucrats working out how best to implement what they choose to do,” Kevin Gardiner, head of investment strategy at Barclays Wealth, told Bloomberg Television.

“Eventually the dust will settle and investors will come back to risky assets, but at the moment this regulation issue is shattering everything.”

The Dollar Index, which measures the greenback against a basket of six major currencies, fell 1.13% to 86.39.

"Euro is popping all over as talk is going around that the ECB may be considering intervention," Brian Dolan, chief strategist at in Bedminster, New Jersey, told Reuters.

The euro rose 0.9% to US$1.2289 after earlier rising as high as US$1.2328. The euro was last up 0.5% at 112.72 yen.

US Treasury Inflation Protected Securities, or TIPS, plunged as a report showed US consumer prices unexpectedly declined in April.

Demand for the bonds, which are designed to protect investors against rising prices, weakened as the outlook turned from inflation to deflation. The break-even rate between yields on 10-year TIPS and nominal US Treasuries, a gauge of trader expectations for consumer prices, contracted for a fifth straight day.

The yield on the benchmark 10-year note rose 2 basis points to 3.36%, according to BGCantor Market Data. The two-year note yield increased 4 basis points to 0.77%.

In its latest meeting minutes, the US Federal Reserve lifted its estimates for economic growth and debated eventually selling mortgage debt. It offered no hints of imminent changes in monetary policy.

The Fed has purchased more than U$1.4 trillion in mortgage debt. Fed officials agreed at their April 27-28 meeting that such holdings could boost inflation expectations and would eventually have to be sold, but not anytime soon.

"Most participants favoured deferring asset sales for some time," the minutes said.

The report reflected the US central bank's thinking before a worsening of the European debt crisis, which has taken a toll on US financial markets and prompted a reopening of a key emergency lending agreement with other central banks.

The Reuters/Jefferies CRB Index, which tracks 19 raw materials, fell 0.90% to 252.64

Gold fell as investors used profits from bullion to cover losses on other markets.

Spot gold hit a low of US$1,192.57 an ounce and was bid at US$1,195.75 an ounce at 1508 GMT, against US$1,219.70 late in New York on Tuesday.

"What is the use of an insurance policy if you can't cash it in at some point?" Daniel Major, an analyst at RBS Global Banking & Markets, told Reuters.

US crude oil prices fell for the seventh consecutive session as Germany's moves to curb speculation roiled roiled investors.

US crude for June delivery declined 44 cents to US$68.97 a barrel as of 1.30pm EDT. It fell as low as US$67.90, its lowest intraday level since September 30, 2009.

Brent crude fell 98 cents to US$73.45.

Copper for July delivery fell 4.40 cents, or 1.45%, to US$2.9870 per pound by 10.08am EDT on the New York Mercantile Exchange's COMEX division.

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