While you were sleeping: Fixed-income safety appeals

Tuesday 25th May 2010

Stocks in the US fell as investors preferred the safety of fixed-income securities while they assess developments in Europe’s debt crisis.

Four Spanish savings banks said they planned to form the nation’s fifth-largest banking group with more than 135 billion euros (US$168 billion) in assets.

Caja de Ahorros del Mediterraneo, Grupo Cajastur, Caja de Ahorros de Santander y Cantabria and Caja de Ahorros y Monte de Piedad de Extremadura have submitted their proposal to Spain’s central bank, they said today in a filing.

Three days ago Spain’s central bank seized CajaSur, the first takeover under a state-financed rescue plan that Standard & Poor’s estimated might cost as much as 35 billion euros.

The Bank of Spain is stepping up efforts to buttress or combine the weakest of the nation’s “cajas,” mutually owned banks that boosted lending more than fivefold during Spain’s economic boom and account for about half the country’s loans.

In late trading, the Dow Jones Industrial Average fell 0.66% and the Standard & Poor’s 500 Index dropped 0.59%. The Nasdaq Composite edged 0.08% higher.

Among the most active stocks were Apple Inc, Boeing Co and Bank of America Corp.

The Chicago Board Options Exchange Volatility Index, or VIX, which is known as Wall Street’s ‘fear gauge’, fell 7.3% to 37.16.

The Stoxx Europe 600 Index advanced 0.4% to 238.02. The gauge is trading at less than 15 times the reported earnings of its companies, near the cheapest valuation since 2008.

“Valuations against bonds and against cash are looking attractive,” Ian Harnett, managing director at Absolute Strategy Research in London, told Bloomberg Television.

“Once you get some kind of visibility on the political dimensions and some sort of agreement between nations we think the upside is pretty high.”

National benchmark indexes rose in 4 of the 11 western European markets open. The UK’s FTSE 100 rose 0.13% and France ’s CAC 40 gained 0.01%. Germany’s DAX slid 0.4%.

Markets in Switzerland, Austria, Norway, Denmark, Luxembourg, Iceland and Greece were closed for public holidays.

Among the most active were Rio Tinto Group, Barratt Developments Plc and Banco Bilbao Vizcaya Argentaria SA.

The Dollar Index, which measures the greenback against a basket of six major currencies, rose 0.99% to 86.21.

The euro fell in the wake of the Bank of Spain’s take over of CajaSur amid concerns about Europe’s debt crisis and weakness in the banking sectors of some euro zone members.

In late morning New York trading, the euro fell 1.5% to US$1.2386. It fell nearly 1% versus the yen to 112.03.

"The Spanish news is not really a big story, but it does highlight that there are a lot of cracks in the financial system," Steven Butler, director of foreign exchange trading at Scotia Capital in Toronto, told Reuters.

"The concern is that if these cracks get bigger, the question is who would be able to contain it. This is obviously a warning and we'll see if it becomes more significant."

US Treasuries rose, pushing 10-year yields toward the lowest level in a year, as concern that Europe’s sovereign-debt crisis would hamper economic growth increased the appeal of the safety of US government securities.

Investors are expected to snap up the US$113 billion of 2-, 5- and 7-year notes the US will auction this week.

“It’s risk aversion and flight to quality from what’s going on in Europe,” Dan Mulholland, a Treasury trader in New York at Royal Bank of Canada, one of 18 primary dealers that trade with the Federal Reserve, told Bloomberg. “The supply will be met with good demand.”

The yield on the benchmark 10-year note fell 2 basis points, or 0.02 percentage point, to 3.22% at 2.10pm in New York, according to BGCantor Market Data.

The Reuters/Jefferies CRB Index, which tracks 19 raw materials, rose 0.19% to 251.90.

US crude rose 40 cents to US$70.44 a barrel at 12.48pm EDT.

Brent crude was down 11 cents at US$71.57.

Copper for July delivery rose 6.60 cents, or nearly 2.2%, to $3.1270 per pound by 10.37am EDT on the New York Mercantile Exchange's COMEX division.

Businesswire.co.nz

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