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While you were sleeping: G20 on a collision course

Wednesday 23rd June 2010

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The new UK government, as promised, brought down a tough emergency budget, adding to a wave of austerity measures in the euro zone, firmly placing Europe and the US on a collision course and the global economic outlook in doubt.

The move to end stimulus spending in Europe combined with an unexpected drop in US home sales put US investors on edge.

In late trading, the Dow Jones Industrial Average was down 1%, the Standard & Poor’s 500 Index fell 1.13% and the Nasdaq Composite was 0.61% lower.

The S&P 500 was struggling to stay above its 200-day moving average, a key technical level it broke last week. The S&P energy sector fell 1.3%.

Among the most active stocks on Wall Street were Alcoa Inc, Home Depot Inc, Walgreen Co and Jeffries Group. The Morgan Stanley housing index dropped 1.4%.

Purchases of of existing houses, which are tabulated when a contract closes, decreased 2.2 percent to a 5.66 million annual rate, figures from the National Association of Realtors showed today in Washington.
Shares in Apple Inc rose after the company said it had sold 3 million of its iPad tablets as of June 21. The iPad is currently available in the US, Australia, Canada, France, German, Italy and Japan, among other countries. It will be rolled out in nine more markets in July.

The Chicago Board Options Exchange Volatility Index, or VIX, which is known as Wall Street’s ‘fear gauge’, fell 0.92% to 24.65.

The Stoxx Europe 600 Index slipped 0.5% to 256.92, bringing to an end a nine-day advance.

The UK’s FTSE 100 shed 0.98%, France’s CAC 40 lost 0.83% and Germany’s DAX slid 0.38%.

Fitch Ratings said the risk of the euro zone economy falling into a double-dip recession had increased over the past three months, mainly due to weakened confidence in the private sector about the economic outlook.

Among the most active stocks in Europe were BNP Paribas SA, Societe Generale SA, Aegon NV, Chemring Group Plc, BP Plc and Carnival Plc.

The new UK coalition government detailed its first budget overnight. The government will cut spending and increase taxes to rein in its deficit. Among the taxes will be a new levy on banks.

Chancellor of the Exchequer George Osborne said he’s forecasting economic growth of 1.2% this year and 2.3% in 2011.

“This is an unavoidable budget,” the 39-year-old politician said. “Everyone will be asked to contribute.”

The fiscal tightening amounting to about 40 billion pounds a year by 2015 would nearly erase a deficit that reached 11% of gross domestic product in the last fiscal year. About four-fifths of the correction will be based on spending cuts with tax increases accounting for the rest.

The main rate of value added tax will rise to 20% from 17.5%, though the increase was delayed until the start of 2011.

The UK budget’s focus on austerity measures is in keeping with a range of spending cuts across Europe as the members of the euro zone struggle to control their finances. The moves are in sharp contrast to the US approach to renew its economy and the differences are expected to be a hot topic at this week’s G20 meetings in Canada.

The Dollar Index, which measures the greenback against a basket of six major currencies, fell 0.14% to 85.86.

In early afternoon trading in New York, the dollar was down 0.5% versus the yen to 90.59, while the euro dropped 0.5% as well at 111.42 yen but was little changed against the dollar at US$1.2303.

The single euro zone currency recovered from the day's lows as US equities recouped some of their losses, prompting short-covering in the euro and pushing it above US$1.23.

The 25-day rolling correlation between euro/dollar and the S&P 500 remained at a solid 59% on Tuesday, making the currency one of the proxies for risk appetite, Reuters reported.

Investors and analysts told Bloomberg News that it appeared the Australian and Canadian dollars were gaining favour with global central bankers seeking alternative reserve currencies in the wake of the euro’s slide.

Earlier this month the Russian central banker said it might add both the Aussie and the Canadian dollar to its international reserves. The IMF is believed to be looking at widening the basket of currencies it uses in transactions, including the Aussie and loonie.

On the bond market, the 10-year US note yield dropped three basis points, or 0.03 percentage point, to 3.22% in early afternoon trading in New York, according to BGCantor Market Data.

The US government’s sale of US$40 billion in two-year notes drew a record low yield of 0.738%. The debt auction’s bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 3.45, the highest since October. 

The Treasury is selling US$38 billion in five-year notes tomorrow and US$30 billion in seven-year securities on June 24.

The Federal Open Market Committee will hold its target rate for overnight lending between banks at a record low range of zero to 0.25% at the end of its two-day meeting tomorrow, according to all of the 96 economists surveyed by Bloomberg News. Policy makers have kept the benchmark at that level since December 2008.

The Reuters/Jefferies CRB Index, which tracks 19 raw materials,  fell 0.22% to 263.12.

Spot gold was bid at US$1,239.70 an ounce at 13.38 GMT, against US$1,231.65 late in New York on Monday. U.S. gold futures for August delivery edged up US$0.20 an ounce to US$1,241.00.

Commerzbank analyst Eugen Weinberg said at a presentation at the bank's London offices on Tuesday that he expected gold to rise to new highs at US$1,300 an ounce in the fourth quarter after correcting during the summer months.

Silver might rise to as high as US$23 an ounce next year, the highest price since 1980, as investors sought a cheap alternative to gold and a global economic recovery boosted industrial demand, Weinberg also forecast. The metal is trading at about US$18.82 today - about 11% higher than at the start of 2010.

US copper traded largely flat on Tuesday as the market took a breather after the  previous session's solid gains on hopes China would buy more of the metal if it revalued its currency.
Copper for July delivery up 0.50 cent at $2.9470 a pound, with trading ranging from US$2.9115 to US$2.9790.

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