While you were sleeping: Contagion woes renew

Wednesday 28th April 2010

Stocks plunged after the debt rating of Greece and Portugal were cut amid signs that the crisis in Europe was spreading because of a lack of resolve to address the situation.

Share indexes across Europe fell more than 2%, while the three major ones on Wall Street were each down more than 1% in late afternoon trading.

S&P cited the "political, economic, and budgetary challenges that the Greek government faces in its efforts to put the public debt burden onto a sustained downward trajectory."

For Portugal, S&P cut its rating by two notches to A-minus, saying Portuguese finances were structurally weak and the economy uncompetitive. Lisbon needed to do more than it currently planned to stabilise its finances, S&P said.

At the Chicago Board Options Exchange Volatility Index, the VIX - the fear guage surged as much as 21%. It was up 16% at 20.29 at 2.30pm EDT. The index measures the cost of using options as insurance against declines in the Standard & Poor's 500 Index.

Europe’s Stoxx Index, a gauge of options on the Dow Jones Euro Stoxx 50 Index, climbed 17% to 28.56.

In mid afternoon trading, the Dow Jones Industrial Average fell 1.18%, the Standard & Poor’s 500 dropped 1.54% and the Nasdaq Composite was down 1.36%.

The S&P 500 broke through a technical resistance level and chartists now look at 1,180 as a near-term support. Mid-term support is seen at around 1,150, the peak the benchmark hit in January.

Among the most active were JPMorgan Chase & Co, Citigroup Inc, Estee Lauder Cos, Office Depot Inc and Western Union Co.

Shares of Goldman Sachs Group rose as its chief executive and the bond trader at the centre of the SEC's fraud charges gave testimony to a U.S. Senate committee, defending their actions.
 
In Europe overnight, the Dow Jones Stoxx 600 recorded its biggest drop in five months, ending 3.1% lower at 261.65

Among national benchmarks, the U.K.’s FTSE 100 tumbled 2.61%, Germany’s DAX 30 shed 2.73% and France’s CAC 40 declined 3.82%.

Shares in Greece fell 6%.

The catalyst for the wave of pessimism was a decision by S&P Ratings Services to cut its ratings on Greek debt to junk status, while Portugal’s was cut two steps as contagion from Greece’s debt crisis spreads through the euro region. Credit-default swaps on Greek debt jumped 104 basis points to a record 814 basis points, Bloomberg reported.

Portugal may follow Greece in having its debt downgraded to junk, according to Ignis Asset Management.

The downgrades came a day after Germany blinked: Chancellor Angela Merkel said she wasn't going to release bail-out funds for Greece until the nation had a “sustainable” plan to reduce its deficit shortfall.

Some of the biggest movers included BHP Billiton, Xstrata Plc, Spain's Banco Popular Espanol SA, Banco Comercial Portugues SA and National Bank of Greece SA, which plunged 10%.

The risk premium on Portuguese bonds rose to more than double the past year’s average this month. Portugal’s credit default swaps show investors rank its debt as the world’s eighth-riskiest, worse than for Lebanon and Guatemala, according to Bloomberg.

Portuguese spreads, the extra yield that investors demand to hold its debt rather than German equivalents, jumped to 227 basis points today, the most since at least 1997.

The Dollar Index, which measures the greenback against a basket of six major currencies, rose 1.1% to 82.08. 

The U.S. dollar and yen advanced as the euro sank.

The euro dropped as much as 2.4% to 122.68 yen in the biggest intraday decrease since February 4, compared with 125.73 a day earlier. The euro slipped 1.1% to US$1.3243. The greenback slid 0.8% to 93.24 yen, from 93.96.

"There's just a feeling that even with all these downgrades, we're still playing catch-up and there's still more to bad news to come," Win Thin, a currency strategist at Brown Brothers Harriman in New York told Reuters. "People know Greece and Portugal are issues, but the gorilla in the room is still Spain."

The 16-nation euro was headed toward US$1.32, a level last reached on April 30, 2009. Stop-loss orders to sell the euro may be clustered there, according to foreign-exchange strategists who spoke with Bloomberg.

The U.S. dollar eased in its slide against the yen after the Conference Board said its sentiment index rose to 57.9 in April from a revised 52.3 in the previous month. The median forecast of 78 economists in a Bloomberg News survey was for an increase to 53.5 from a previously reported 52.5. Another sign that the recovery is firming in the world's biggest economy.

Two-year U.S. Treasury note yields fell to the lowest level since March 18 even as the Treasury sold a record-tying $US44 billion of the securities. Ten-year note yields dropped to the least since March 23, while 30-year yields touched the lowest since March 18.

The yield on the benchmark 10-year note declined 11 basis points to 3.7% at 2.42pm in New York, according to BGCantor Market Data.

The two-year notes sold today that settle on April 30 drew a yield of 1.024%, compared with the average forecast of 1.022% in a Bloomberg News survey of eight of the Federal Reserve’s 18 primary dealers. Investors bid for 3.03 times the amount offered, compared with 3 times last month and an average of 3.10 for the past 10 sales.

The Reuters/Jefferies CRB Index, which tracks 19 raw materials, fell 1.87% to 273.18. 

Copper fell in London as concern about potential delays in financial aid for Greece drove investors away from higher-yielding assets. Aluminum, lead and zinc also dropped.

Crude oil for June delivery fell US$1.83 to US$82.37 a barrel in electronic trading on the New York Mercantile Exchange. Copper retreated 4.3% to US$3.3945 a pound while aluminum sank 7% and nickel, tin and zinc dropped more than 3%.

Gold rose to a two-week high and hit record levels in both euro and Swiss franc terms. Spot gold hit a peak of US$1,163.75 and was bid at US$1,161.95 at 1525 GMT, against US$1,153.38 late in New York on Monday. It hit record highs in euros at 874.70 euros an ounce and in Swiss francs at 1,254.87 francs.

Investment demand took holdings of the world's largest gold-backed exchange-traded fund, New York's SPDR Gold Trust, rose more than 6 tons to a record 1,146.216 tons on Monday, the fund said.

Businesswire.co.nz

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