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While you were sleeping: Stalled on slower growth

Friday 20th August 2010

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Global equities shifted into reverse after two more economic reports suggested the US recovery was grinding to a halt.

Jobless claims rose to a seasonally adjusted 500,000 last week in the US, rising when they had been forecast by many market players to decline. It was another sign that American employers are hesitating to expand amid increasing signs consumers were holding back.

In a separate report, the Philadelphia Federal Reserve Bank said its business activity index dropped to minus 7.7, the lowest since July 2009, as new orders and shipments fell and the employment situation deteriorated.

"It is certainly disheartening news about the economy," David Resler, chief economist at Nomura Securities International in New York, told Reuters.

In late trading, the Dow Jones Industrial Average dropped 1.4%, the Standard & Poor's 500 Index shed 1.61% while the Nasdaq Composite Index declined 1.55%.

Among the most active stocks on Wall Street were Alcoa, General Electric, 3M, Intel and Sears Holding.

Intel fell after announcing a plan to buy online security software maker McAfee for US$7.68 billion.

Sears dropped after saying sales at the largest US department store chain slid in its second quarter, failing to meet analysts’ expectations.

The Chicago Board Options Exchange Volatility Index, or VIX, which is known as Wall Street’s ‘fear gauge’, rose 7.28% to 26.38 in New York. The index measures the cost of using options as insurance against declines in the Standard & Poor’s 500 Index.

The Stoxx Europe 600 Index declined 1.4% to 253.9 after rising as much as 0.7% earlier in the session following the Bundesbank’s improved forecast for German economic growth.

The UK’s FTSE 100 dropped 1.73%, Germany’s DAX lost 1.80% and France’s CAC 40 plunged 2.07%.

Among the most active stocks in Europe were Pennon Group, United Utilities Group, Holcim and BP.

The Dollar Index, which measures the greenback against a basket of six major currencies, rose 0.35% to 82.51.

The euro slipped against the greenback. In late trading, the euro was down slightly at US$1.2858, according to Reuters data.

The US dollar fell against the yen, moving toward recent 15-year lows on growing speculation that Japanese authorities were unlikely to intervene to counter their currency's recent strong run.

The US dollar shed 0.2% to 85.34 yen, not far from a 15-year low of 84.72 yen hit on trading platform EBS last week.

Speculation about intervention has mounted before a meeting between Japan Prime Minister Naoto Kan and Bank of Japan Governor Masaaki Shirakawa expected next Monday. Analysts said Japanese authorities were unlikely to conduct yen-selling intervention unless the currency's rise accelerates sharply.

However, intervention was being pushed by a regional Federal Reserve president - at least in terms of the US Treasuries market.

“Should economic developments suggest increased disinflation risk, purchases of Treasury securities in excess of those required to keep the size of the balance sheet constant may be warranted,” James Bullard, head of the St. Louis Fed, said today in a speech in Rogers, Arkansas.

Bullard was optimistic about the economic outlook. Prospects for the economy, while downgraded in recent months, were still favourable, Bullard said.

The outlook “remains positive,” Bullard said.

“Continued expansion is the most likely course going forward.”

The US will sell US$102 billion of two, five and seven-year notes next week, the fourth straight monthly reduce in the combination of maturities.

In trading today, the two-year note yield fell two basis points to 0.48% at 1.30pm in New York. The 30-year bond yield touched 3.62%, the lowest level since April 2009, according to BGCantor Market Data.

The Reuters/Jefferies CRB Index, which tracks 19 raw materials, fell 0.62% to 268.22.

Gold initially jumped but the rally faded as losses in US stocks deepened, prompting investors to sell gold to cover margin calls as stock prices accelerated losses.

Spot gold was at US$1,232.15 an ounce at 12.44pm EDT, against US$1,227.55 late in New York on Wednesday. US gold futures for December delivery rose US$2.70 to US$1,234.10.

Oil fell for the second straight session, as the weak US economic data fueled worries about demand in the world's biggest oil consumer.

US September crude was down US$1.15 at US$74.27 a barrel at 12.30pm EDT. ICE front-month Brent fell US$1.24 to US$75.23.

Brent's premium against U.S. crude dropped back to below a dollar a day after it rose to US$1.39,  the highest since early June.

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