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Fears that China is poised to raise interest rates and worries over the eurozone’s fiscal crisis are battering growth-focused assets.
Shanghai’s Composite index is leading the declines with a fall of more than 5 per cent, while copper, the industrial metal bellwether, is off 2.8 per cent on concerns any move from Beijing designed to smother inflation will hobble growth.
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The FTSE All-World index is down 0.9 per cent and traders are moving into traditional havens such as core sovereign debt, the yen and dollar. US equity futures are down 1.3 per cent.
The euro is again under pressure after European finance ministers at the G20 meeting in Seoul held discussions about the extreme stresses in the currency bloc’s sovereign bond markets.
Worries are mounting that Ireland and Portugal may require assistance to tackle their budget difficulties as “peripheral” bond spreads signal some form of default is likely. Contagion is afoot. The premium investors require to buy benchmark Spanish and Italian bonds relative to German Bunds have also risen to a euro-era high.
Signs of increasing tensions in the financial system can be seen in US swap spreads, which have now moved higher by about 11 basis points this week to 26 basis points, their widest in four months, according to Reuters
After such a good run since the start of September – the All-World by the start of this week was up 17 per cent and the Reuters-Jefferies CRB commodities basket up 21 per cent – the temptation to lock in profits is high. This is doubtless contributing to the selling in such riskier assets.
Factors to Watch. Analysis of the announcements and chatter from the G20 may have some impact, particularly on currencies.
It’s another big day for European results, but the pickings out of the US are meagre, with JC Penney the possible highlight. In terms of economic data, the US November Michigan Confidence index has the power to drive market sentiment.
Asia-Pacific. Most Asian exchanges are lower, following an overnight drop on Wall Street and as the China tightening and eurozone contagion fears abound. The South Korean market is outperforming as trading adjusts to Thursday’s late-session decline.
The FTSE Asia Pacific index is down 1.5 per cent, with Japan’s Nikkei 225 average off 1.4 per cent, and Australia’s S&P/ASX 200 down 0.8 per cent, the latter impacted by weaker bank shares on capital-raising concerns.
South Korea’s Kospi Composite earlier jumped 2.3 per cent after plunging 2.7 per cent at the last minute of the previous session. Here too, investors have succumbed to the broader malaise and the Kospi is down 0.1 per cent. Financial regulators are looking into what caused the late-session losses, which traders say were linked to the expiry of options contracts.
The Shanghai Composite index has shed 5.2 per cent and the Hang Seng index in Hong Kong is off 1.9 per cent. Investors are worried that Beijing may raise interest rates as soon as this weekend to curb inflation, which hit a two-year high last month. In addition, property developers fell after the state-run Securities Times reported that China has curbed foreign investment in the local real-estate market.
Europe. Bourses have opened sharply lower, reflecting Asia’s slide and worries about banks’ exposure to eurozone sovereign debt. The FTSE Eurofirst 300 is down 1.5 per cent and London’s FTSE 100 is off 1.4 per cent with the mining index off 4 per cent as commodities slide. Dublin is down 0.8 per cent.
Rates. US 10-year yields are down 3 basis point to 2.63 per cent as investors seek the relative safety of “core” debt. Bund yields are down 2bp to 2.41 per cent.
“Peripheral” eurozone debt is mixed, with yields remaining at recent record levels. Spanish 10-year yields are up 4bp to 4.69 per cent, while Greek equivalents are up 4bp to 11.72 per cent.
However, Portugal’s benchmarks are lower by 23bp to 7.15 per cent and Ireland’s are off 13bp to 9.13 per cent.
Forex. European debt problems continue to weigh on the euro, which fell to a six-week low of $1.3606 in early Asian trading. The single currency is now down 0.3 per cent at $1.3625.
Growth-related currencies, such as the Aussie dollar, are struggling, as anxiety about China and the eurozone reduces risk appetite. Money is moving into traditional “havens”. The dollar index, which tracks the buck against a basket of its peers, is close to a six-week high, up 0.2 per cent at 78.30.
The yen is up 1 per cent relative to the euro at Y111.65 and up 0.8 per cent versus the dollar at Y81.87.
A lack of concrete details about how the G20 will tackle currency tensions was believed to be behind a sharp fall in the Korean won. The won is down 1.6 per cent versus the dollar at Won1,127.5 as traders speculated that Seoul would impose capital controls to stop the flows of hot money into the currency.
Commodities. The complex is seeing heavy selling as investors remove bets from an asset class that has enjoyed a sparkling few months. Metals and agricultural commodities are all in retreat, as the stronger dollar – in which most are denominated – adds to the pressure.
Oil is down 2 per cent at 86.01 a barrel and copper is down 2.8 per cent to $8,594, having hit a record high of $8,966 a tonne on Thursday. Gold is lower by 1.8 per cent to $1,385 an ounce.
Americas. On Thursday, Wall Street saw selling, though stocks finished well off their session lows as the more bullish investors continued to apply the “buy on the dips” mentality prevalent since implicit support for assets was provided by the Federal Reserve’s QE2 programme. The S&P 500 more than halved its early decline to close down 0.4 per cent, held back by a 16 per cent slide in Cisco shares following the technology group’s weak earnings forecast and wariness over the eurozone debt situation.
Those concerns also affected other bourses in the Americas. Declines for Canadian shares were muted, however, by resource stocks as copper and other commodities continued to forge ahead. The S&P/TSX composite index fell just 0.06 per cent.
Brazil’s Bovespa fell 0.6 per cent, lead lower by Petrobras, off 1.5 per cent, in spite of strong energy prices. Mexico’s IPC index dropped 0.3 per cent.
Follow the market comments of Jamie Chisholm in London and Telis Demos in New York on Twitter: @JamieAChisholm and @telisdemos
