Dollar and government bonds rally as investors seek havens - European bourses stabilise after early sell-off

Dollar and government bonds rally as investors seek havens - European bourses stabilise after early sell-off
By Jamie Chisholm
Copyright The Financial Times Limited 2009
Published: November 27 2009 07:13 | Last updated: November 27 2009 22:32
http://www.ft.com/cms/s/0/3f57bfac-db23-11de-9023-00144feabdc0.html


18:25 GMT: Investors piled into dollars as US traders got their first chance to assess the global rout in risky assets that followed the Dubai World debt restructuring.

A reappraisal of the much-discussed dollar carry trade – where the buck is sold to pay for other assets – saw the greenback rebound from a fresh 14-year low against the yen and pick up speed against a swathe of other currencies.

After falling below Y85 in Asian trading, the dollar was later up 0.2 per cent to Y86.76. It rose 0.4 per cent against the euro to $1.4957 and climbed 0.2 per cent on a trade-weighted basis to 74.99.

US stocks opened their half-day session sharply lower, though they managed to pare losses. The S&P 500 closed 1.7 per cent to 1,091.50. At one stage, equity futures had been pointing to a 3 per cent decline on concerns about possible financial contagion from the Dubai crisis.

The market’s low volumes accentuated the session’s volatility. The Vix index, a gauge of investor anxiety, soared 21 per cent to 24.74.

European stock markets initially added to Thursday’s heavy losses, though the improvement in New York helped the FTSE 100 finish up 1 per cent at 5,245.7, and the FTSE Eurofirst 300 gained 1.2 per cent to 999.59.

The volatile session in Europe followed another day of sharp falls in Asia as analysts struggled to calculate what would be the full impact of Dubai’s difficulties. Banks and construction stocks with links to the emirate were particularly badly hit.

The Nikkei 225 in Tokyo fell 3.2 per cent to 9,081.5, with exporters again bearing the brunt as the yen soared. The Kospi in Seoul was one of the worst performers in the region, losing 4.7 per cent to 1,524.5, its worst day since January. The sell-off took both bourses to four-month lows.

Mainland China’s benchmark, the Shanghai Composite, lost 2.4 per cent and Hong Kong’s Hang Seng fell 4.8 per cent to 21,1134.5, with index heavyweight HSBC taking a battering.

In Australia, the S&P/ASX 200 slumped 2.9 per cent to 4,572.1 as resource groups joined financials in the sell-off, as commodity prices pulled back.

Oil broke back below the $75 mark, at one stage but was later down 2.4 per cent to $76.06, helping to lead the commodity complex off its lows.

The haven of triple-A government bonds was much in demand. The benchmark US 10-year Treasury yield fell 7 basis points to 3.20 per cent. Meanwhile, the yield on the two-year Treasury note was at 0.68 per cent, down 6 basis points on the day. The two-year yield was up from an overnight low of 0.608 per cent, just above the 0.604 per cent record low established last December.

Japanese bonds also rallied as equities slumped and data showed that deflation continued to stalk the land. The yield on the 10-year JGB fell 4 basis points to a seven-week low of 1.25 per cent.

The Market Eye

“I’ve never seen a quicker paper liquidation in gold ever.” Those were the words of Ben Davies, director of gold hedge fund Hinde Capital, as he surveyed carnage in the bullion complex on Friday morning. The precious metal at one stage dropped almost 5 per cent as a soaring dollar provided an excuse for some serious profit-taking after a multi-month rally that saw gold almost hit $1,200 on Thursday. Gold later recovered some poise to trade off 1.3 per cent at $1,172.52.