Euro plunges as growth worries mount

Euro plunges as growth worries mount
By Robert Budden
Copyright The Financial Times Limited 2010
Published: May 14 2010 08:29 | Last updated: May 14 2010 12:23
http://www.ft.com/cms/s/0/ab272860-5f28-11df-978c-00144feab49a.html


12.00 BST: Fears of deflation in Spain and renewed concerns that tough new austerity measures across Europe would damp growth spooked investors in the region on Friday, sending the euro to new 18-month lows, share markets tumbling and gold to a new high.

The euro, which had been trading 0.3 per cent higher against the dollar at $1.2570 in early trade, fell through last week’s 14-month lows of $1.2510 to $1.2465, its lowest level against the dollar since November 2008 and a decline of 0.5 per cent.

Traders, who said they had been seeing earlier support for the euro as it approached $1.25, said the next milestone for the single currency was $1.2328, the low it hit at the height of the financial crisis in October 2008 amid heavy haven demand for the dollar.

Core consumer prices in Spain, excluding energy and fresh food, fell 0.1 per cent from a year earlier, the National Statistics Institute in Madrid announced on Friday. The surprise fall, following a 0.2 per cent rise in March, marked the first annual decline in data going back to 1986.

Fears that deflation would exacerbate Spain’s debt problems sent financials sharply lower, with the European banking sector down 3.4 per cent in early trade led by Société Générale in France, down 5.9 per cent.

In sovereign bond markets, yields on 10-year Greek bonds climbed 42 basis points to 7.78 per cent, the first significant climb in Greek yields since the European Central Bank commenced its purchases of eurozone periphery debt on Monday. Portuguese sovereign 10-year yields climbed 9 basis points to 4.63 per cent.

There was haven buying in gilts with 10-year yields falling 9 basis points to 3.75 per cent and 10-year German Bund yields 7 basis points lower at 2.86 per cent.

The decline in European stock markets – already under pressure on continued concerns over government deficit reduction challenges – followed falls in Asia as markets were weighed down by financials and the technology sector. The Eurofirst 300 index was 1.9 per cent lower.

Futures on the S&P 500 indicated US equity markets would open 0.6 per cent lower.

In Asia, Japan’s Nikkei 225 closed down 1.5 per cent, led lower by consumer goods and technology stocks. Sony was down 6.8 per cent after the electronics company issued profit expectations for the year that undershot consensus estimates. Other big exporters such as Canon and Honda were also affected, falling more than the wider market.

In Shanghai, real estate and banking stocks – down 0.8 per cent and 1.7 per cent respectively – continued to weigh on the equity market. The wider Shanghai Composite closed 0.6 per cent lower.

In a sign of further steps being taken by China to damp an overheating property market in urban centres, the China Securities Journal reported that Shanghai’s municipal government was putting up nearly 40 lots of land for sale in the city’s most extensive release yet.

Nymex crude was down $1.62 to $72.95 a barrel, its fourth straight day of losses and lowest level for over three months, as inventories at Cushing in Oklahoma remained at record highs. Copper was also lower at $6,994 a tonne on continued concerns over slowing global growth. Australia’s ASX 200 stock market index was down 0.9 per cent, with basic resources stocks 0.5 per cent lower.

Gold rose above €1,000 a troy ounce for the first time and hit a fresh record high in dollars terms on Friday amid the fresh turmoil in financials market. The nominal all-time high of $1,248.95 a troy ounce was up 1.4 per cent on the day. It also hit new highs in Swiss franc and sterling terms.

There were further signs that last week’s turmoil on concerns over Greek contagion had caused investors to seek safe havens.

Data released on Friday from EPFR Global, which tracks fund flows, showed that in the week ending May 12, while equity funds tracked by the organisation posted inflows of $9.9bn, money market funds attracted a year-to-date high of $23.5bn of net new money. This marked the first weekly inflow into this defensive asset class since the first week of 2010. In the year to date, money market funds have witnessed $388.5bn of outflows, EPFR said.