WSJ: Dow's Reversal Comes Too Late for Global Selloff
By BRIAN BASKIN
FEBRUARY 5, 2010, 4:24 P.M. ET
The selloff in global markets accelerated, then abruptly reversed late, leaving commodities and the euro down on fears about the potential global fallout from Europe's sovereign debt crisis but U.S. stocks up.
U.S. Treasurys, a traditional safe haven in times of global turmoil, rallied while the dollar soared, pushing the euro below $1.36 to its lowest level since May 20; the common currency hit its weakest point against the yen in almost 12 months. A steep drop in oil futures triggered losses across the commodities spectrum, as investors nervous about the pace of the economic recovery gravitated toward the dollar.
U.S. stocks were deep in the red for much of the day before eking out a gain on a dramatic recovery after a much better-than-expected reading of U.S. consumer credit in December. But the reversal came to late for stock markets elsewhere, which slid amid fears that the fiscal woes of Greece, Portugal, Spain and other euro zone countries could ripple further, pushing a global economic recovery further out on the horizon.
"The sovereign-credit concerns are just overwhelming people," said Peter Boockvar, strategist at Miller Tabak. "It's one big liquidation. People have been hoping there will be one event that will clear up the problems, but they're having to realize, it's going to be a process."
For much of the day, the sharp market moves appeared to beget additional declines, with stock market investors citing the soaring dollar and vice versa.
"It is a flight-to-quality trade from Europe," said Thomas Roth, executive director in the U.S. government bond trading group at Mitsubishi UFJ Securities (USA), Inc in New York.
The Dow Jones Industrial Average ended up 10.05 points, or 0.1%, to 10012.23, escaping its first close below 10000 in three months. General Electric fell 1.6%. The Nasdaq Composite Index gained 0.l7% to 2141.12. The Standard & Poor's 500-share index added 0.3% to 1066.19.
Analysts said the veracity of the moves across financial markets was likely exacerbated by the fact that Friday is the last trading day ahead of the weekend. Finance ministers from the Group of Seven, including Germany, France and Italy as well as European Central Bank President Jean-Claude Trichet, are meeting this weekend in Canada and there is potential for other political developments in Europe.
"The markets are betting on a situation that I don't think will happen, which is a more extreme situation of default or an economy leaving the euro area," said Carlos Almeida Andrade, chief economist of Banco Esprito Santo in Lisbon.
That said, the euro could still decline to $1.30, or "a little bit further" before investors over the next few weeks determine belt-tightening plans in Greece, Portugal and Spain will save the monetary union from crisis, he said.
The cost of insuring Greek and Portuguese debt against default remained near record-high levels Friday, although down from late Thursday.
In the commodity markets, the rush to the exits began when oil prices dipped below $72.43 a barrel, the 2010 low, in late morning trading in New York. Futures had managed to bounce back from around that price three times in the last week, but support crumbled amid concerns about weak oil demand in what is shaping up to be a slow economic recovery.
"A lot of people piled in [the oil market] at the beginning of the year, and at the beginning of this week," when investors held a more optimistic economic outlook, said Andy Lebow, senior vice president for energy with MF Global in New York. "There's a sense of uneasiness about ... how robust the recovery's going to be."
The breach triggered numerous sell stops, automatic orders to exit trading positions that many investors set up around major price milestones. Within minutes, oil prices had tumbled to $69.50 a barrel, the lowest price seen since Dec. 15. Crude for March delivery rebounded to settle at $71.19, down $1.95, or 2.7% on the New York Mercantile Exchange.
Oil's free-fall acted as a cue for other commodities to follow suit. Copper sank to its lowest settlement since October, with the most actively traded March contract ending 0.8% lower at $2.8575 a pound. Gold, too, followed oil lower, with the most active April contract settling 1% lower at $1,052.80 an ounce. ICE March sugar was down 4.5% at 26.44 cents a pound.
The euro fell to $1.3585, its weakest point since May. The dollar has gained ground in recent sessions as investors steer clear of assets that are perceived to be riskier.
A weak recovery in the U.S. and Europe leaves commodities even more heavily dependent on emerging markets, particularly China, for demand growth. Commodity prices, particularly copper, had already fallen from highs hit near the start of the year after China's government moved to reduce bank lending, in an attempt to stave off high inflation with the potential cost of slower growth.
Write to Brian Baskin at brian.baskin@dowjones.com
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