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FT: Traders focus on Europe’s fiscal problems

By Jamie Chisholm, Global markets Commentator
Published: February 15 2010 08:39 | Last updated: February 15 2010 21:34

21:30 GMT. Holidays in Asia and the US served to sharpen the focus on Europe’s fiscal problems on Monday, keeping the single currency under pressure.

News of accelerating economic growth in Japan could not prevent the Tokyo market closing with losses as those bourses open in the region got their first opportunity to react to China’s surprise monetary tightening late last Friday.

The FTSE World equity index rose 0.1 per cent. Trading across the world is likely to be pretty thin as players prove reluctant to take aggressive positions with New York shut for Presidents’ Day and China, Hong Kong, Taiwan, Singapore and Malaysia all closed for the lunar new year holiday. Brazil and other parts of South America are enjoying Carnival.

Investors from London to Paris and Frankfurt can look forward to reaction to late news on Monday that EU leaders are looking for more stringent austerity measures than Greece’s government may be currently willing to undertake, at least not without concrete promise of a bail-out. Greek 10-year sovereign debt took a hit as the disappointing news emerged, rising 10 basis points by the end of the day.

The euro followed suit, going from unchanged at midday to flirting with nine-month lows just below $1.36. It was down 0.2 per cent at the end of the day. Data from the Chicago Mercantile Exchange showed record levels in short positions, or bets against the single currency, for the second time in the past two weeks.

Investors have been fearful that the concerns about Greece could spread to other so-called “peripheral” European economies such as Portugal and Spain, pushing up their bond yields and making it even more difficult for them to service their debts. The reasoning is that austerity measures required to show fiscal discipline could fracture the fragile economic recovery.

“Greece is obviously still at the front of most traders’ minds....and it seems to me that unity is one thing missing here and clarity over how best to deal with this is far from there,” said Maurice Pomeroy at Strategic Alpha.

Meanwhile, markets were reminded that debt woes are not exclusive to Europe. Traders are also keeping an eye on developments in Dubai, where Dubai World remained in discussions with creditors over its $22bn debt. Talk that investors would have to take a 40 per cent “haircut” on their DW debt have been denied but have heightened concerns that problems in the emirate are not near conclusion.

? European bourses managed decent gains as traders noted a late rebound on Wall Street on Friday. The S&P 500 closed with a loss of 0.3 per cent, but it had been lower by 1.4 per cent during European hours. The FTSE Eurofirst 300 rose 0.4 per cent and the FTSE 100 in London climbed 0.5 per cent, with miners and insurers strong.

The Athens stock market was closed for the Ash Monday holiday.

In Asia, the Nikkei 225 fell 0.8 per cent. Better nominal GDP growth than expected was not as perky as first thought when deflation was taken into account, while Beijing’s move to crimp lending raised concerns that Japan’s export markets might see less demand. The FTSE Asia-Pacific index fell 0.4 per cent.

? Trading in the forex markets was very quiet, though the euro continued to find few friends. The single currency spent much of European trading hours twitching within a tight 40 pip range at close to eight-month lows versus the dollar. It was later down 0.2 per cent at $1.3605.

Sverre Holbeck, senior analyst at Danske Markets, noted that the latest data on futures contracts at the Chicago Mercantile Exchange showed speculative investors increased negative bets on the euro in the week ending February 9.

“As a share of open interest, short positions have reached close to 30 per cent which does point to an increasingly crowded trade. In turn, this could spell upside risk for euro/US dollar if the positions were to be unwound,” he said in a report.

The dollar rose less than 1 per cent against a basket of its peers.

? With US Treasury markets closed, the Bund took up the mantle of benchmark and its yield rose 1 basis point to 3.20 per cent.

Greek bonds came under pressure as the EU Commission said it had asked Athens to explain reports it had used derivatives to obscure its debt levels. The Greek 10-year bond yield rose 10bp to 6.23 per cent, pushing the spread with Bunds to 304 basis points. Spanish sovereigns saw their yields rise by about 4bp.

The credit default swaps of Dubai - a product that is intended to track the cost of insuring against default - surged as traders expressed concern about the ongoing negotiations to restructure the debt of state-owned Dubai World. Reuters reported that it cost $651,000 a year for five years to insure $10m of Dubai debt, the highest since March last year.

? Gold bucked a slightly firmer dollar to gain 0.7 per cent to $1,101, while oil fell after a bearish forecast from a top Saudi official, who talked of US and Saudi efforts to reduce their consumption and transition to renewable and nuclear power. The crude benchmark was down 0.2 per cent to $74.00.


Additional reporting by Telis Demos in New York


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