CH: Global markets nervously looking at US bond prices
LONDON — Stocks mostly fell Wednesday as bond market investors continued to fret about Europe's debt crisis and increasingly over the scale of U.S. borrowing following President Barack Obama's agreement with the Republicans to extend about-to-expire tax cuts for all Americans.
In Europe, the FTSE 100 index of leading British shares was down just under 2 points at 5,806.64 while Germany's DAX fell 15.05 points, or 0.2 percent, at 6,986.86. The CAC-40 in France was up 13.76 points, or 0.4 percent, higher at 3,824.26.
U.S. shares are poised to fall further at the open following Tuesday's late sell-off — Dow futures were down 28 points, or 0.3 percent, at 11,327 while the broader Standard & Poor's 500 futures was flat at 1,223.20.
Though stock investors initially cheered the tax deal in the U.S. as it boosted near-term U.S. economic growth projections, they are keeping a close watch on developments in the bond markets. U.S. Treasuries have moved sharply lower following Obama's compromise deal on the tax cuts — the yield on ten-year Treasuries is now standing at 3.22 percent, its highest level since late June.
The worry in the markets, echoed by credit ratings agency Moody's Investor Services, is that the tax cuts extension could add around $4 trillion to the U.S. deficit over the coming ten years compared to the scenario on which the Obama administration had based its projections.
Bond investors are worried there is no credible plan to get a grip on the U.S.'s own problems, especially as the pillars of the U.S. government are split.
"What Treasuries investors would like to see is a sign that someone in the Administration or the Congress takes the federal budget problem seriously," said Stephen Lewis, an economist at Monument Securities.
The impact is being felt around the world, including in Germany where the yield on ten-year bunds spiked Wednesday above 3 percent for the first time since mid-May in the immediate aftermath of the bailout of Greece.
"The slide in U.S. Treasuries is putting pressure on government bond markets elsewhere," said Lewis.
Developments in the bond markets over the last couple of days have highlighted that debt levels are historically high all around the world after governments loosened the purse strings to deal with the global financial crisis and the ensuing recession.
"It has been convenient and justifiable for Greece and Ireland to attract most of the adverse publicity emanating from the sovereign bond crisis," said David Buik, markets analyst at BGC Partners. "However, no one should be under any illusions that every government in the world, with the exception perhaps of China and Germany, is over-borrowed including the U.S."
As the U.S. deficit comes into focus, there's been an easing in the bond markets of the more highly indebted countries in Europe following indications that the European Central Bank is taking a more active role in the crisis, through bigger purchases of government bonds.
So far, the ECB's bond buying appears to be doing the trick — buying bonds supports their prices, taking pressure off the banks that hold them. It also lowers bond yields, which indicate the borrowing costs countries would face were they to go into the market for more credit.
Portugal is one country that will be breathing a huge sigh of relief as the yield on its ten-year bonds has slid below 6 percent from just above 7 percent a week ago, while Ireland's government will be comforted that the passage of its budget Tuesday, which includes euro6 billion of austerity measures, has pushed Irish bond yields down by 0.13 percentage point to 7.83 percent.
However, Europe's debt crisis has not magically gone away and there's been mild disappointment in the markets that two days of discussions between Europe's finance ministers in Brussels did not yield much more than a commitment to make bank stress tests more rigorous and comprehensive.
Calls for the creation of pan-European bonds and an expansion in Europe's bailout funds fell on deaf ears, particularly in Germany.
"There is a feeling that this continued predisposition to tinker around the edges will in likelihood go the same way as all the other measures before it," said Michael Hewson, market analyst at CMC Markets.
That disappointment was most evident in the performance of the euro, which was trading 0.6 percent lower at $1.3207. Last week, the euro had sunk below $1.30 amid concerns that Europe's debt crisis was showing increasing signs of spreading to Portugal more dangerously to much bigger Spain.
Investors are also keeping a close watch on developments in China, amid mounting market talk that the country's monetary authorities are planning to raise interest rates soon — possibly this weekend — in an attempt to rein in inflationary pressures and cool a property-related credit boom.
The fears of a monetary tightening have been stoked by market speculation that the country's inflation rate topped 5 percent in November.
Given that backdrop, it's unsurprising that Chinese shares dropped. The benchmark Shanghai Composite Index lost 1 percent to 2,848.55 while the Shenzhen Composite Index for China's smaller, second market dropped 0.3 percent to 1,305.25.
Elsewhere, South Korea's Kospi slipped 0.4 percent to 1,955.72 and Hong Kong's Hang Seng lost 1.4 percent to 23,092.52.
Japan's Nikkei 225 stock average bucked the trend, adding 91.23, or 0.9 percent, to 10,232.33 as the yen continued to weaken against the dollar to the relief of the country's exporters — by mid morning London time, the dollar was up 0.4 percent at 83.94 yen.
Oil prices suffered a bout of profit-taking after hitting a two-year on Tuesday.
Benchmark crude for January delivery was down 59 cents at $88.10 a barrel in electronic trading on the New York Mercantile Exchange. The contract hit $90.76 on Tuesday, the highest price since Oct. 8, 2008.
