We could go down so fast that you’ll get a nose bleed!
European stock markets slumped and the euro dropped under $1.28 for the first time in four months Wednesday owing to concerns over fallout from the Cyprus bailout and a disappointing bond sale in Italy, analysts said.
London’s FTSE 100 (FTSE: ^FTSE – news) index of leading companies fell 0.69 percent to stand at 6,355.10 points in afternoon deals, as Frankfurt’s DAX 30 (Xetra: ^GDAXI – news) shed 1.44 percent to 7,766.11 points and in Paris the CAC 40 (Paris: ^FCHI – news) slumped 1.46 percent to 3,693.95 points.
Madrid tumbled 1.90 percent and Milan lost 1.59 percent. The Athens stock exchange, a low volume market, plunged 6.83 percent.
Italian borrowing rates fell slightly in a 10-year debt auction on Wednesday, but borrowing rates were higher for five-year debt and demand was weak amid concerns of political deadlock in the recession-hit country following inconclusive elections.
Stock indices were falling “as the ongoing issues in Cyprus continue to weigh on sentiment,” said Alpari trading group analyst Craig Erlam.
Gold prices slipped to $1,591 an ounce from $1,598 Tuesday on the London Bullion Market.
Troubled eurozone nation Cyprus on Wednesday scrambled to finalise capital controls to avert a run on banks, a day before they are due to reopen after a nearly two-week lockdown while the island secured a huge bailout.
Meanwhile there are fears that the controversial terms of the bailout could be mirrored in any future financial rescues of indebted eurozone members.
Nicosia early Monday agreed a last-minute deal with its international lenders that will see it receive a $13 billion rescue package to help pay its bills.
And while the decision to tax bank savings above 100,000 euros raised fears of a similar move in future rescues — reinforced by comments from the head of the Eurogroup of finance ministers — officials have since insisted that Cyprus is a special case.
“The negative sentiment is also enhanced by rumours that this format will be adopted as a template for any further bailout schemes,” said Currencies Direct trader Amir Khan.
“Although top officials deny any such move in the future, markets are still wary that this format will leave the banks with fewer deposits and in turn will allow them to lend less, shrinking growth.”
Elsewhere on Wednesday, in indebted eurozone member Italy there was weak demand at an auction of 5- and 10-year bonds, with bid-to-cover ratios of 1.2 and 1.3.
Ratios of above 2.0, where submitted bids are double those accepted, are considered strong.
The Italian treasury took in 3.91 billion euros at a rate of 3.65 percent, a five-month high.
However the yield on 10-year bonds dipped 4.66 percent, compared with 4.83 percent at the last similar auction on February 27, with three billion euros raised.
The European Commission meanwhile said its key business and consumer confidence index for the eurozone fell 1.1 points in March to 90 points, reflecting a downturn in the manufacturing and service sectors while consumer sentiment was steady overall.
Amid the gloom in Europe, US stocks moved lower Wednesday in early trading.
The Dow Jones Industrial Average gave up 0.33 percent, the broad-based S&P 500 sank 0.36 percent, while the tech-rich Nasdaq Composite Index dropped 0.26 percent.
The retreat followed strong gains Tuesday that resulted in a record high for the Dow and a near-all-time high to the S&P 500.
“Follow-through has been lacking this morning for reasons that are both convenient and clear,” Patrick O’Hare of Briefing.com wrote. “Headlines out of Europe are largely to blame.”
— Dow Jones Newswires contributed to this report —
Double economic Trouble
The UK’s 2009 budget deficit is the worst in its history and the present government is doing very little to alleviate the potential problems and collateral damage because it is playing a waiting game. Instead of taking hold, the government is still bleating about bankers’ bonuses with most of its energies focused on an impending General Election.
It is very doubtful whether the government has finished handing money to the banks and it is very likely that the UK budget deficit as well as the rate of inflation will rise over the next two years.
The explosion in the supply of gilts would be bad enough if the Treasury only had to borrow enough to equal each year’s budget deficit but the time will come when the Treasury has to borrow enough to replace maturing gilts as well as enough to fund its deficit— and that means an even greater avalanche of gilts will need to find buyers each year.
The Law of Supply and Demand dictates that when you get a massive increase in the supply of anything, its value plunges — and United Kingdom gilts as well as US Treasury bonds are no exception.
So far, most investors have been willing to pay a relatively high price and accept lower yields but now even that is changing! The most ominous “noises” are coming from China which is the the single largest holder of U.S. debt. Last month China dumped more Treasuries than in ANY month since the US government started tracking the data in 2000. Unfortunately for the USA, China holds nearly one half of its debt.
Last week’s US Treasury auctions turned out to be a monumental failure, with demand extremely weak. The 30-year auction was especially weak: Indirect bidders — mostly foreign governments and investors — took just 28.5 percent of the bonds sold, compared to a ten-auction average of 43.2 percent percent. That is ominous.
As a result, prices slumped and yields surged. In effect, the U.S. Treasury had to bribe investors with higher yields to get them to buy. Immediately alarm bells began ringing at the Fed.
Four days ago, the U.S. Federal Reserve raised the discount rate on loans made directly to banks. The 25-basis-point (0.25%) increase was the FIRST hike in the discount rate since early 2006. Secretly, the Fed is in a panic to ward off a bond market collapse and the UK Treasury is concerned about a similar collapse in its own gilt market!
Sooner or later, the Americans MUST send the message that they’re serious about cutting back on their money printing. The same applies to the UK’s “Quantitative Easing”. There has been an announcement from the Bank of England to the effect that Quantitative Easing has stopped – for ever! The sad fact is, however that they don’t know whether to p**s or climb off the pot.
The danger of course, is that foreign investors could get an entirely different message: That Washington’s and London’s efforts to fight the most severe recession since the 1930s are waning or that they are deluded enough to think that their work is over.
If that happens, there will be turmoil — not just in the bond/gilt market, but in every other asset class. The two governments are between a rock, a hard place and more rock.
The Chinese are beginning to flex their muscles and have been especially vocal about surging U.S. deficits over the last year and have repeatedly warned that such deficits are unsustainable. As America’s largest financing nation they have also asked the Fed for some sort of guarantee on Treasury bonds. China owns over 40% of all outstanding U.S. Treasury supply – or more than $1 trillion dollars!
If U.S. Treasury bonds are an ideal short then Britain’s gilt market is probably an even better speculation on the short side. The United Kingdom is amassing piles of debt and there does not appear any end in sight. The transition to a “do-nothing” system is further compounded by the fact that some economists say that the UK should spend its way out of trouble whilst others say that government spending should be cut. Some say that the government should start making inroads into its deficit while others say that it should wait.
The U.K.’s financial system is essentially bankrupt – no matter what cosmetic pronouncements are made by a frightened government. In 2008, the aggregate cost of bailing-out its banks exceeded the entire value of England’s gross domestic product.
Quantitative Easing (QE), the Bank of England’s euphemism for a massive credit expansion, is no greater anywhere than in the United Kingdom and the Bank of England’s multi-billion bond purchases have triggered a rise in inflation. The BoE has been an aggressive buyer of British gilts since the end of last year – especially longer dated gilts.
The big question for gilts is what happens once the Bank of England finally terminates or slows its QE program? Who will absorb this supply? The odds are pretty high that the UK will have a hard time finding buyers to finance its ballooning budget deficits.
Both Anglo-Saxon economies represent the worst long-term inflation scenarios and shorting their respective government bonds ranks as one of the greatest speculations over the next decade. There’s lots of fun to be had by the Investment banks and foreign investors and yet another opportunity for the banks (once again) to destroy (at least) two economies.