Resurgent risk aversion pushed markets lower again this afternoon, as fears about global growth and a renewed Eurozone crisis took precedence over the US debt ceiling crisis in the minds of shares spread betting investors.
Safe havens like the Swiss franc, Japanese yen and gold all rose.
By 3.30pm (London time), the Dow Jones was down 0.5% at 12068, while the S&P 500 had dropped 0.66% to 1278.41 and the Nasdaq 100 had lost 0.36% to 2345.61. In London, the FTSE 100 continued to struggle, held down mainly by mining stocks, falling 0.6% to 5739.93.
US consumers start hoarding cash
In yet more uncomfortable news for the US economy, American personal spending fell in June. Commerce Department figures showed that spending dropped 0.2% following May’s 0.1% rise, having been expected to increase by 0.1%.
With job growth still almost non-existent, and rising prices eating away at US incomes, American consumers remain reluctant to spend. Indeed, the savings rate rose to its highest level since September, reaching 5.4% from May’s 5%.
Although the data did not provoke the rapid moves in markets seen yesterday following the impressive miss on ISM manufacturing data, it adds to the weight of opinion that is beginning to believe that the slowdown in the US economy may be more than temporary.
Eurozone crisis reignites
As one crisis draws to a temporary close, another has sparked back into life. Yields on Italian and Spanish ten-year bonds (seen as a useful benchmark of market sentiment) are rising once more, reaching 6.26% and 6.46% respectively, uncomfortably close to the 7% line that forced Greece, Ireland and Portugal to go cap in hand to the EU and IMF.
Indeed, the crisis has become so severe that Spanish PM José Rodriguez Zapatero has cancelled his holiday to southern Spain in order to coordinate the mounting panic in Madrid.
If Mrs Zapatero is annoyed by the loss of her holiday, then she should blame her husband, since it could be argued that it was Zapatero’s decision to bring forward the general election from March to November that precipitated the latest round of Eurozone jitters.
With Spain’s political class now more preoccupied with securing re-election rather than dealing with the public finances, the prospects of crafting a meaningful response to any summer crisis look dim at best, especially with most of the EU’s bureaucracy holidaying in Tuscany.
Swiss franc & yen race ahead
Today has been a day for safe havens, with assets viewed as more secure, hitting new highs.
The Swiss franc is among those pushing ever-higher as the developed world lurches from crisis to crisis. The currency gained 1.2% against the euro, reaching an all-time high of 1.1043, while against the US dollar it added 0.7% to 0.7784.
Eurozone concerns are resurgent once again, and while the US might have avoided disaster for now, the debt ceiling saga in Washington underlines the seriousness of America’s fiscal problems.
The yen is also on a roll today, pushing USD/JPY down to levels not seen since 1995, although fears of possible intervention grow as the Japanese yen continues to strengthen.
Precious metals back in favour
Gold and silver are also in high demand today, as risk aversion takes centre stage. With the Eurozone looking to be entering a period of stagnant growth, and US manufacturing showing signs of weakness, the prospect of further stimulus measures has propelled investors towards tangible assets in preference to paper currencies not backed by gold.
The yellow metal reached a high of $1640 per ounce, while silver has lived up to its racier reputation and outperformed gold, rising 2% to $40.11 per ounce.
As usual, these moves have reignited the debate over whether gold is a bubble. Gold bears point to the fact that George Soros, who indeed called gold the ‘ultimate bubble’, has sold all of his holdings.
However, investors looking for real returns won’t find them in low-interest currencies like the dollar and pound, and more rate rises in the euro look unlikely, given that today’s PPI data showed no price growth in the Eurozone between June and July.
Vote reminder
Don’t forget, the Senate is expected to vote on the debt ceiling deal at 5pm (London time). It is expected to pass, so the reaction is likely to be muted.
Increasingly, the focus will shift back to the health of the US economy as Friday’s non-farm payrolls draw ever-closer.
The US economy is forecast to have added 95,000 jobs overall, with 135,000 added in the private sector in July.
If the numbers fail to meet estimates, markets could react quite sharply to say the least.
Remember that financial spread betting is a leveraged product and can result in losses that exceed your initial deposit. Spread betting may not be suitable for everyone, so please ensure that you fully understand the risks involved.
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'Shares Spread Betting Markets Fall on Global Growth Concerns', Article by IG Index, last update: 2-Aug-11
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