Strong demand for German debt failed to support global equities this afternoon. Reports of a fresh warning from Fitch Ratings on Italy’s sovereign debt weighed on market sentiment.
By 4pm (London time), Wall Street pulled back from its five-month high, with the S&P 500 0.29% lower at 1288.34 and the Dow Jones down 0.32% to 12,422.66. Across the Atlantic the FTSE 100 fell 0.70% to 5657.09.
Fitch warns of euro collapse
French-owned ratings agency Fitch soured investor sentiment this afternoon after it announced that the European Central Bank should ramp up its buying of Eurozone debt to prevent a ‘cataclysmic’ collapse of the euro.
It further said that while it does not expect a breakup, it could happen if Italy did not find a way out of its debt problems. Stating the obvious, and what forex spread betting investors and politicians have kept their head in the sand for, the agency went on to say that the collapse of the euro would be disastrous for the global economy.
David Riley, the head of sovereign ratings for Fitch, later urged the European Central Bank to abandon its current reluctance to scale up its purchases of troubled Eurozone debt and drop its resistance to the region’s bailout fund borrowing directly from the bank.
Thought the agency warned that the economic outlook for the Eurozone has deteriorated, it said (to little surprise) that it does not expect to strip France of its triple-A rating for this year at least.
Though, the firm did emphasise that it is the weakest triple-A country within the Eurozone.
German bond auction reiterates the nation’s safe-haven status
A strong sale of German bonds earlier this morning was seen as a clear sign that spread bettinginvestors were seeking shelter in safe-haven debt amid concerns over Greece's efforts to secure further aid.
However, the strong demand at the German auction has been interpreted as a risk-averse move, which could bode badly for the Italian and Spanish bond auctions later in the week.
Germany’s five-year bond auction attracted bids for more than double the targeted amount, underscoring the country’s status as the Eurozone’s safest haven despite the country’s wilting economic growth.
The auction received bids of €8.97 billion for the sale of €4 billion in five-year notes at an average yield of 0.9%.
Meanwhile, the German office of statistics reported earlier that the economy suffered a modest slowdown to 3% growth last year, from the 3.7% growth seen in 2010.
Separately, comment from German chancellor Angela Merkel helped to ease declines in global equities but was not enough to see equities move back into positive territory.
Chancellor Merkel said that Germany may add more funding to a permanent Eurozone bailout fund.
US housing data
Data released this afternoon showed that applications for US home mortgages rose in the first week of the year as demand for both purchases and refinancing picked up.
The US MBA index for mortgage application activity rose 4.5% in the week ending 6 January.
Broken down, the index showed that refinancing applications gained 3.3%, while loan requests for home purchases increased by 8.1%.
The improvement in demand came despite a rise in interest rates, suggesting that the US housing market is slowly headed toward the road of recovery.
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'Spread Betting: Growing Eurozone Concerns See Bids on German Bonds Double', Article by IG Index, last update: 11-Jan-12
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