Sunday, August 7, 2011

Sell-off starts following US downgrade -

While investors took some confidence from the European Central Bank’s signal that it was preparing to buy Italian and Spanish bonds to prevent the eurozone debt crisis from escalating, the move was not enough to stop the selling.

By late morning in Hong Kong, the FTSE All-World Asia Pacific index excluding Japan was down 2.4 per cent, having lost 8.5 per cent last week in a global market rout.

The Hang Seng was 4.2 per cent lower at 20,064.45, while in Tokyo the Nikkei 225 was down 1.3 per cent at 9,178.03 and in Sydney the S&P/ASX 200 fell 1.9 per cent to 4,027.70. On the Chinese mainland, the Shanghai Composite tumbled 4.8 per cent to 2,500.03.

US crude fell $2.64 to $84.24 a barrel, its sixth loss in seven sessions. Spot gold, a perceived safe haven, jumped 2 per cent to an all-time high of $1,698 an ounce.

After US markets closed on Friday, Standard & Poor’s, the rating agency, downgraded the US government’s long term credit rating to AA+ from AAA. The outlook remained negative, which means that the rating could be downgraded again to AA in two years.

US Treasuries initially dropped in Asian trading on Monday, but then recovered as investors moved back in to the traditional safe haven. The yield on the benchmark 10-year note – which moves inversely to prices – dropped three basis points to 2.53 per cent by early afternoon in Tokyo.

Bond traders shrugged off the US downgrade, noting that, a decade after Japan lost its AAA rating, 10-year Japanese government bond yields are still only 1 per cent and the yen is as strong as ever.

However, Asian equity markets reacted sharply, especially as S&P 500 futures were pricing in falls of more than 2 per cent once the US markets opened later in the day.

“While the downgrade should be largely factored into equity markets given the sharp falls over the last two weeks, it does add to the general air of uncertainty,” said Shane Oliver, head of investment strategy at AMP Capital Investors in Sydney.

“It also makes the economic outlook marginally less certain,” he said.

A plunge in global equity markets last week, the biggest since Lehman Brothers collapsed in 2008, was largely driven by fears that the world economy is slipping into a recession. Slower global growth would make the large amount of public and private debt weighing on the US and Europe all the more burdensome.

Although Asia was not the focus of concern, its equity markets have fallen just as sharply as those in the west because the region’s economy and financial system remain as closely linked to the US and Europe as ever.

The cost of insuring Asian corporate debt against default rose to the highest in more than a year. The Markit iTraxx Asia index of 50 investment-grade borrowers outside Japan rose 3 basis points to 136 basis points, according to Bloomberg.

The dollar fell against the yen, trading at Y78.04 from Friday’s Y78.40 in New York. Traders were still on intervention alert following remarks by Fumihiko Igarashi, a vice-finance minister, on NHK on Sunday that Tokyo is ready to sell the yen again should speculative moves in the market warrant it.

Tokyo may have spent about Y4,500bn ($57.7bn) last Thursday selling yen for the third time since September to curtail the surging currency and protect the country’s exporters, analysts have estimated. Many argue there will have to be a lot more intervention by authorities to have any effect on the yen, which is rising due to its status as a perceived safer haven.

Yoshihiko Noda, the finance minister, told reporters on Monday that he had explained to the G7 why Tokyo had intervened in the currency markets last week and said US Treasuries continue to be attractive assets for Japan. The country is the second-biggest holder of US government debt behind China.

One Tokyo-based trader said that, “from where I sit, it’s not panic, it’s uncertainty. The S&P downgrade is not a surprise per se, but the outcomes are uncertain. We don’t know what implications are coming.”

Norman Chan, chief executive of the Hong Kong Monetary Authority, said the territory would stand behind the US dollar in spite of the downgrade.

The Hong Kong currency’s 28-year old peg to the dollar would remain in place, he said, as the US remained the most liquid and one of the most stable investment destinations in the world. Previous market shocks occurring within the US did not send the dollar moving in just one direction and the drop in the 10-year Treasury yield since the end of July showed that Treasuries would remain a safe haven for investors in times of global uncertainties, he added.

The dollar peg, which imposes on Hong Kong the same ultra-low interest rate environment as in the US, has been blamed for high inflation and record-high property prices in the self-governing Chinese territory. Mr Chan said that another global credit squeeze could occur if the US and European debt crisis escalated.

By Robert Cookson in Hong Kong and Lindsay Whipp in Tokyo Aug 8, 2011

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