Yen, bonds, gold all gain at dol­lar's ex­pense

The Pak Banker - - MARKETS/SPORTS -

Tur­bu­lence tore through global mar­kets on Thurs­day as in­vestors sought the safety of Ja­panese yen, gold and top-rated bonds while dump­ing U.S. dol­lars on bets the Fed­eral Re­serve could be done with rais­ing in­ter­est rates. Even the ab­sence of Tokyo for a hol­i­day could not stop the dol­lar from hit­ting a 15-month low on the yen, and gold fi­nally broke ma­jor chart re­sis­tance to reach its high­est since May as a wave of risk aver­sion swept through trad­ing floors.

Europe got off to a tor­rid start, with Bri­tain's FTSE 100 .FTSE down 2.3 per­cent, Ger­many's DAX .GDAXI 2.4 per­cent lower, France's CAC 40 .FCHI down 2.8 per­cent and U.S. fu­tures also point­ing to 1 per­cent drop for Wall Street ESc1 later. Swe­den's crown SEK= and govern­ment bond yields SE2YT=TWEB were sent tum­bling as its cen­tral bank de­liv­ered a sur­prise cut to its al­ready deeply neg­a­tive in­ter­est rates.

In­sa­tiable de­mand for U.S. Trea­suries drove longer-term yields to al­most three-year lows and flat­tened the yield curve in a way that has pre­saged eco­nomic re­ces­sion in the past.

Bench­mark Euro­pean Ger­man Bund yields DE10YT=TWEB dropped like a stone and UK yields UK10YT=TWEB hit an all-time low too, as riskier Span­ish ES10YT=TWEB, Ital­ian IT10YT=TWEB and Por­tuguese PT10YT=TWEB bonds moved in the op­po­site di­rec­tion. The euro zone's fi­nance min­is­ters are set to meet later with wor­ries creep­ing back in about Por­tu­gal and Greece's abil­ity to stick to the terms of their bailouts again.

"What this shows is that the risk-off mode has come back very quickly and that the worst may still be to come in th­ese mar­kets," said Rabobank Euro­pean strate­gist Emile Car­don.

"What is dif­fer­ent to pre­vi­ous times is that the bad news in now com­ing from ev­ery­where, China, Por­tu­gal the U.S. the com­mod­ity sec­tor the bank­ing sec­tor. It's like sev­eral smaller crises could com­bine into one big cri­sis."

The flight from risk told on most Asian shares, with Hong Kong .HSI - a favourite chan­nel for global in­vestors to play China - div­ing 4.2 per­cent as in­vestors there re­turned from the long Lu­nar New year hol­i­days.

Main­land China mar­kets are closed all week. MSCI's broad­est in­dex of Asia-Pa­cific shares out­side Ja­pan .MIAPJ0000PUS shed 1.4 per­cent, and South Korea .KS11 re­sumed with a 2.9 per­cent drop. Wall Street had ended Wed­nes­day mixed af­ter Fed Chair Janet Yellen sounded op­ti­mistic on the U.S. econ­omy, but ac­knowl­edged risks from mar­ket tur­moil and a slow­down in China.

An­a­lysts took that to mean a hike in March was un­likely, but fur­ther tight­en­ing re­mained pos­si­ble later in the year.

"Yellen made it clear that while the Fed still ex­pects to con­tinue on its grad­ual tight­en­ing path, pol­icy was not on a pre-set course and would re­spond ap­pro­pri­ately to de­vel­op­ments," said Justin Fabo, a se­nior econ­o­mist at ANZ.

"The real test may come later, if mar­kets con­tinue to de­te­ri­o­rate and look to cen­tral banks to save them. Are pol­i­cy­mak­ers' guns loaded with blanks?" It seemed some were al­ready pre­par­ing for the worst. Longer-term U.S. debt ral­lied hard as in­vestors wa­gered that ei­ther the Fed would be un­able to tighten at even a grad­ual pace, or that if it did hike it would only has­ten the ar­rival of re­ces­sion and de­fla­tion.

In a marked turn­around, yields on 10-year Trea­suries fell to 1.6330 per­cent US10YT=TWEB, from a top of 1.773, al­most ex­actly match­ing the low­est close from May 2013. Fu­tures TYc1 im­ply fur­ther price gains lie ahead.

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