Fed outlook, China rattle investors

2011-09-22 10:33

London - World stocks hit a fresh one-year low on Thursday and investors poured money into safer currencies and government bonds after the Federal Reserve gave a grim outlook for the US economy and China's manufacturing slowed.

The dollar rose to a seven-month high against major currencies as a broad sense of aversion to risk swept through financial markets.

The Fed set the ball rolling on Wednesday when it launched Operation Twist, a plan to lower borrowing costs by selling or not renewing short-term debt in favour of longer bonds.

The move was expected, but the Fed's statement of the rationale behind it was stark: there were "significant downside risks" to the US economy.

"It seems the market doesn't believe Operation Twist is enough to kickstart the spluttering economy... (and) a very downbeat outlook... seems to have unsettled markets even further," said Ben Potter, market strategist at IG Markets.

Concern was heightened on Thursday when HSBC's China Flash purchasing managers' index showed the factory sector shrank for the third consecutive month in September, pointing to a slowdown in the world's second-largest economy.

World stocks as measured by MSCI fell as much as 2% to a new year low, making for a 14% year-to-date loss. The more volatile emerging markets stock index was down more than 4% for a 22% 2011 loss.

In Europe, where questions remain about the eurozone's ability to manage some of its countries' heavy debt, stock losses amounted to a 20% loss for the year-to-date.

The FTSEurofirst 300 .FTEU3 fell 2.2%.

Japan's Nikkei .N225 closed down 2.07%.

South Africa's Top-40 (Tradeable) [JSE:J200] index tumbled more than 2% as investors hammered everything from manufacturers to resource-related companies.

However, shares of gold miners bucked the trend, buoyed by weakness in the local currency. A weaker rand is a positive for gold miners as it boosts profits when overseas earnings are brought home.

The Top-40 index was down 2.3% at 27,345.22 in morning trade. The broader All-share  [JSE: J203] index was down 2.2%.

Safety first

The mood drove investors to seek relative safety. The yield on 30-year German debt sank to a new record low as investors bought the paper.

The 30-year German benchmark yield fell to 2.538%, passing the previous lows seen in late August 2010.

Yields on 10-year US Treasuries, the target of Fed activity, were down to just above 1.8%.

On currency markets, the dollar climbed to a seven-month high against major currencies.

"The dollar's strength and the risk aversion that we have seen in recent weeks have picked up steam," said Tohru Sasaki, head of Japan rates and FX research at JPMorgan Chase.

The euro edged back towards a seven-month low of $1.3495 hit last week.

Indebted Greece, struggling to avoid default, made new budget-cutting pledges on Wednesday aimed at securing the next slice of bailout funding from international lenders.

"As ever, the question is, will these measures be implemented and maintained by the current government and the governments to come?," Societe Generale strategists wrote in a note to clients.