Portugal downgrade, China spook markets

2011-07-06 18:28

New York - Portugal’s credit downgrade pressured world stock markets on Wednesday, reigniting fresh fears about eurozone debt just as concerns over Greece ebbed, while China’s latest rate hike weighed on commodities.

But US equity markets bucked the trend, with Wall Street’s three main indexes moving higher at midday, albeit on light volume.

Moody’s downgrade of Portugal cast new doubt on European efforts to rescue distressed eurozone states without debt restructuring. Portugal’s government bond yields hit lifetime highs, hammering the euro.

China’s central bank raised interest rates for the third time this year, making clear that taming inflation is a top priority as its economy slows.

Copper  and crude oil slipped half a percent in London trading. Gold, a safe haven, rose more than 1% in New York.

Analysts said risk aversion across financial markets highlighted the fragility of the global recovery.

“Maybe we want a quick fix, maybe we are looking for one, but there is no quick fix and if there is, I haven’t heard it yet,” said Frank Lesh, a futures analyst and broker at FuturePath Trading LLC in Chicago.

The two-year yield on Portuguese government debt surged more than 2 percentage points to a lifetime high of 15.77%  while the 10-year yield climbed more than 1 percentage point to 13.45%, also its highest ever.

The FTSEurofirst 300 index tracking European shares and the MSCI world equity index, which follows global equities, both slipped about half a percent.

The JSE all-share index was down 0.38%, with platinum miners falling 0.70% and resources little changed. Banks also lost 0.78%, financials dropped 0.50% and industrials shed 0.68%. Gold miners, however, rallied 2.79%.

The rand was bid at R6.73/$, from R6.70/$ to the close on Tuesday. Gold was quoted at $1 528.61 a troy ounce from $1 508.75/oz at the JSE's previous close.

Shedding risk

Investors were also shedding risky assets ahead of the European Central Bank’s monetary policy announcement on Thursday. The ECB is all but guaranteed to raise interest rates by 25 basis points to 1.5% - an encouraging development for the euro - although markets remain uncertain on the timing of further rate moves by the central bank.

The euro fell 0.8% on the day, after touching a one-week low at $1.42370 and extending losses from the previous day. Its losses versus the dollar boosted the greenback 0.5% against a currency basket.

The euro’s losses come as fears over Greece and Portugal prompt investors to hunt for safer havens such as the Swiss franc and yen.

“Greece is a basket case and we will probably have Portugal and Ireland drifting in the same boat,” said Steve Barrow, head of G10 currency research at Standard Bank.

“But for the ECB raising rates, we would have the euro falling pretty sharply. It is likely to hold in the $1.40-$1.50 range for now.”

Markets showed little reaction to US data on the service sector reflecting a slight slowdown in growth in June, according to the Institute for Supply Management. The benchmark 10-year US Treasury note was up 3/32, its yield at 3.1062%.