Stocks slip before US jobs data

2011-06-03 13:22

London - European shares and US debt yields slipped while the euro hovered near one-month highs against the dollar on Friday before non-farm payrolls data that could stoke concerns about a slowdown in the US economy.

Oil prices also edged lower as a protracted slowdown in the the second-biggest energy consumer after China could hit consumer spending, leading to lower fuel use. Brent crude futures fell $1 to $114.52 a barrel. A raft of grim US data this week has already made investors wary about the near-term economic outlook and pushed benchmark 10-year Treasury yields below 3% for the first time since December.

Even as investors weigh whether this signals a soft patch or a prolonged slowdown, markets have begun to come around to the view that government bonds should benefit in the near term as inflationary expectations will be contained.

Brushing aside Thursday's warning from ratings agency Moody's that the risk of a US debt default was small but rising, 10-year Treasury debt prices rose, with yields about two basis points down at 3.013% from late US trade on Thursday.

"We've seen some fairly poor economic data recently and this is why we have these lower rates at the moment. Markets are bracing for the worst," said Rabobank strategist Philip Marey.

"If there's an upward surprise (from payrolls) it could have a strong upward impact on yields ...

"But I wonder how much lower they can go if it's a downward surprise, because markets are positioned for lower figures (than consensus). They could maybe reach 2.95% if there's another disappointment in the data."

German government bonds diverged from Treasuries, with the 10-year Bund yield up 3.5 bps at 3.019% as euro zone officials appeared close to agreeing a second bailout for debt-laden Greece, though losses could be capped by the US jobs report.

Greek Prime Minister George Papandreou and the chair of euro zone finance ministers, Jean-Claude Juncker, are expected to meet mid-afternoon to discuss fresh austerity measures. Markets are also awaiting the conclusions of an EU, IMF and ECB mission assessing whether the country has met fiscal targets.

Anticipating a US weak jobs reading at 1230 GMT, analysts have cut their forecasts on non-farm payrolls growth to 150 000 from 180 000, according to a Reuters poll.

Dollar weakness

A weak number may weigh further on the dollar but traders said the euro could struggle to make gains much beyond its earlier one-month high of $1.4518, citing offers around that high and more ahead of an options barrier at $1.4550.

The euro was steady on the day at $1.4490.

Against a basket of currencies, the dollar held steady at 74.33, having hit a one-month low of 74.209 earlier on Friday with market players increasingly wary of a pullback.

"The data is likely to continue to point at a soft patch in the US economy and could lead to a risk-off scenario that would imply dollar weakness against the Swiss franc and yen and strengthening against the Aussie, Canadian dollar and sterling," said Jeremy Stretch, currency analyst at CIBC.

"The reality is that the market is expecting jobs growth of around 100-120 000 and a reading of 150 000 could see some temporary easing of the depression surrounding the recovery scenario".

A weak reading on payrolls could further dent demand for risky assets as the Federal Reserve prepares to wind up its $600bn bond purchase programme this month and US policymakers appear reluctant to offer more support to the ailing economy.

US stock futures point to a lower open on Wall Street, with the Dow Jones Industrial Average , Standard & Poor's 500 and Nasdaq composite seen down around 0.3%.

The pan-European FTSEurofirst 300 index fell 0.4%, after shedding 1.3% in the previous session to its lowest close in six weeks, as the US economic recovery looked shakier. World stocks as measured by MSCI were 0.1% lower.

Credit Suisse strategists say the end of the asset-buying programme could be "a tactical headwind for trades that have benefited from extremely low real rates and now have expensive valuation".

Those trades are high leverage stocks, high dividend yield stocks, US equities, gold and short U.S. dollar, they say in a note.

Spot gold was last bid at $1 525.44 a troy ounce from $1 532.55 late on Thursday in New York, with traders saying a poor jobs figure could see it pushing back towards the record high of $1 575.79 it hit on May 2.