US Credit Downgrade Spurs Safe Haven Buying and Lifts Silver Spreads
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For today's update see Spread Betting Daily.
The Daily Update from Anthony Grech, Research Analyst, IG Index.
Spread Betting 8 August 2011: 11.00am Update
After a brief move into positive territory, the FTSE 100 has turned sharply downward, as pledges by central banks to intervene failed to calm financial spread betting investor nerves.
Significant gains by bank shares helped to prop up the leading index for a time, but heavy drops in mining shares eventually pushed the index down.
By 10.30am (London time), the FTSE 100 was down 1.95% at 5144.78, while the FTSE 250 went into full-blown retreat, slumping 2.6% to 10041.39. European markets also fell, with the DAX down 2.4% and the CAC 40 dropping 1.9%. Spanish and Italian stock markets rapidly gave up gains made earlier in the session.
ECB enters the market
It was always going to be an interesting start to the week. After what must have been a weekend of intense pleading by Eurozone politicians, the ECB has finally begun to move. The bank commenced purchases of Spanish and Italian government debt this morning, after succeeding in persuading Rome to announce more market liberalisation measures.
Yields on benchmark ten-year bonds issued by Madrid and Rome dropped below 6%, pushing them further away from the 7% level that has become the perceived breaking point for indebted Eurozone states.
Central bank intervention has become the order of the day, and a telephone conference by G7 central bankers produced a resolution to intervene in forex markets if the conditions were warranted.
Ultimate safe haven rises yet further
The impact of S&P’s downgrade of the US (which, by the way, puts it on the same footing as Belgium) has yet to be fully appreciated, but it has had the effect of sending gold racing higher yet again.
The yellow metal, which John Maynard Keynes denounced back in 1924 as a ‘barbarous relic’, is now above $1700 per ounce, with September futures having gone as far as $1715 per ounce. Flight to safety has also given the silver spread betting market a push again, moving back towards $40 per ounce.
Banks briefly surge, but miners sink again
There was a brief rally in banking shares this morning, which for a time prevented the FTSE 100 from slipping into negative territory. Both Lloyds and RBS rose this morning, but their gains were rapidly cut back from between 5% and 6% in earlier trading to 3.6% and 1.3% respectively by 10am (London time).
In Europe, CDS spreads on French bank Societe Generale and Italian bank Unicredit widened to record levels. This was in reaction to fears that SocGen’s Greek loans will put its stability at risk, while Unicredit’s loans to the Italian government are at risk if Rome is forced to seek financial help.
Fears of a second global recession are sending mining stocks lower once more. Yet again falls of 3% and more are common across the sector, with the biggest faller being ENRC, registering a loss of 6% to 593.5p. Kazakhmys follows behind with a 5.5% drop.
The losses in share prices mean that some of the biggest London mining stocks are now down almost 20% since last Tuesday.
US pre-market
US September futures are pointing to heavy falls for Wall Street following the opening bell, as US markets wake up to their nation’s new status as a less-than-perfect sovereign. Dow futures are down 1.9% while those for the S&P 500 are 2.2% lower.
No US economic data is scheduled for release today, and I suspect the general market turmoil will continue to push all but the most important economic data into the background.
Remember that financial spread betting is a leveraged product and can result in losses that exceed your initial deposit. Spread betting may not be suitable for everyone, so please ensure that you fully understand the risks involved.
The above comments do not constitute investment advice and neither IG Index nor SpreadBets.org.uk accept any responsibility for any use that may be made of them.
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"US Credit Downgrade Spurs Safe Haven Buying and Lifts Silver Spreads" last update by AG, 08-Aug-2011
Warning: Financial spread betting carries a high level of risk. You can lose more than your initial investment or stake. Financial spread betting may not be suitable for all investors. Only trade with money that you can afford to lose. Make sure you fully understand the risk involved. If necessary, seek independent financial advice.
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