Market Unstable

A rally on Wall Street supported by some upbeat comments on the US economy by Ben Bernanke helped to steady equity investor nerves a little on Wednesday.But the fallout of Tuesday’s global financial market turmoil continued to reverberate. Credit markets, particularly, continued to see high volatility as investors moved to price in greater risk premia.

Sentiment still appeared to be shaky as investors and strategists debated whether the global turmoil on Tuesday was a one-day wonder or marked a broader shift in risk appetite.

The Vix index, a measure of investor expectations of US stockmarket volatility, fell nearly 15.8 per cent to 15.3 after soaring more 60 per cent on Tuesday. But even after the fall, the Vix still remained at more than six-month highs.

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Wall Street found support from bargain hunting initially but Mr Bernanke’s comments shored up gains. The US Federal Reserve chairman told Congress there was “a reasonable possibility that we’ll see some strengthening of the economy sometime during the middle of the year”.

This countered a string of poor economic data yesterday including a sharp downward revision of estimates of US GDP growth in the fourth-quarter, a 16.6 per cent plunge in US new home sales in January and a weaker-than-expected measure of business activity in the mid-west.

By midday, the S&P 500 Index traded 0.3 per cent higher at 1,405.75 while theDow Jones Industrial Average added 0.3 per cent at 12,257.74 and the technology-led Nasdaq Composite rose 0.2 per cent to 2,413.64.

US Treasuries weakened after a flight to safety on Tuesday saw yields tumble. The yield on the benchmark 10-year note rose 5.3 basis points to 4.566 per cent.

European and Asian equity market mostly continued to see heavy losses, partly in catch up to Wall Street’s Tuesday losses.

The Chinese stockmarket, which triggered this week’s global sell-off with a heavy 9 per cent fall, was the big exception. The Shanghai Composite index rebounded 3.9 per cent to 2,881.07.

But elsewhere, Mumbai fell by 4 per cent, Tokyo by 2.8 per cent, Singapore by 3.7 per cent, Manila by 7.9 per cent and Seoul by 2.6 per cent. However, many Asian markets closed off the worst levels of the day.

In Europe, the FTSE Eurofirst 300 index fell 1.6 per cent to 1,481.89 while the UK’s FTSE 100 dropped 1.8 per cent.

European and US credit markets continued to suffer although not as badly as on Tuesday.

The European iTraxx Crossover index of junk-rated companies saw another huge re-pricing of risk first thing in the morning, with spreads leaping another 37 basis points after the previous day’s roughly 21bp increase. But with stock markets finding their feet, this index later recovered to finish about 12bp higher at about 213bp.

In the US meanwhile, spreads on the DJ CDX Crossover index was more than 3bp wider at about 143.75bp in late afternoon,after the record 26bp leap wider on Tuesday.

Some analysts said there could be more of the correction to come, particularly in Europe. Suki Mann, credit strategist at SG CIB, said: “We’re not out of the woods yet – it’s a little too early to think that the recovery from the initial sharp sell-off in risk products will not entertain some further volatility.”

On currency markets, the yen weakened after sharp gains on Tuesday on reduced fears on an unwinding of the carry trade – the borrowing of funds in low-interest rate currencies like the yen and investing in higher yielding assets elsewhere.

The yen fell 0.5 per cent to Y118.50 against the dollar and fell 0.2 per cent to Y156.50 against the euro by mid-afternoon in New York.

“While it is not unprecedented for the dollar to fall during a spike in volatility, investors need to watch this closely. Could the US be losing its status as a safe haven?,” said Richard Bernstein, chief investment strategist at Merrill Lynch.

“A weak dollar in a time of slowing growth might complicate the Fed’s tasks quite a bit. We have suggested that attempting to solve the US’s economic problems via the currency rather than through responsible fiscal and monetary policy could be a dangerous route. Perhaps that is coming to the forefront.”