Equities plunged today and the dollar surged as traders and investors rushed into the safe haven of US Treasuries on growing fears over the health of Europe’s club med economies. In the space of a few weeks investor fears, which initially had been confined to Greece, have spread to Portugal and Spain and spilled over into US and UK equity markets. Portuguese, Spanish and Greek markets were hit hardest as fears over their mounting debt undermined confidence in their economies and the ability of their governments to fund budgets. The US dollar surged to its highest level against the euro, US Treasuries rose and the VIX (or fear index), which tracks volatility on the S&P500 jumped 17% to 25.22. Earlier Jean Claude Trichet, ECB President, had attempted to allay investor fears by stressing that the public finances of the eurozone compared “flatteringly” with those of other countries but this only served to push the euro and equities lower. Portugal’s stock market fell almost 5%, the biggest single day fall since November 2008. Spanish shares dropped almost 6% to their lowest level since July, and Greek shares fell a more modest 4%. The S&P was down almost 3% – its worst day’s fall since April 2009 & confirming my prediction that the recent rally was likely to reverse given the lack of any meaningful volume on the daily chart. The yield spread between Club med bonds & Germany widened sharply as risk aversion appears to have well and truly returned on the back of Europe’s debt problems. Tomorrow will be a crucial day for the markets with Non Farm Payroll in the US and corporate earnings which even if they come in strongly may not be enough to calm investor fears.
Technically the euro sank to a 7 month low during the ECB statement and broke below the key USD1.38 level following Trichet’s question and answer session. The dollar index (which tracks the US dollar against a trade weighted basket of currencies) almost hit its key level of 80. Ahead of the NFP release traders are likely to continue selling the euro and if the figures come in better than expected we could see a further strengthening of the US dollar. Other markets which suffered as a consequence of investor flight from risk included commodities which saw both gold and oil plunge along with Aussie and New Zealand Dollar, the first of which is came under pressure following the release of poor retail sales figures and the second was hit by a rise in unemployment which was unexpected, coming in at 7.3% against a forecast of 6.8%. In recent weeks both these high yielding currencies have come under increasing pressure as carry trade speculators continue to panic and unwind positions in ever larger volumes. The most interesting chart for currency traders is the NZDUSD (New Zealand/US Dollar) which has now broken below key technical support at the 0.7 price handle and is about to breach the 200 day moving average all of which point to a continuation of the downwards move for this pair. In the medium term this pair could break significantly lower, possibly even to re-test support in the 0.64 price region, so look to build short positions over the next few weeks as the pair moves lower.
NZDUSD Chart 4 Feb 2010
Intriguingly gold has not responded to this current wave of panic with the main beneficiaries being the US Dollar and Treasuries.
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Market News :
Cost of Insuring Spanish & Portuguese Debt At Record High
