Stocks struggled to sustain recent gains while the dollar rose on renewed growth concerns after data showed a contraction in German industrial production and the UK central bank delivered a downbeat assessment of growth prospects.
The Bank of England has cut its economic growth forecast for the next two years sharply, highlighting the damage that the financial crisis has inflicted on the UK economy.
The BoE’s growth revision came as Germany reported industrial output and exports that fell more than economists had estimated.
“Wednesday’s session has seen a cooling of recent enthusiasm, at least on the European side,” said Adrian Miller, a director for global markets strategy at GMP Securities.
“From a data or economic standpoint, the most significant news on Wednesday was the downward revision of the Bank of England’s growth and inflation estimates,” he said.
Growth Concerns Resurrected – USD Strengthens
The US dollar rebounded against most leading currencies after recent declines with the dollar index – which measures its value versus a basket of currencies – climbing 0.2 per cent by midday in New York.
The single currency fell 0.4 per cent against the dollar to $1.2325 after trading above $1.24 on Tuesday.
However, the British pound reversed earlier losses. It was close to $1.57 against the US dollar and neared €1.27 against the euro.
Some investors focused on comments by Sir Mervyn King, BoE governor, who said the UK would eventually “get back to the same growth rates” experienced before the crisis.
In other downbeat news for the eurozone, Standard & Poor’s lowered the outlook on Greece’s credit rating to “negative” from “stable” late on Tuesday.
The rating agency said the worsening of the Greek economy increases the likelihood that the country may need additional financial aid.
The news helped rekindle demand for top tier government bonds after a pause.
Yields on benchmark 10-year German Bunds, which touched 1.16 per cent in late July, fell 6 basis points and traded at 1.43 per cent.
Demand was also supported by a strong €3.4bn auction.
In contrast, Spanish 10-year yields rose 7bp to 6.88 per cent, moving closer to 7 per cent, a level considered unsustainable by many market analysts.
In the US, trading in US Treasuries was volatile. After dropping earlier in the session, the yield on the 10-year note was 1bp higher at 1.62 per cent by midday in New York, still near a five-week high.
The US Treasury continued with the second round of its quarterly refunding yesterday by selling $24bn in 10-year debt amid tepid demand.
A drop in German stocks weighed on European equities with the FTSE Eurofirst 300 closing 0.2 per cent higher as the FTSE All-World Index traded up only fractionally by midday in New York.
On Wall Street, the S&P 500 was little changed. The index crept just 0.1 per cent higher, but the broad measure of US stocks was still trading above the 1,400 mark, its highest level since May.
“With the fundamental imbalances still uncorrected in Europe, and the [US] domestic economy showing no sign of accelerating, the case for being long equities and short Treasury debt is hard to make for any extended period,” said Steven Ricchiuto, chief economist at Mizuho Securities USA.
Trading in commodities was mixed. Copper, a gauge of manufacturing activity, fell 0.4 per cent to $3.43 a pound after gaining 4.6 per cent in the previous three sessions.
In contrast, Brent crude oil, which rose almost 6 per cent over the same period, added another 64 cents to $112.65 a barrel.
Gold prices rose 0.2 per cent to $1,613 an ounce.
25th August 2012
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