Risk appetite wilts as Saudi market tumbles 7% – FT

Posted on March 2, 2011 by

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Stocks are retreating sharply and Treasuries are in demand after oil and gold surged, with traders spooked by a 7 per cent fall in the Saudi Arabia stock market on fears that unrest may spread to the kingdom.

The S&P 500 on Wall Street is down1.2 per cent as worries about the Mideast override news that US manufacturing is at its strongest in nearly 7 years. That extends its decline to 2.4 per cent since the spike in Libya fears at the beginning of last week.

Ben Bernanke added some credibility to fears over oil prices when he said that the Federal Reserve, which had previously been focused on personal consumption prices, said that rising energy prices represented “a threat both to economic growth and to overall price stability”.

Gold has shot up 1.5 per cent to $1,432.10, a new record peak. Crude oil, both the US benchmark and the European benchmark, hit post-Libya highs, trading above $100 and $116 a barrel, respectively.

The FTSE All-World equity index is down 0.7 per cent to 224. The benchmark hit a post-credit-crunch high of 229 just seven days ago on hopes the global economic recovery was gathering steam, and those convictions still seem intact – for now.

Inflation continues to be the global concern for investors. Manufacturing surveys out of China and India show the sector continues to expand, though tighter monetary conditions in the former appear to have reduced the pace of activity to a six-month low.

This has led to some selling of industrial metals during the Asian trading session on concerns that demand from China may ease. The surveys – with strength also seen in the UK and the eurozone – show surging input prices as higher raw materials prices feed into the supply chain.

The CBOE’s Vix volatility index is up 14 per cent to above 21, the second time since last week it has jumped above 20. The Fed’s $600bn “quantitative easing” programme has suppressed volatility to around 16, near its post-crisis lows, since the summer. The absence of volatility had become a much-discussed market talking point, but the events in the Middle East seem finally to have unearthed some underlying anxiety.

Europe – Bourses opened higher, with investors noting a firm performance out of Asia and US stock futures trading at their best level in five days. But worries about Saudi Arabia and a subsequent slip on Wall Street has pushed equities sharply lower into the close.

The FTSE Eurofirst 300 was down 0.7 per cent and London’s FTSE 100 shed 1 per cent, with banks again struggling, as Monday’s comments from HSBC about the negative impact of stricter regulation continue to pressure the sector.

Commodities – Oil is firmer as the fighting in Libya and political turmoil elsewhere in the region show little sign of abating. Doubtless, rhetoric from the west mooting possible intervention is also worrying traders, as are the reports that Saudi Arabia is getting involved militarily in Bahrain (denied by the latter). Brent crude is up 2.2 per cent to $114.17 a barrel, while the US-based Nymex contract is up 1.9 per cent at $98.83.

Copper has had a volatile session. Lower in Asian trading on concerns demand may fall from China, then stronger in Europe. But the red metal is now off 0.7 per cent at $4.45 a pound, reflecting a shrinkage of risk appetite in the metals complex.

Forex – The dollar index remains near four-month lows, but it is up 0.2 per cent, the highest on the day, above 77. It gains strength as stocks tumble late in the session. Among major currencies, the New Zealand dollar and Australian dollar are taking the brunt of the sell-off, falling 0.5 per cent and 0.6 per cent, respectively.

Rates – Yield on 10-year Treasury notes are down 2 basis point to 3.45 per cent, reversing an earlier rise before Mr Bernanke spoke. Treasuries were rising in tandem with the dollar, giving a bit of support to those who argue that it would be short-sighted to be short the dollar, even as correlations are breaking down.

Asia-Pacific – Tokyo was one of the standouts in a generally upbeat region. The Nikkei 225 rose 1.2 per cent as a weaker yen encouraged exporters and foreign investors continued to favour Japan over local peers, which are struggling to contain inflation. After many years of deflation in Japan, such higher prices will be considered a boon rather than a problems, goes the reasoning.

Chinese investors welcomed a cooling in manufacturing activity because they reasoned it may reduce the need for a more restrictive monetary policy from Beijing. The Shanghai Composite rose 0.5 per cent, while the Hang Seng in Hong Kong added 0.3 per cent, with the volatile property sector having one of its better days.

Sydney’s S&P/ASX 200 was down 0.1 per cent, while Seoul was closed for a holiday. India’s Sensex index is up 3.4 per cent as traders react to the upbeat manufacturing survey and a well received budget. The FTSE Asia Pacific index rose 1.2 per cent.

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