Surging euro gives Europe stocks a beating
Thursday, September 13, 2007
THE euro surged to a lifetime high against the US dollar yesterday, weighing on European shares as investors remained nervous over the health of the US economy even with an expected interest rate cut there next week.
Wall Street was set for a weaker open while Tokyo stocks and the yen fell after Japan's embattled Prime Minister Shinzo Abe announced his resignation, fanning political uncertainty.
Money markets showed tentative signs of stabilisation with overnight dollar interbank lending rates falling below the Fed's benchmark rate to their lowest since August 16.
Financial markets have been volatile in recent weeks as a credit squeeze stemming from fallout in US sub-prime mortgages hit risky assets and pushed up interbank lending costs.
Expectations the Federal Reserve would cut interest rates next week by as much as 50 basis points gave some relief to risky assets, but this is negative for the US dollar as it erodes the yield premium the currency offers.
Investors are also wary there could be more evidence the turmoil is hitting the real economy which would hurt corporate profits.
"There is quite a lot of volatility... There is still a lot of uncertainty in the markets," said Philippe Gijsels, senior equities strategist at Fortis Bank in Brussels.
"(A strong euro) is bad news for the European economy and also for European equities."
The FTSEurofirst 300 index was down 0.15 per cent on the day while the MSCI main world equity index was up 0.1 per cent on the day.
The MSCI index has recouped around half of the losses caused by a drop from the July record high to the August trough.
US stock futures pointed to a weaker open on Wall Street. Earlier Tokyo stocks fell half a per cent while the rest of Asia , measured by MSCI, was up 0.4 per cent.
The euro rose as high as US$1.3884, bringing its gains this year to almost five per cent.
Investors are keen to gauge how much the recent market turmoil would damage the world economy, which was enjoying its strongest growth in three decades earlier this year.
Analysts say the economy will soon feel the impact of elevated interbank lending rates. Banks are unwilling to lend to each other and keen to hang onto cash due to uncertainty over the valuation of complex products with exposure to sub-primes or the beleaguered asset backed commercial paper market.
For now there were tentative signs that interbank lending rates have stabilised off recent peaks.
At the closely-watched fixing, London interbank offered rate fell below the fed funds target rate of 5.25 per cent to their lowest since August 16, a day before the Fed cut its discount rate.
However, three-month euro rates only fell slightly on the day, with liquidity injection by the European Central Bank earlier having little effect. Earlier the ECB lent banks a record €75 billion in extra three-month funds.
Ratings agency Standard & Poor's said on Tuesday US corporate default rates could accelerate from next year.Reuters
Wall Street was set for a weaker open while Tokyo stocks and the yen fell after Japan's embattled Prime Minister Shinzo Abe announced his resignation, fanning political uncertainty.
Money markets showed tentative signs of stabilisation with overnight dollar interbank lending rates falling below the Fed's benchmark rate to their lowest since August 16.
Financial markets have been volatile in recent weeks as a credit squeeze stemming from fallout in US sub-prime mortgages hit risky assets and pushed up interbank lending costs.
Expectations the Federal Reserve would cut interest rates next week by as much as 50 basis points gave some relief to risky assets, but this is negative for the US dollar as it erodes the yield premium the currency offers.
Investors are also wary there could be more evidence the turmoil is hitting the real economy which would hurt corporate profits.
"There is quite a lot of volatility... There is still a lot of uncertainty in the markets," said Philippe Gijsels, senior equities strategist at Fortis Bank in Brussels.
"(A strong euro) is bad news for the European economy and also for European equities."
The FTSEurofirst 300 index was down 0.15 per cent on the day while the MSCI main world equity index was up 0.1 per cent on the day.
The MSCI index has recouped around half of the losses caused by a drop from the July record high to the August trough.
US stock futures pointed to a weaker open on Wall Street. Earlier Tokyo stocks fell half a per cent while the rest of Asia , measured by MSCI, was up 0.4 per cent.
The euro rose as high as US$1.3884, bringing its gains this year to almost five per cent.
Investors are keen to gauge how much the recent market turmoil would damage the world economy, which was enjoying its strongest growth in three decades earlier this year.
Analysts say the economy will soon feel the impact of elevated interbank lending rates. Banks are unwilling to lend to each other and keen to hang onto cash due to uncertainty over the valuation of complex products with exposure to sub-primes or the beleaguered asset backed commercial paper market.
For now there were tentative signs that interbank lending rates have stabilised off recent peaks.
At the closely-watched fixing, London interbank offered rate fell below the fed funds target rate of 5.25 per cent to their lowest since August 16, a day before the Fed cut its discount rate.
However, three-month euro rates only fell slightly on the day, with liquidity injection by the European Central Bank earlier having little effect. Earlier the ECB lent banks a record €75 billion in extra three-month funds.
Ratings agency Standard & Poor's said on Tuesday US corporate default rates could accelerate from next year.Reuters
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