The markets

Stocks, commodities hit by Europe woes

SMH,

31 May, 2012

Benchmark US Treasury yields fell to their lowest levels in at least 60 years Wednesday and stocks and commodities sold off as fears over the deepening euro zone debt crisis gripped investors.

The Dow Jones industrial average dropped 161.13 points, or 1.28 per cent, to 12,419.56. The S&P 500 Index fell 19.15 points, or 1.44 per cent, to 1,313.27. The Nasdaq Composite lost 33.63 points, or 1.17 per cent, to 2,837.36. European and global shares fell more than 1 per cent.

Australian shares are poised to rejoin the slide, with the SPI futures recently off 39 points, or about 1 per cent, to 4047 points. The benchmark S&P/ASX200 index yesterday fell 20.2 points, or 0.5 per cent, at 4094.2, while the broader All Ordinaries index fell 19.4 points, or 0.5 per cent, to 4148.8.

The Australian dollar was almost one US cent lower, sinking to 97.1 US cents in recent trade. It was also buying 78.5 euro cents, 62.7 pence and 76.8 yen.

Spain's stock market hit a nine-year low as the country's borrowing costs rose to near the 7 per cent level that had forced other euro zone nations to seek bailouts.

In Greece, the outcome of an election next month that may decide whether it remains in the euro was still uncertain as polls showed parties for and against a bailout neck-and-neck.

"The politics in Greece is combustible but the systemic importance of Spain is far greater," said Stephen Wood, chief market strategist with Russell Investments in New York, which oversees $US141 billion. "This is an ongoing drama that will not go away any time soon."

The benchmark 10-year US Treasury note was up 35/32, its yield at 1.6288 per cent - the lowest since the 1940s.

European stocks, tracked by the FTSEurofirst 300 index , closed 1.5 per cent lower at 975.74, having traded 105 per cent of its 90-day volume average. The blue-chip Euro STOXX 50, which fell 2 per cent, traded 70 per cent of its volume average.

Spanish bonds

Spain's Ibex 35 index fell 2.8 per cent, its lowest since 2003.

MSCI's all-country world equity index shed 1.65 per cent.

The yield on Spain's 10-year benchmark was at 6.675 per cent. Italy's funding costs rose sharply at a bond sale, with 10-year yields topping 6 per cent for the first time since January.

The euro neared a two-year low as Spain's central bank governor said the government would miss its deficit target this year.

"Uncertainty remains high and headline risk is likely the key driver," said Camilla Sutton, senior currency strategist at Scotia Capital in Toronto. "The fear is that we only have Band-Aid solutions, and we still don't have a medium-term plan for Europe."

The European Commission threw Spain two potential lifelines, offering more time to reduce its budget deficit and offering direct aid from a euro zone rescue fund to recapitalize distressed banks.

The euro was last down 0.8 per cent at $US1.2400 after touching $US1.2384, its lowest level since early July 2010. It also fell against the safe-haven yen, losing nearly 1.4 per cent to trade near 97.90 yen, a four-month low.

The euro's weakness underpinned the dollar index, which measures the US dollar against a basket of major currencies. The index rose above 82.923, its highest since September 2010.

The rise in the dollar, as well as fears over the European debt crisis, dragged down commodities. Copper and platinum both sank to 4-1/2-month lows as investors piled into safe havens.

"As we've seen during other periods of extreme risk aversion, investors go into Treasury bonds, which are yielding record lows, or they stay in cash. It's preservation of capital," said analyst Robin Bhar at Societe Generale in London.

Oil lost about $US3 a barrel. London's benchmark Brent crude hovered at around $US103, breaching the $US105 support level. US crude in New York traded below $US88, or under the $US90 support.

Gold, which serves as an alternative play to the US dollar, was down 0.8 per cent at below $US1,568 an ounce.

Arabica coffee closed at a 21-month low while US cotton was headed to finish at a 27-month bottom.