Investors flee to safe haven assets, wiping 2012 gains


WORLD STOCKS erased the year’s gains yesterday as investors fled risky investments for safe-haven assets on concerns about the euro zone’s deepening debt woes, while US stocks lost ground after the market debut of social network Facebook.

Brent crude briefly slipped below $107 per barrel to its lowest in 2012 as the euro zone crisis raised fears of a global slowdown that could dent oil demand.

The euro hovered near a four-month low, while benchmark 10- year German bond yields hit a record low.

At home, sentiment was soured by a report from Deutsche Bank suggesting Ireland may be forced into a second bailout by mounting loan losses within its banking system.

Deutsche Bank analysts David Lock and Jason Napier said: “A new, even modest, increase in capital requirements could deter sovereign investor participation and tip the balance in favour of the sovereign requiring a second loan programme.

“Although resilient during 2009 and 2010, mortgage arrears have risen sharply over the past year, house prices are continuing to fall, market liquidity is limited, and over half of customers are now in negative equity,” the analysts said.

“We fear the size of negative equity balances for some mortgage holders may greatly reduce their incentive to co-operate, pushing them towards default.”

Deutsche Bank also downgraded Bank of Ireland.

Elsewhere, world stocks, as measured by the MSCI index, dropped 0.7 per cent and to a level below where they began the year, having relinquished all the first-quarter gains fuelled by the European Central Bank’s injection of more than €1 trillion. The index was on track for a sixth day of losses.

Riskier assets were all heading for big weekly losses, while German borrowing costs hit record lows.

Investors were unnerved by a ratings downgrade of 16 Spanish banks by Moody’s Investors Service.

Banco Santander and Banco Bilbao Vizcaya Argentaria, Spain’s biggest lenders, were among nine institutions cut three levels, with seven kept on review for further downgrades.

Moody’s cited a recession and mounting loan losses for the move.

An unexpected contraction in US regional factory activity reported on Thursday also rattled investors.

Sentiment has soured to such an extent that an opinion poll showing Greeks are returning to establishment parties that support the country’s bailout had little impact.

If Greeks do vote for the establishment politicians on June 17th, Greece’s place in the euro zone would look more secure and the threat of contagion engulfing countries such as Spain would diminish.

Benchmark 10-year German bond yields hit a record low of 1.396 per cent yesterday and two-year yields also fell to their lowest-ever level at just 0.028 per cent.

The euro did manage to rise from a four-month low against the dollar as investors pared bets against the single currency after a 4 per cent drop this month, but concerns about Greece and Spain were likely to keep it under pressure.

Technical support also helped, traders said, as the euro approached its January low of $1.2623.

A break beneath that would opened the door to a slide toward the 2010 lows of around $1.1875.

Despite yesterday’s gains, investors preferred the relative safety of the dollar and the Japanese yen.

– (Reuters /Bloomberg)