Markets still tense despite late rally

VOLATILITY WAS the defining characteristic of global markets yesterday, as markets remained extremely tense despite an afternoon rally by European equities.

All major European bourses closed around 3 per cent higher yesterday, boosted by the announcement from French president Nicolas Sarkozy that he is to meet German counterpart Angela Merkel next Tuesday to discuss the euro zone crisis.

A day after French stocks plummeted on concerns about the state of the French economy, French banks were among the biggest gainers when markets opened yesterday, boosted by the affirmation of France’s triple-A status by the three main credit rating agencies.

Following a mid-morning fall, European equity markets again rebounded as US markets opened, boosted by better-than-expected jobless data from the US which showed that the number of Americans claiming jobless benefits for the first time fell to a four-month low last week. Markets were also buoyed by Italy’s announcement of additional austerity measures.

However, tensions on the inter-bank lending market surfaced as banks’ overnight borrowings from the European Central Bank jumped to the highest in three months, a sign some lenders may have need for emergency cash.

The gap between the three- month euro interbank offered rate and the overnight indexed swap rate widened to the most since April 2009.

On the stock markets, national benchmark indices rose in every western European market except Denmark and Greece yesterday. The British FTSE 100 ended up 3.1 per cent, the Frankfurt DAX added 3.3 per cent, the Paris CAC rose 2.9 per cent while in Dublin, the Iseq, finished 1.6 per cent higher. However, the market was extremely volatile.

In France, Société Générale, which had fallen by 15 per cent on Wednesday, opened 8 per cent higher. It then plunged as far as 8 per cent down on the day, before recovering to finish 3 per cent higher.

Similarly, on the Iseq, CRH, the largest constituent on the Irish index, fluctuated between lows of €10.86 and a daily high of€12.18, before finishing at €11.74, illustrative of market volatility.

On bond markets, bunds and gilts made losses yesterday as some of Wednesday’s safe-haven flows reversed. The yield on Irish ten-year government bonds edged up slightly to 9.78 per cent up from 9.55 per cent the previous day.

US government bonds also fell sharply in volatile trade, ahead of a $16 billion 30-year treasury auction.

However, the yields on Italian and Spanish bonds continued to decline as the European Central Bank bought Italian and Spanish government bonds for a fourth day to stabilise the market.

Currencies were equally unstable. The dollar and euro soared more than 5 per cent versus the Swiss franc after the Swiss National Bank said it could ease monetary policy further. Markets focused on the possibility of a temporary peg between the franc and the euro to rein in a soaring currency. – (Additional reporting Bloomberg)