Markets enjoy second day of recovery

FINANCIAL MARKETS across the world bounced back strongly yesterday to enjoy a second consecutive day of recovery.

Anticipation of a more proactive policy response to the euro-zone crisis was cited as a central factor in the rally.

Ireland benefited from improved international sentiment as government bond yields recorded their largest one-day fall in more than a month.

The yield on the 10-year benchmark closed at 8.25 per cent, down almost half a percentage point to register a new low for 2011.

Economic data from the US also provided market participants with some reassurance that the world’s largest economy had not lurched back into recession.

Much of the greater risk appetite appears to have been caused by last weekend’s meeting of finance ministers and central bank presidents in Washington.

The gathering brought fresh commitments from the euro-zone attendees to ramp up their response to the crisis.

“What I learned in Washington is that Europeans finally get it,” said Mohamed A El-Erian, chief executive and co-chief investment officer at Pacific Investment Management, the world’s biggest manager of bond funds.

However, many investors were unconvinced by the sustainability of this week’s rallies in most asset classes, with some traders attributing at least part of the price rises to pension funds positioning themselves for the closing of third-quarter accounts.

“All these end-of-quarter issues are amplifying the moves that we’ve been seeing in stocks,” said Paul Simon, chief investment officer at Tactical Allocation Group. “I don’t have a lot of faith in the moves we’ve been seeing.”

Nevertheless, the calming of last week’s panic allowed Italy and Spain, the euro zone’s two most vulnerable countries which are not already locked out of bond markets, to raise fresh funds yesterday.

Italy’s bond auction raised €11 billion in treasury bills and €3.5 billion in bonds maturing in 2013. The Spanish state also successfully tapped investors yesterday, auctioning €3.2 billion of 77- and 175-day treasury bills.

However, both countries’ debt management agencies had to offer significantly higher yields than one month ago to entice investors to take up the paper.

Although rumours that Greece will default on its sovereign obligations remained rife yesterday, markets showed signs of being more convinced that euro-area leaders could ringfence any Greek default and prevent contagion spreading to other countries.

The visit of Greek prime minister George Papandreou to Berlin yesterday provided a strong signal of Greco-German unity.

On the other side of the Atlantic, consumer confidence in September rose slightly on August, while house prices in 20 cities in July were stable compared with the previous month. – (Additional reporting: Reuters, Bloomberg)