World stocks down 20% since May

Reuters: World stocks sank sharply for a 10th session running on Tuesday, racking up a “bear market” 20 per cent loss since early May, fuelled by fears of a new global downturn.

Stocks have shed nearly 17 per cent since late July alone. Ten days of losses are extremely rare. The record is 13, back in the 1990s. Gold hit another record high and the Swiss franc was in demand as money fled to whatever was seen as a safer harbour.

Focus was on a meeting of the US Federal Reserve later in day, with investors likely to scour for hints about any new monetary stimulus programme with fears of a new global downturn growing.

Higher-than-expected inflation data from China added to investor concerns, with the United States slowing and its credit rating downgraded, and Europe reeling under a debt crisis.

There was some easing of the latter, however, with Italian and Spanish Government bond yields falling and traders saying they were seeing more buying by the European Central Bank.

MSCI’s all-country world index was down one per cent, and has now shed 20 per cent since peaking in May. The market rule of thumb is that a fall of that magnitude constitutes a “bear market”.

Emerging market stocks lost 3.5 per cent and are down 17 per cent for the year.

“Not even in the global financial crisis did we see this extraordinary volatility,” said RBS Australia’s head of Sydney sales trading, Justin Gallagher.

European bourses put in a short-lived attempted at gains at the open, but succumbed to the overall mood. The FTSEurofirst 300 index of top European shares was down 2.2 per cent, losing ground for the eighth session in a row and hitting a two-year low.

Some long-term investors, however, are starting to see opportunities in the rout.

BlackRock, a leading US investment house, said it was going to use profits from its gold and bond portfolios to seek out stock bargains.

Gold posted another record high as investors sought some haven for their money. It was up about three per cent at around $ 1,770 an ounce. It gained more than three per cent on Monday.

“Markets are now worried about another global recession. Out of Europe, French bond yields have widened on expectations of sovereign debt downgrade because of the country’s exposure to peripheral European debt,” said Natalie Robertson, a Commodities Strategist at ANZ.

German business daily Handelsblatt quoted Moritz Kraemer, Head of the European sovereign unit of Standard & Poor’s as saying the rating outlook for Britain and France was stable and he did not expect to downgrade them within the next two years.

The dollar fell two per cent on the day against the Swiss franc, extending losses to hit a record trough as the US currency tumbled against currencies perceived to be safe havens.

It fell as low as 0.7359 Swiss franc, according to electronic trading platform EBS. In earlier trade, it fell nearly one per cent on the day versus the yen to 76.99 yen.

The dollar was down half a per cent against a basket of currencies.

Over time, analysts expect currencies with deeper liquidity to stay in favour in a predominantly risk-off environment.

“Liquidity matters in the current environment so the Swiss franc, the yen, the dollar and to some extent the euro will remain well supported, They are large and liquid and don’t have the stretched positioning associated with carry currencies such as the Aussie, Kiwi and the Nordics,” said Raghav Subbarao, Currency Strategist at Barclays Capital.

On bond markets, Italian and Spanish government yields fell. Italian five-year government bond yields were 27 basis points lower at 4.3 per cent, with 10-year yields 20 bps lower at 5.1 per cent.

Spanish 10-year yields were 18 basis points lower at 5.02 per cent.