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Sovereign debt worries rattle investors

By Robert Budden

Published: February 4 2010 08:55 | Last updated: February 4 2010 09:51

0940 GMT: There were further signs of contagion across the eurozone on Thursday ahead of
a European Central Bank meeting, as investors sold government bonds of peripheral eurozone
countries, sending yields higher.

The western Europe Markit SovX index, which measures the cost of insuring against the risk
of default, widened beyond 100 basis points for the first time amid heavy buying in the
sovereign credit default swap market. CDS spreads on Portugal hit record highs, up 12.2 basis
points to 206 basis points, while Greece credit default swaps rose 14.3 basis points to 405
basis points, heading closer to records of 421 basis points reached in January.

Greek 10-year bond yields rose 6 basis points in early trade to 6.76 per cent, with yields on
Portugal’s 10-year bonds jumping a further 9 basis points to yield 4.75 per cent. Ten-year
Spanish sovereign yields climbed 6 basis points to 4.16 per cent. Ten-year gilts were steady,
however, with yields at 3.90 per cent, ahead of the Bank of England meeting later in the day.

The euro fell below $1.383 against the dollar, hitting lows last seen in June 2009.

“The euro was initially buoyed yesterday [Wednesday] by the European Commission’s
endorsement of the Greek debt plan. However, it slipped back after Portugal cut a planned
treasury bill issue and Spain disclosed that its budget deficits for the next three years will be
higher than forecast. It would appear the sovereign debt problem is turning into a contagion in
the eurozone,“ said Michael Hewson of CMC Markets.

Among stocks, Spain’s Ibex index was down 2.6 per cent and Portugual’s PSI 20 fell 3.6 per
cent. London’s FTSE 100 was largely a sea of red having been up as much as 0.3 per cent in
early trade, trading 0.8 per cent lower. The FTSE Eurofirst 300 was down 0.9 per cent.

Investors will be keeping a close eye on comments from ECB president Jean-Claude Trichet
at the central bank’s press conference for any comments on the fiscal health of peripheral
eurozone states as fears of a sovereign default persist.

The ECB is widely expected to keep interest rates on hold, as is the Bank of England. In the
UK, all eyes will be on the Bank’s £200bn quantitative easing programme – printing money
to buy government bonds – which most analysts expect will not be renewed. The Bank could
seek authorisation for a higher QE limit, however, paving the way for possible further gilt
purchases – a move that would probably be positive for gilt prices, sending yields lower.
Continued concerns over monetary tightening in China sent Asian equity markets lower on
Thursday, with the Shanghai Composite closing down 0.3 per cent and the Nikkei 225 half a
per cent lower following Wednesday’s brief rally in Asia.

Banks in China led the retreat after China’s sovereign wealth fund denied reports that it was
looking to buy shares in the country’s top banks.

A surprise fall in Australian retail sales – down 0.7 per cent in December from the previous
month – hurt Australian equity markets, with the S&P/ASX 200 down 0.6 per cent.

The news also damaged the Australian dollar, still reeling from the surprise decision by the
Reserve Bank of Australia earlier in the week to hold off from raising interest rates. The
Aussie, long a popular carry trade currency, hit a six-week low of $0.8793 against the US
currency.

The New Zealand jobless rate also rose to its highest level in more than a decade, hitting 7.3
per cent in the final quarter of last year, sending the kiwi to a five-month low against the
greenback of $0.6955.

In the US, jobless claims numbers will be watched ahead of the big show numbers of non-
farm payrolls due out on Friday.

Among commodities, Nymex crude was trading 70 cents lower at $76.25 a barrel while gold
was slightly lower at $1,103 an ounce.