Source: Vivianne Rodrigues in New York

Wednesday 18.20 BST. Risk appetite is deteriorating sharply as hopes for Chinese stimulus measures are dashed and concerns grow over Spain’s banking problems.

In the US, eurozone fears were compounded after a report showed pending home sales dropped by the most in a year, sending the S&P 500 index down more than 1 per cent. The broad measure of US stocks is on track to close the month of May 6 per cent lower.


The FTSE All-World equity index is down 1.6 per cent as the FTSE Eurofirst 300 sees a loss of 1.5 per cent and after the Asia-Pacific region slid 0.7 per cent. The Vix index, a measure of expected US equity volatility known as the “fear gauge”, is up 11 per cent to 23.3.

Traditional “risk-off” strategies are being deployed with vigour across the market.

The euro has dropped below $1.24, the Reuters-Jefferies CRB commodities basket is at its lowest since October 2010 and perceived havens are seeing strong demand.

Benchmark US Treasury yields are down 12 basis points to 1.62 per cent, the lowest in more than 60 years, while the dollar index has risen 0.5 per cent to flirt with a two-year high, a move that leaves gold down 0.9 per cent to $1,542 an ounce.

The two main market drivers on Wednesday are essentially the reverse of factors that had delivered a more positive tone for much of the previous session.

Investors had been buoyed on Tuesday by hopes a plan by Madrid to nationalise troubled lender Bankia would help draw a line under Spain’s banking difficulties – helping to ease broader eurozone tensions.

At the same time, a belief that the Chinese government was planning to deliver a bold stimulus plan to raise the pace of growth also bolstered investor sentiment.

But it was noticeable that while equities and commodities had a decent day, gauges tracking eurozone anxiety – such as the euro and sovereign bond yields – did not join in the bullish mood.

The latter assets proved the more prescient.

First, traders on Wednesday are faced now with the news that Madrid’s plan to pay for the Bankia rescue has been shot down by the European Central Bank, raising fears that Spain’s borrowing difficulties will become more acute as the market prices in extra funding.

The yield on Spain’s benchmark 10-year bond is up 21 basis points to 6.65 per cent, approaching levels that precipitated bailouts for fellow eurozone members Greece, Portugal and Ireland.

An Italian debt auction has also tested the market. Rome was looking to sell up to €6.3bn in five- and 10-year bonds, and before the issue the country’s benchmark 10-year yield rose sharply.

In the event, the auction went reasonably well but at a higher coupon as investors remain nervous about Rome’s finances. The secondary market 10-year yield pushed above 6 per cent, though it is now up 19bp to 5.96 per cent, a four-month peak.

As money leaves the “Mediterranean” sovereigns it seeks safety in the northern “core”, pushing yields on benchmark German Bunds down 9bp to a record low of 1.27 per cent. UK gilt yields are sliding 13bp to 1.64 per cent, also a record trough.

The single currency is struggling in the wake of all this eurozone negativity, earlier touching a fresh 22-month low of $1.2387. It is now off 0.7 per cent to $1.2295.

The euro, and indeed the market as a whole, had a sharp bounce at 12.00 BST when European Commission comments about the possibility of using the bloc’s permanent bailout fund to recapitalise banks hit the wires. But this rally swiftly faded once traders realised it was a suggestion in a report and not agreed policy.

The second issue rattling confidence is global growth concerns, focusing on China. The country’s official Xinhua news agency – and a number of other reports and commentaries – said Beijing had no plans to introduce large-scale stimulus measures to boost the slowing economy.

“The Chinese government’s intention is very clear: It will not roll out another massive stimulus plan to seek high economic growth,” Xinhua said on Tuesday. “The current efforts for stabilising growth will not repeat the old way of three years ago.”

That has knocked Asian bourses and commodities with a tight correlation to China’s economic health.

The Shanghai Composite was down 0.2 per cent but weakness in Hong Kong-traded financial stocks – also reacting to eurozone worries – saw the Hang Seng underperform with a fall of 1.9 per cent.

Copper is lower by 2.3 per cent to $3.38 a pound and US-traded WTI crude has broken back below $90 a barrel, currently off 3.4 per cent to $87.72.