Rush to safety as worried investors flee periphery
BORROWING costs jumped again yesterday in peripheral Eurozone as fears grew that Greece is on its way out of the currency union.
Investors piled cash into “safe haven” countries, driving down borrowing costs in the UK and Germany and fleeing riskier assets.
German backing for bailouts and austerity took a beating as Angela Merkel’s CDU party lost a major regional election over the weekend, while Greek politicians again failed to agree on a new government, hitting confidence across the continent.
Italy’s 10-year borrowing costs rose 18.8 basis points (bp) to 5.697 per cent yesterday, while Spain’s jumped 22bp to 6.227 per cent and Greece’s increased by 283.2bp to 27.584 per cent.
Meanwhile the UK saw 10-year gilt yields drop to a record low of 1.861 per cent, before rising to 1.877 per cent by the end of the day.
German yields fell 5.9bp over the day to 1.457 per cent, and 10-year US Treasury yields dropped 5.3bp to 1.78 per cent.
Stocks also fell hard over the day as investors sought safer locations for their cash.
“Event risk and political uncertainty in Eurozone appear too high to be ignored,” said JP Morgan.
“Buying the dips might be tempting, but in the event of a country leaving Eurozone, markets would care about only one question: who is next?”
Even traditional safe haven gold fell another 1.58 per cent to $1563.5. Analysts blamed the increasingly strong US dollar, as the market is priced in the currency, hitting demand from other countries.
The continued pressure on governments’ debts means leaders are showing few signs of backing down over austerity measures.
Spanish leader Mariano Rajoy yesterday restated his belief that spending cuts and tax rises are needed to reduce the country’s debts, which his economic reforms will help restore growth in the medium term.
However, new French president Francois Hollande takes office today and will meet German chancellor Merkel. The two are expected to seek common ground after Hollande’s previous rejection of Merkel’s plans for fiscal discipline for the Eurozone.