Stocks struggle as Korea and euro leave traders wary

By FT reporters

Published: December 20 2010 06:03 | Last updated: December 20 2010 18:55

Monday 18.25 GMT. Cold war-type tensions in Korea, the cold shoulder for the euro and the cold weather affecting much of the European continent have meant a difficult start to the holiday-shortened trading week.

Despite a poor performance in Asia, stocks managed to heat up in Europe as the end of year rally trundled on. Wall Street is flitting between positive and negative territory but the S&P 500 is currently up 0.3 per cent and the FTSE All-World index has nudged up 0.1 per cent.

Industrial commodities are firmer; but gold, the dollar and Treasuries are also enjoying inflows, related to an underlying nervousness.

Equity benchmarks remain at or near two-year highs after a good run in December on hopes that the US economy is entering “escape velocity” after the recent recession.

But traders remain wary about the eurozone fiscal mess. The euro is at two-week lows after investors were left unimpressed by the lack of forceful solutions emanating from last week’s summit in Brussels.

Volumes had already started to get thin last week as many funds were reluctant to make any big bets into the new year and as profitable positions were pared.

As such, the transport difficulties faced by many traders on Monday in Europe are likely to have accelerated the decline in activity.

Add to that a wariness about an escalation of belligerence on the Korean peninsula and only the brave may be tempted to go long risk into the holidays.

Thankfully for the bulls, Pyongyang so far has not made good its threat to retaliate for Seoul’s military exercises, and this had leant support to equities in the mid-period of the global session.

However, it is noteworthy that even when US stocks were higher at the open on Monday, the Vix volatility index had moved up 2.2 per cent to 16.5 as investors used the cheap cost of options to protect their portfolios. But the Vix has now pared its gains and is up 0.4 per cent at 16.17.

Another cautionary sign is that the euro at one point breached its 200-day moving average versus the dollar at $1.31. A break decisively below that level may boost the dollar – often an unwelcome catalyst for equities.

Europe – Bourses opened mixed but selective buying allowed most major exchanges to register gains. The FTSE Eurofirst 300 closed higher by 0.6 per cent – a 27-month peak – and London’s FTSE 100 gained 0.3 per cent as retailers fell back but gas and electricity groups attracted buyers.

Asia-Pacific – Shares were lower as investors focused on geopolitical risk on the Korean peninsula, amid fears Seoul’s planned live-fire drill from the disputed Yeonpyeong island could spark retaliation from Pyongyang. Losses were pared as the session drew to a close, however.

The FTSE Asia-Pacific index was down 0.3 per cent with South Korea’s Kospi, which at one point was off 1 per cent, losing 0.3 per cent as shipbuilders provided support on hopes for large overseas orders. Japan’s Nikkei 225 fell 0.9 per cent and Australia’s S&P-ASX 200 declined 0.6 per cent.

In China, the Shanghai Composite lost nearly 3 per cent in early trade as worries about tighter monetary conditions also affected sentiment. Property developers in Shanghai declined after Beijing on Sunday urged local authorities to take steps to curb rapid growth in land prices. The SCI closed off 1.4 per cent, while Hong Kong’s Hang Seng index was lower by 0.3 per cent. India’s Sensex index bucked the regional trend with a gain of 0.1 per cent.

Forex – The South Korean won has been volatile as dealers reacted to tensions on the Korean peninsula and news that Seoul is to impose levies on capital flows. The won retreated 1.5 per cent at one stage to hit a three-month low of Won1,171.90 per dollar, but has staged a turnaround and is now up 0.2 per cent at Won1,150.25.

The geopolitical concerns are helping support the traditional haven currencies such as the dollar, Swiss franc and yen. The buck is up 0.3 per cent on a trade-weighted basis to 80.62, while the euro is down 0.6 per cent to $1.3112, having earlier hit $1.3096, as eurozone debt woes weigh. The Swissie has hit a record level versus the euro of SFr1.2671.

Rates – The smell of cordite in the air often encourages the buying of highly rated government debt but the US 10-year yield, which was lower earlier, is now down just 1 basis point at 3.32 per cent. Only last week the benchmark had moved above 3.5 per cent for the first time since May as hopes for US economic growth saw funds move into “riskier” assets.

Eurozone “peripheral” debt is little changed, while the 10-year Bund yield is down 5 basis points at 2.96 per cent.

Commodities – The complex is stronger, as bulls convinced of forthcoming supply/demand imbalances tussle with underlying worries about tightening in the eurozone, the Korean spat and China monetary policy. Metals and agriculturals are mostly stronger, helping to push the Reuters-Jefferies CRB benchmark index to a fresh 26-month high of 322.90 at the open. The CRB is now up 0.9 per cent at 323.36, even as oil is up 0.4 per cent to $88.41 a barrel.

Gold looks to be benefiting from the Korean and eurozone worries and not put off by the stronger dollar, gaining 0.5 per cent to $1,386 an ounce. Capital Economics, the London-based research boutique, says it expects the bullion to hit $2,000 an ounce by the end of 2012, citing “anticipation of fresh shocks to the global financial system”.

Additional reporting by Song Jung-a in Seoul