Wednesday 21 February 2018

Euro hits four-month lows against dollar on Cyprus worries

Traders work on the floor at the New York Stock Exchange
Traders work on the floor at the New York Stock Exchange

By Wanfeng Zhou, Reuters

MAJOR stock markets fell and the euro slumped to a four-month low against the dollar today, hit by a disappointing Italian bond auction and concern about the wider impact of the Cyprus bailout on the euro zone.

Safe-haven government bonds rallied. U.S. Treasuries debt prices jumped, driving benchmark yields to their lowest levels in three weeks. German bunds also gained.

Italy, at a debt auction on Wednesday, paid more to borrow over five years than it has since October as lack of progress in forming a new government and worries about Cyprus's bailout hurt demand.

Cyprus is finalizing capital control measures to prevent a run on banks by depositors after the country agreed a bailout deal that will wipe out some senior bank bondholders and impose losses on large depositors.

The worry among investors is that despite attempts by some officials to dismiss the idea, the plan could become a blueprint for any future euro zone bailout.

"Europe is a lingering threat with the fragility of its banking system," said Russ Koestrich, global chief investment strategist at BlackRock in San Francisco.

MSCI's index of world shares, which tracks 6000 stocks in 45 countries, fell 0.6 percent to 357.26 points.

European shares dropped 0.7 percent to 1,180.22 points.

U.S. stocks fell in early trade. A robust rally a day earlier sent the Dow Industrials to another record close and the S&P 500 to within striking distance of its all-time closing high.

The Dow Jones industrial average dropped 84.64 points, or 0.58 percent, to 14,475.01. The Standard & Poor's 500 Index slipped 9.02 points, or 0.58 percent, to 1,554.75.

The Nasdaq Composite Index lost 19.77 points, or 0.61 percent, to 3,232.71.

Benchmark U.S. 10-year Treasury notes were up 18/32 in price to yield 1.8471 percent.

The euro fell as low as $1.2755, the weakest since late November, and last traded at $1.2767, down 0.7 percent on the day.

"Rising Italian borrowing costs and its political situation are both negatives," said Greg Anderson, G10 strategist at Citigroup in New York. "Investors are not overly short the euro, so there is plenty of scope for the euro to test the lows of the past cycle."

Bleak euro zone data added to the bearish sentiment.

The first fall in euro zone economic confidence after four months of gains in March came on top of an ongoing slump in Italian manufacturing and retail sales and a confirmation that France's economy contracted at the end of last year. 

German government Bund futures, an asset that investors value in times of increased tension, rose 75 ticks, their biggest jump since inconclusive Italian elections last month rattled markets.

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