Risk Appetite Returns to the Financial Markets: Spread Betting Update

Posted on | December 1, 2009 |

US equity markets made decent gains at the start of trading today as concerns over Dubai World’s debt problems receded.

Robust Chinese manufacturing data was also responsible for today’s strong start.

It seems as though the recent bout of profit-taking opened a window of opportunity for cash-hungry investors who were waiting on the sidelines.

Risk appetite flourished again today, after Dubai World announced that it has begun ‘constructive’ talks with lenders to restructure $26 billion (£15.7 billion) worth of debt. It also said that remaining liabilities are stable.

The market appears to be feeling more confident since the debt problem is appearing more manageable and containable.

‘The fallout from the Dubai situation and the overall contagion effect should be both short-lived and quite limited,’ wrote Suki Mann, a credit strategist at Societe Generale. ‘We are close to the end of a remarkable year for risky assets, and this is probably the last chance for fast money to make a quick turn.’ [1]

With Dubai no longer seen as a threat to the global economic recovery, the markets are once again focusing on the fundamental economic environment, with morale buoyed by some encouraging data from China and the US.

Investors cheered today after a survey released by HSBC indicated that China’s dominant manufacturing sector expanded at its fastest pace in five years last month.

Meanwhile, a separate report revealed that pending US home sales unexpectedly jumped 3.7% in October. Furthermore, the Institute of Supply Management’s manufacturing index showed that the US manufacturing sector expanded for a fourth consecutive month in November.

The ISM manufacturing Index fell to a reading of 53.6 in November from the prior month’s three-year high of 55.7. Readings below 50 signal a contraction.

‘This dip down is more of a mid-course correction rather than a sign the boom is over,’ said Ethan Harris of BofA Merrill Lynch Global Research. October was ‘a little too strong relative to other information on the economy, which generally looks like a very moderate recovery.’ [2]

By 3.30pm (London time) the Dow Jones Industrial Average was trading 105.58 points (+1.02%) above its previous close at 10450.42 while the broader S&P 500 Index was 11.22 points (+1.02%) higher at 1106.85. The Nasdaq, meanwhile, gained 21.08 points (+1.2%) to 1788.51.

The VIX, a gauge of stock market volatility, and often referred to as the ‘fear index’, tumbled 7.2% to a reading of 22.75. In turn, heightened levels of risk appetite weighed on the US Dollar, which helped drive commodity prices higher.

December gold managed to climb to a new record $1199.3 per troy ounce today as investors bought the precious metal to hedge against prospective US Dollar declines.

The weaker Dollar also helped January crude oil futures (WTI) advance 2% to $78.85 a barrel and January Brent crude rise 1.8% to $79.89 a barrel.

Not surprisingly, US miners rebounded today, with Freeport-McMoRan Copper & Gold trading 1.8% higher at $84.26 and Newmont Mining up 3.4% to $55.46. In the meantime, energy major Chevron gained 1.4% to $79.11, while Exxon edged 0.7% higher to $75.61.

Financials were also in recovery mode following yesterday’s sell-off, with shares in Fifth Third Bancorp and BB&T Corp up 0.45% to $10.12 and 1.3% to $25.23 respectively, after Citigroup upped them to a ‘buy’ recommendation. [3]

Insurer American International Group surged 11.3% to $31.61 a share, meanwhile, after announcing that it has reduced the debt owed to the Federal Reserve Bank of New York by $25 billion.

Elsewhere, office products firm Staples saw its shares jump 5.8% to $24.67 after unveiling third-quarter earnings and revenues that were ahead of expectations. The company’s fourth-quarter outlook was also encouraging.

Automakers were also in the limelight today, with General Motors saying that vehicle sales in China jumped 109.5% in November as compared to a year ago. The motor company said it benefited from strong demand for fuel-efficient cars.

Ford Motor’s shares, meanwhile, edged 0.22% higher to $8.91 after it said sales in France grew 87% on the year in November.

[1] Source: Bloomberg News (1 December 2009)
[2] Source: Bloomberg News (1 December 2009)
[3] Source: Reuters News (1 December 2009)

By Anthony Grech, Research Analyst, IG Index.

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