Risk assets weak as gold hits $1,600

Risk assets are starting the week on the back foot, with sentiment battered by worries over eurozone and US sovereign debt issues.

Global growth concerns are also overpowering any residual bullishness engendered by a generally positive start to the US second-quarter earnings season, as traders warily eye Friday’s publication of weak consumer confidence data for the world’s biggest economy.

The FTSE All-World equity index is down 0.6 per cent as European bourses see heavy losses. The FTSE Eurofirst 300 is off 1.1 per cent, with banks suffering as investors get the first chance to discount details of the latest European bank stress tests. “Underwhelmed” by the tests’ toughness and disinfectant properties, appears to be the verdict.

S&P 500 futures suggest Wall Street will deliver a fall of 0.5 per cent at the opening bell, with IBM likely to be the headline earnings report of the session.

Gold is signalling the anxiety stalking dealing rooms. The precious metal has hit another record at $1,601.80 an ounce, as investors seek alternatives at a time of fiscal uncertainty. The bullion is currently up 0.5 per cent to $1,601, while silver is selling for $40.34 an ounce, an 11-week high.

No deal on the US debt ceiling over the weekend means traders are having to price in the possibility of a default by Washington at the start of August. But while the lack of progress is certainly not helping to calm nerves, judging by the action in the US bond complex, few expect the worst scenario.

Benchmark Treasuries have been pretty resilient in the face of credit agency warnings of downgrades should President Barack Obama and the Republicans not manage to reconcile their differences to reduce the budget deficit.

Treasuries also continue to provide a haven for funds in times of broader market angst. Ten year-yields are marginally softer at 2.89 per cent, though this is an underperformance relative to Bunds, which are again benefiting from Germany’s European “safety” profile.

Benchmark Bund yields are down 6 basis points to 2.64 per cent, near an eight-month low, with investors apparently not hopeful that this week’s eurozone summit will deliver anything concrete to halt the bloc’s sovereign debt contagion.

The Markit iTraxx SovX index of western European sovereign credit default swaps has hit a record of 309 basis points, up 11.5bp on the day, reflecting a widening of spreads with Bunds. The yield on 10-year Spanish notes is up 26bp to 6.33 per cent.

The euro is thus again under pressure, falling 0.5 per cent to $1.4043, a move that is helping boost the dollar index by 0.6 per cent in generally “risk off” trading.

The trend was equally downbeat in Asian action. The FTSE Asia Pacific index excluding Japan is down 0.5 per cent as shares of energy producers and News Corp lost ground in Australia while exporters led declines in Seoul. Markets in Japan were closed for a national holiday.

In earlier trading in Sydney, News Corp extended losses after the former chief executive of the UK newspaper group, Rebekah Brooks, was arrested by police as the phone hacking scandal continues to escalate. Energy producers lost ground on fears that demand will slow as the global economy slows. Australia’s S&P/ASX 200 was off 0.03 per cent.

South Korea’s Kospi Composite index was down 0.7 per cent, while Taiwan stocks retreated 0.4 per cent as smartphone maker HTC tumbled after losing a preliminary patent infringements verdict to Apple, in which a US trade panel ruled that the Taiwanese company infringed on two of Apple’s patents.

The Shanghai Composite index lost 0.1 per cent as investors remained concerned about the policy repercussions from high inflation, while Hong Kong fell 0.3 per cent.