Global equities slide as yen extends gains
Neil Dennis

Equity markets across The US, Europe and Asia sold off sharply on Monday as growing concerns over the unwinding of the yen carry trade drove Tokyo’s benchmark Nikkei 225 Average more than 3 per cent lower.

The US dollar slumped 1.2 per cent to Y115.43 against the Japanese currency as yen carry trades – where low-yielding yen are borrowed to fund higher-yielding investments – unwound sharply. The euro fell 1.7 per cent to Y151.57.

“We are clearly still in correction mode, with Japanese stocks hurt by further yen strength and US indices called lower again,” said Martin Slaney at GFT Global Markets.

Tokyo’s Nikkei 225 fell 3.3 per cent to 16,642.25, its biggest single-day loss in nine months, as export stocks such as carmakers were hurt by the strength of the yen.

Elsewhere in Asia, Hong Kong’s Hang Seng index shed 4 per cent to 18,664.88, its worst loss since October 2003. The Straits Times index in Singapore slid 3.1 per cent, the Taiwan Weighted index lost 3.7 per cent, and India’s Sensex shed 3.7 per cent.

The US opened weaker, but losses were not as sharp as early futures trade had suggested. The Dow Jones Industrial Average shed 0.2 per cent to 12,078.53 and the Nasdaq Composite lost 0.8 per cent to 2,349.93.

European stocks slumped in response to Asian declines. The FTSE Eurofirst 300 fell 1.5 per cent to 1,440.34, while London’s FTSE 100 was down 1.2 per cent to 6,043.5, having earlier dipped below 6,000. The biggest fallers in Europe were mining stocks and banks.

Miners slid as metals prices on commodity exchanges were also sold off amid the market turmoil as investors continued to seek less risky assets. Copper prices fell by 4 per cent on the Shanghai commodities exchange.

The flight to safety drove further gains for high-quality assets, and government bonds were sharply higher. Last week, the 10-year Treasury note yield fell by 15 basis points. UK gilt and short sterling interest rate futures rose, with March gilt futures up 33 ticks at 109.76 and March bund futures up 40 ticks to 116.82.

Although the carry trade unwind has been responsible for much of the removal of risk appetite, economists cited a number of factors behind recent equity market losses, including softer US data and fears of spreading contagion from the US subprime market.

“There is the chance that the ’risk reassessment’ becomes a self-fulfilling prophecy, in that a lower risk appetite generates significant asset price movements that in turn further lower risk preference,” said Charles Diebel, interest rate strategist at Nomura.

And investors concerned with how long the turbulent market conditions will persist were unlikely to be comforted by analysis from stock market historian David Schwartz. He said: “In the last quarter-century, there were 64 short-term declines of at least 5 per cent. It is not common knowledge, but the average length of these declines was 32 days.”

Copyright The Financial Times Limited 2007