Debt worries wreak global havoc

Financial markets experienced one of the most dramatic weeks in years as sovereign debt worries triggered an avalanche of risk reduction. The euro remained under pressure all week as the market viewed the Greek bailout with scepticism and renewed selling pressure on southern European government debt and banking stocks followed. Investors seeking a safe haven from the turmoil drove 10-year government bond yields in Germany down to a record low at 2.8 per cent.

Thursday's near-1,000 point sell-off in the Dow Jones index will, however, be the lasting memory from this week. The Thursday trading session opened weak as traders watch the unrest in Athens unfold on their screens. What followed was the most dramatic and amazing market collapse seen since the 1987 crash. It later turned out that a chain event of trading errors triggered the panic on electronic trading platforms with bids disappearing. The lack of circuit breakers caused some 300 stocks to be driven down by more than 60 per cecnt, some reaching the lowest possible price of just one cent before recovering back to near their original price level. The monthly employment data from the US calmed the markets somewhat as new job creation exceeded expectations. Nervousness persists as fears about the banking system freezing up again have become a present danger.

Commodities took the brunt of the selling as risk aversion and lack of liquidity triggered reversals across the board. Gold managed a small gain on the week helped by its safe haven status but also struggled amid continued dollar strength. Crude oil and petrol suffered double digit falls as the oil less recovery in the US and fears about overheating in China took prices lower.

Last month crude tested and got rejected three times above 87, which triggered a seven dollar sell-off once the recent low at 81 gave way. Trend line support back from July 2008 at 74.30 halted the move and some consolidation below 81 is now expected. Long term, the 100 week moving average has crossed down through the 200 week leaving little room to the upside. The 74.30 mark will be crucial in determining if this market is in for additional weakness over the coming weeks.

- The author is Senior Manager for CFD and Listed Products, Saxo Bank. The views expressed are his own

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