Asian stocks and commodities fell on Tuesday after Germany’s finance minister cautioned against hopes for a quick fix to Europe’s debt problem, reminding investors not to become too optimistic about a rapid development to the two-year-old crisis.
Investors rushed to seek protection in the options market against losses, with the CBOE Volatility index VIX — Wall Street’s so-called fear gauge — rising 18.2 percent to 33.39 on Monday, its highest one-day jump since August.
In Asian credit markets, spreads on the iTraxx Asia ex-Japan investment grade index, another gauge for whether investor risk appetite is returning, were about 12 basis points wider early on Tuesday, after tightening by about 26 points over the past week on hopes of progress in Europe.
Germany’s finance minister, Wolfgang Schaeuble, said on Monday that even though European governments would adopt a five-point platform to address the crisis, a definitive solution would not be reached at the October 23 European Union summit.
This came in the heels of a Group of 20 meeting of finance ministers in Paris the past weekend, which had raised expectations that European banks would be recapitalized, and the region’s bailout fund expanded to deal with a potential debt default by Greece.
“Although markets were not expecting the debt crisis to be resolved overnight, shares prices are likely to succumb to profit-taking after a rally,” said Hiroichi Nishi, equity general manager at SMBC Nikko Securities.
MSCI’s broadest index of Asia Pacific shares outside Japan fell 1.2 percent, with the materials sector in the MSCI index slumping more than 2 percent.
The Nikkei stock average opened down 1.4 percent, while Australian shares were down 1.6 percent.
World stocks, as measured by the MSCI’s all-country world equity index, fell 1 percent, and U.S. stocks suffered their worst loss in two weeks on Monday, with the Dow Jones industrial average down 2.12 percent.
The MSCI have recovered from 15-month lows by more than 10 percent in the past nine days, on growing expectations Europe was finally accelerating efforts to resolve its debt crisis.
The euro fell from a one-month high against the dollar of $1.39148 hit on Monday.
Oil was also lower, with Brent crude down 0.2 percent to $109.90 a barrel and U.S. crude futuresdown 0.2 percent at $86.19.
Retreating appetite for risks benefited government bonds, with 10-year U.S. Treasuries gaining 23/32 in price to yield 2.17 percent on Monday.
The declines in the markets may be limited given a lack of rush into other assets perceived as safe-haven.
Gold was flat and the dollar index was also little changed.
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If anyone can explain what benefit Germany gets from bailing out Europe vs bailing out its own banks I’m sure the German ministry of Finance would be interested.
The only thing that I can think of, that has been mentioned here before by people smarter than I, is that they have to bail out Europe because they can’t go back to the Deutschmark. If they went back to the Deutschmark, their currency would be perceived as a safe haven relative to the rest of Europe and their currency would appreciate. Not a good scenario right now for an exporting economy.
But it’s an idea that’s also completely unsellable to the people in Germany at the moment.