Nasdaq
Picture: REUTERS

GLOBAL stock markets turned tail and money flooded into safe-haven bonds yesterday, even before European Central Bank (ECB) chief Mario Draghi had finished explaining that he had no concrete proposals for drawing a line under the eurozone fiscal crisis.

In a week when the world's leading central bankers came under considerable scrutiny for signs that they might boost rapidly falling confidence in the global economy and the future of the euro, the ECB and US Federal Reserve failed to announce any new measures to encourage growth.

The JSE fell from its record high as investors scrambled for safe-haven assets.

The rand weakened for a fourth day immediately after Mr Draghi's press conference, wiping out gains made earlier in the day.

"Investors are flocking to the exits, favouring traditional safe havens such as core government bonds, with the September German bunds contract hitting session highs," Ishaq Siddiqi, market strategist at London-based ETX Capital, said.

"Investors feel he (Mr Draghi) has failed to deliver on his pledge by not announcing a 'big bazooka' initiative such as buying distressed peripheral bonds," he said.

The rand weakened 0.4% to R8.38/$ in late afternoon trade in Johannesburg after strengthening by as much as 1.2%.

The JSE's all share index reversed earlier gains as miners such as Anglo American came under pressure, closing 0.1% lower after gaining just under 0.5% during the day.

Mr Draghi, who last week pledged to do "whatever it takes" to preserve the euro, said the ECB had decided to keep its main rate at 0.75%. He said policy makers may undertake open-market operations and high yields were unacceptable - but did not announce any immediate steps to do so.

On Wednesday the Fed also signalled its readiness to support the US economy even as it refrained from adding to bond purchases.

"No news is bad news in this case," Ian Cruickshanks, head of treasury strategic research at Nedbank Capital, said. "The market was building itself up for a let-down."

After Mr Draghi made his pledge last Thursday, global stock markets - including the JSE, which reached a new record high - rallied on optimism that the ECB would take action to ease soaring debt costs for Spain and Italy.

The ECB has been criticised for not being as aggressive as its peers in trying to bolster the ailing European economy. Since the end of September 2008, it has cut borrowing costs to 0.75%, while the US Fed has cut rates to 0.25% and the Bank of England to 0.50%.

"The ECB says it will wait and see if the economy falls further ... the next set of data is going to show the European Union in recession," Mr Cruickshanks said.

Manufacturing contracted in almost all of the 17 eurozone countries last month despite an interest rate cut and a weaker exchange rate. The core economies of Germany and France were the key drivers of the weakness.

Commodity prices have weakened this year on the economic slowdown in Europe, the US and China. Metals and other raw materials account for 45% of South Africa's exports last year.

Yesterday the FTSE was up 1% at a three-month high before Mr Draghi's press conference but closed 0.9% down. The plunge started soon after he began speaking at 2.30pm.

S&P futures delivered a 25-point peak-to-trough swing before leaving Wall Street 0.5% in the red.

The euro had jumped above $1.23 shortly after Mr Draghi began delivering his opening statement at the press conference and immediately retreated nearly 3c from a four-week high above $1.24. Stephen Pope at Spotlight Ideas said after both the Fed and the Bank of England sat on their hands this week, the market had placed an even greater onus on Mr Draghi to back up his "whatever it takes" pledge.

"After zero from Ben (Bernanke) and Mervyn (King), everything was on Mario (Draghi's) shoulders and I sense he has spoken tough words, and delivered his speech (last week) in an emotional and angry tenor, but (today) missed a chance.

"What is all the nonsense about taking two weeks to design the 'whatever it takes' package? Why is the package not ready to roll right now?"

With Financial Times

derbyr@bdfm.co.za