Oil and gold break new ground

Gold and oil prices hit record highs on Wednesday, while the Dow Jones Industrial Average suffered its worst start to a new year since 1983 and Treasury bonds surged after fresh signs of weakness in the US economy.

Gold climbed above its previous lifetime peak of $850 an ounce reached in January 1980 and oil hit $100 a barrel. The euro climbed above $1.47 and the yield on the 10-year Treasury moved back below 4 per cent amid mounting expectations for aggressive interest rate cuts by the Federal Reserve.

The catalyst for much of the day’s action came from a weak manufacturing report from the US Institute for Supply Management. The headline index fell to 47.7 last month, the lowest level since April 2003, compared with expectations for a modest increase from November’s 50.8. A reading below 50 indicates a manufacturing contraction.

“Overall, this is a seriously weak report though the headline is still not quite at recession levels,” said Ian Shepherdson, chief US economist at High Frequency Economics.

“But it is far too close for comfort and it reinforces our view that the Fed has a lot more easing to do.”

Alan Ruskin, chief international strategist at RBS Greenwich Capital, noted that the report’s weakness was concentrated in the new orders data, which he said was disturbing in that it was the most important forward-looking component.

Investors largely shrugged off a further easing of money market tensions on Wednesday as sterling, dollar and euro Libor rates continued to fall. The declines were most notable in sterling, with the one-month rate recording its steepest one-day fall for eight years.

Neil Mellor, currency strategist at Bank of New York Mellon, said it was clear that recent coordinated measures by several central banks had been successful in “greasing the wheels” of the interbank lending markets.

He added: “The crux of the issue is whether or not these trends will persist once the special year-end measures have run their course – trends thereafter will be testimony to the market’s disposition towards would-be borrowers’ balance sheets and hence a possible insight into the market’s likely tolerance of risk.”

Equity markets suffered sharp losses in the wake of the ISM report. Wall Street briefly stemmed some of the pain after the release of the Fed meeting minutes for December signalled the prospect of more rate cuts.

The minutes noted policymakers “agreed on the need to remain exceptionally alert to economic and financial developments and their effects on the outlook”.

The Dow Jones Industrial Average closed down 1.7 per cent, the S&P 500 fell 1.4 per cent and the Nasdaq Composite declined 1.6 per cent.

European stocks were pulled lower by Wall Street’s retreat and the FTSE Eurofirst 300 index fell 1.3 per cent to 1,487.23 points.

Asian trading was light as Tokyo remained closed for a holiday. The rest of the region was broadly weak, with Seoul falling 2.3 per cent and Taipei down 2.2 per cent, although Mumbai advanced 0.8 per cent to a record high.

Karachi fell for a third successive session after the assassination of Benazir Bhutto.

The equity sell-off helped prompt hefty gains for government bonds as investors looked for safe havens. The yield on the two-year Treasury was down 17 basis points at 2.88 per cent while the 10-year yield was 12bp lower at 3.91 per cent.

In Europe, the 10-year Bund yield was down 11bp at 4.21 per cent and that on the 10-year gilt was 6bp lower at 4.51 per cent.

The flight from risk extended to the currency markets, as the ISM report triggered a rally for the yen amid a broad withdrawal from carry trades – in which low-yielding currencies such as the Japanese unit are sold to fund purchases of higher-yielding assets.

The dollar weakened as the futures market moved to fully price in a quarter-point cut in interest by the Federal Reserve at the end of this month.

Expectations of lower UK rates sent sterling to a fresh record low against the euro after soft UK manufacturing data.

The focus in commodities might have been on gold and oil, but platinum reached a fresh record high and copper rallied as bargain-hunters shrugged off concerns about slower economic growth.