July 25, 2011 / 6:09 AM / 7 years ago

Investors sell stocks, buy gold on US debt crisis

SINGAPORE (Reuters) - Stocks fell while the Swiss franc rose and gold hit a record high on Monday as hopes for a political deal to avert a U.S. default began to fade, though investors were mostly seeking to protect their portfolios with no signs of panic selling.

Equity markets in Asia were down between 0.8 percent to 2.1 percent, and U.S. stock futures fell 1.1 percent, while the benchmark 10-year U.S. Treasury yield rose four basis points to 3 percent.

Investors have been whipsawed in the past few months by hope and disappointment over policymakers’ ability to halt sovereign debt crises in the euro zone and the United States.

The focus was squarely on Washington now after European leaders scraped together a second bailout for Greece last week.

Republicans and Democrats in the U.S. Congress were each trying to put together their own plan after talks with President Barack Obama broke down over the weekend, heightening fears of a catastrophic U.S. debt default that could roil the global economy.

Investors said they still mostly viewed the headlines coming out of Washington as political theatre and expected an eleventh-hour solution before an August 2 deadline when the U.S. Treasury said it would not be able to borrow any more funds. They have continued all the while, though, to cut their exposure to risky assets.

“Despite the ever-frustrating horse-wrangling between the Democrats and Republicans, which could result in a downgrade of the U.S. government debt ranking, I still believe that some kind of temporary deal will be struck in the last minute,” said Khiem Do, head of Asian Multi-Asset with Baring Asset Management in Hong Kong.

“Overall, we remain positive on the solid economic and investment outlook for Asia, which may actually be considered as the ‘safe haven’ while the debt concerns and consumer de-leveraging in Japan, Europe and the U.S. continue,” Do said.

Japan’s Nikkei share average fell 0.8 percent, led by shares of clothing chain company Fast Retailing that were down 1.7 percent after hitting a 13-month high last Friday.

The MSCI index of Asia Pacific stocks outside Japan was down 1.1 percent, with industrials and commodity-related stocks underperforming the most.

The Swiss franc was one of the biggest gainers from late Friday in New York, owing to its safe haven status.

The dollar was down around 0.6 percent from Friday against the franc at 0.8130 and was also down slightly against the yen at 78.40 yen.

ASIAN OPPORTUNITY?

Asian assets were seen by many fund managers as a beneficiary of the increasingly tense investment environment because of the region’s relatively stronger sovereign balance sheets and better growth prospects.

Mark Mobius, executive chairman of Templeton Asset Management’s emerging markets group, believes investors will accelerate diversifying their assets out of the U.S. dollar into Asian currencies if the U.S. debt talks fail.

“The first reaction probably would be that there will be a move into Asian currencies and Asian bonds. People will see that as a safer alternative. You are already beginning to see that trend. Some of the emerging countries have a lower cost on credit default swaps from the developed countries,” said Mobius, who oversees some $50 billion in assets.

However, in times of heightened market volatility, investors usually rush to liquid assets, of which emerging Asia has relatively few compared with developed markets.

Even if Congress were able to broker a deal with Obama, it is not clear the credit rating agencies would hold off from downgrading the U.S. Aaa rating.

Strategists at Bank of America-Merrill Lynch expect the U.S. S&P 500 index to drop about 100 points from where it is now if the United States loses its top debt rating, though they don’t expect the 10-year Treasury yield to rise above 3.60 percent in 2011.

Traders were watching U.S. S&P 500 stock futures closely for indications on the broader market’s willingness to stick with risky assets as the U.S. debt deadline looms.

Correlations between G10 currencies and the S&P 500 index are strongest with the Canadian dollar, Australian dollar and Swedish crown, suggesting those currencies could be in the firing line if fear causes dealers to liquidate positions in a hurry, Robert Rennie, chief currency strategist with Westpac Bank in Sydney, said.

The Korean won, one of the more liquid emerging Asian currencies, has a relatively low correlation with the S&P in the past year.

Treasuries slid in early trading. The 10-year future was down 4/32 to 124-6.5/32, though remains not too far from a seven-month high of 125-28/32 reached in June.

In the cash market, selling was heavier in late-dated maturities. The 30-year yield climbed five basis points from late Friday in New York to 4.31 percent.

In commodities trading, gold rose to an all-time high of $1,622.49 an ounce, then eased to $1,612.75, up 0.9 percent for the day. Silver was at $40.34, close to last Tuesday’s two-month high of $40.84.

U.S. crude oil for September delivery in New York fell more than $1 to just under $99 a barrel, while Brent oil futures were down 71 cents at $117.96.

“Markets still believe that there is going to be a last minute deal on this even though we might be pushing really close to the line, and that is the reason why Asian trading has been largely sanguine,” said Kenneth Akintewe, a fund manager at Aberdeen Asset Management who helps manage $6.8 billion in Asian fixed income securities.

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