Sovereign debt was the term that struck a bell for investors today as European country debt worries spilled over into all asset classes. The equity indexes were hammered with the S&P 500 Index down 34 points or 3% today. The commodity markets were also down sharply with Crude Oil losing $4 dollars per barrel and gold losing 40 dollars per ounce. The Euro reached its lowest level since May of 2009. Volatility also returned to the market with the VIX volatility index rising 4 points to 25.5%.
There is a snow ball effect occurring in the European bond market. The fiscal situation with Greece continues to be on the forefront, but other economies such as Portugal and Spain are now bearing the brunt of investors’ fears. Portugal 10 year bond yields rose 21 basis points on Wednesday; the largest rise in nearly a year and the premium over Germany is the widest in almost that long too. Its 2 year yield rose 23 basis points and 5-year CDS appears to be at record levels. The issue is that even if the EU bails Greece out who would be next? Investors believe this might unveil a huge moral hazard and investors would balk. Portugal would then want to be treating in a similar fashion. Investor does not have to look back that far to remember when the investing world downplayed the important to sub-prime markets. The sovereign risk story has not become a front and center issue.
On the economic front, the Labor Department reported that U.S. productivity continued to surge in the fourth quarter of 2009 as a growing economy didn’t stop many employers from cutting labor costs. Nonfarm business labor productivity, or output per hours worked, rose by a seasonally adjusted annual rate of 6.2% in the October-to-December period, after increasing by 7.2% in the third quarter of last year. Unit labor costs, which are a measure of what it costs firms to pay workers for a single unit of output, fell at a 4.4% annual rate in the last three months of 2009, following a 1.5% decline in the third quarter. Economists had forecast a 3.5% drop in the final quarter of last year.