Euro Drops to 2010 Low as S&P 500 Futures, Dollar Advance

Frankfurt (Jan 2) The euro weakened to a 4 1/2-year low, while Spanish and Italian bonds rose amid speculation the European Central Bank will boost stimulus. Standard & Poor’s 500 Index futures signaled the gauge will rebound and the dollar gained.

Europe’s shared currency fell 0.5 percent to $1.2039 at 8:05 a.m. in New York and the dollar rose versus all of its 16 major peers. Italian and Spanish yields fell to record lows. S&P 500 futures climbed 0.4 percent and Treasuries declined. The Stoxx Europe 600 Index slipped 0.3 percent. West Texas Intermediate dropped 1.8 percent to $52.51 a barrel.

ECB President Mario Draghi said he can’t exclude the risk of deflation in the euro area, hinting that the likelihood of large-scale quantitative easing is increasing, according to an interview with German newspaper Handelsblatt. Euro-area manufacturing expanded less than initially estimated in December, a report showed today before the release of the Institute for Supply Management’s factory index in the U.S.

The Trouble With Falling Prices »

“The market’s verdict right now seems to be that Draghi’s ECB will act swiftly,” said Christoph Rieger, head of fixed-rate strategy at Commerzbank AG in Frankfurt. “If that is the case, spreads can compress further and we stick with our strategic overweight of the peripheral countries. Next to the large peripherals, Portugal should be the best performer of 2015.”

Ten-year yields on Italian bonds fell seven basis points from Dec. 30, to 1.81 percent, and touched 1.80 percent. The yield premium on Spain’s debt over that of Germany shrank to less than 100 basis points for the first time since 2010 as the yield on its 10-year securities touched 1.52 percent. Portugal’s 10-year rate slid 20 basis points to 2.49 percent and the yield on similar-maturity Greek bonds dropped 32 basis points to 9.27 percent.

Default Risk

Credit-default swaps on Spain dropped six basis points to 91 and Portugal declined five to 196, both the lowest since Dec. 8, CMA data show.

The euro touched $1.2035, its lowest level since June 10, 2010, after completing its worst annual loss since 2005.

“The risk that we don’t fulfill our mandate of price stability is higher than it was six months ago,” Draghi told Handelsblatt. “We are in technical preparations to alter the size, speed and composition of our measures at the beginning of 2015, should this become necessary, to react to a too-long period of low inflation. There’s unanimity in the ECB council on that.”

Dollar Gains

The Bloomberg Dollar Spot Index headed for its highest close since March 2009. The yen retreated 0.6 percent to 120.47 against the U.S. currency and the Australian dollar declined 0.7 percent to 81.24 U.S. cents.

Treasuries 10-year notes fell for the first time in five days, pushing the 10-year yield three basis points higher to 2.20 percent. Investors have been buying U.S. assets as the Federal Reserve pledged patience in raising interest rates and economic growth accelerated.

“While the Fed is not going to rush into any action, rates will go up,” said Thomas Averill, a managing director in Sydney at Rochford Capital, a currency and rates risk-management company. “The market is very long the dollar against the yen and the euro, and across the board.”

The pound weakened to the lowest level in more than a year against the dollar after a report showed U.K. manufacturing unexpectedly slowed last month, reducing pressure on the Bank of England to raise interest rates.

Record Close

The S&P 500, which closed at records 53 times last year, slipped in the last two days of 2014, trimming its annual gain to 11 percent.

Two shares fell for every one that gained in the Stoxx 600 today, with trading volumes 31 percent below the 30-day average, data compiled by Bloomberg show.

Royal Bank of Scotland Group Plc slid 1.8 percent after the Times reported the lender may be fined more than 5 billion pounds ($7.77 billion) over its involvement in the sale of toxic mortgage-backed debt in the U.S.

The MSCI Emerging Markets Index rose 0.1 percent, heading for a third weekly gain. The gauge dropped 4.6 percent in 2014, capping the first back-to-back annual decline in 12 years.

The Hang Seng China Enterprises Index advanced 2.2 percent to its highest close since August 2011 today amid speculation the government will further ease monetary policy to support a slowing economy. Hong Kong markets were closed yesterday, while mainland exchanges remain shut until Jan. 5.

China Slowdown

A Chinese manufacturing gauge slipped to the lowest level in 18 months, adding pressure on policy makers to do more to support economic growth, according to data released yesterday by the statistics bureau and the China Federation of Logistics and Purchasing in Beijing.

Hyundai Merchant Marine Co., a shipping line whose affiliate owns a resort in North Korea, jumped 8.5 percent today on prospects of better ties between North and South Korea. Kim Jong Un raised the possibility of a meeting with South Korean President Park Geun Hye for the first time in yesterday’s New Year speech. The Kospi advanced 0.6 percent amid speculation.

Missed Payment

Bonds of Kaisa Group Holdings Ltd. plunged to record lows after the company defaulted on a loan. Kaisa was unable to repay a HK$400 million ($51.6 million) loan from HSBC Holdings Plc on Dec. 31, a deadline triggered by the resignation of Chairman Kwok Ying Shing.

Indonesia’s rupiah lost 1.3 percent after inflation accelerated.

Local markets in China, Russia, Japan, New Zealand, the Philippines, Taiwan and Thailand were closed today.

Crude oil headed for a sixth weekly loss in New York as U.S. producers and the Organization of Petroleum Exporting Countries ceded no ground in their battle for market share.

Silver led gains in precious metals today, with futures rising 0.7 percent. Gold was up 0.1 percent, heading for a third weekly loss.