13:40 GMT. Shares are shrinking from two-year highs and commodities are mostly softer as concerns about Europe’s fiscal condition and further monetary tightening in China weigh on investor sentiment.

The FTSE All World equity index is down 0.5 per cent, but core bond yields are again trundling higher as the long-term impact of the Federal Reserve’s quantitative easing policy stokes inflation fears.

The dollar is a touch softer and S&P 500 equity futures are flat after US weekly jobless claims and the trade deficit for September both fell more than expected.

Without a bid for haven debt, many strategists see the selling of riskier assets as little more than a consolidation phase after the recent QE2, earnings and economic data-inspired run that had pushed the All World up 17 per cent from the start of September. The Reuters-Jefferies CRB commodities basket is up 21 per cent over the same period.

That said, traders are again becoming intermittently concerned about the stresses re-emerging in the eurozone and the “currency war” rhetoric that is bubbling ahead of this week’s G20 meeting in South Korea.

Regarding the former, the spread between Ireland’s benchmark debt and those of Germany hit a euro-era record of nearly 600 basis points as European clearing group LCH.Clearnet raised margin requirements for trading Dublin’s debt.

The move appears to have been interpreted as providing further evidence of the fragile condition of the eurozone “peripheral” sovereign bond complex – as if any reminder were needed

The Market Eye

Dallas Fed president Richard Fisher says the central bank is not looking to use QE2 to spark headline inflation. Corporate America may wish it was. One result of the Fed’s largesse is soaring commodity prices, partly because hot money is chasing real assets. But consumers are in no mood to stump up for higher prices in the shops, and thus some companies’ margins are being crushed. Shares of Dean Foods, the biggest dairy producer in the US, fell 18 per cent on Tuesday following disappointing results that pointed to such a margin squeeze. Equity investors may be wise to start paying more attention to factory gate and consumer price inflation differentials.

Asia Pacific

Asia-Pacific. Stocks reversed early gains on Wednesday morning, with markets in Hong Kong and China at one point falling more than 1 per cent on concerns of inflation and increased speculation of fresh measures to curb property prices on the mainland. The FTSE Asia-Pacific index is weaker by 0.4 per cent.

The Shanghai Composite closed down 0.6 per cent, amid concerns that higher consumer prices and increasing fund inflows could prompt the government to tighten monetary policy further. Bloomberg reported that Beijing has ordered some banks to increase their reserve ratios by 50 basis points. Inflation data for October will be published on Thursday.

In Hong Kong, the Hang Seng was lower by 0.9 per cent as banks and developers slipped. Australia’s S&P/ASX 200 fell 0.9 per cent as traders tracked New York’s losses.

Tokyo and Seoul bucked the regional trend. Japan’s Nikkei 225 rose 1.4 per cent, with banks leading the advance on reports that global regulators are likely to focus their attention on large banks with international businesses, stripping out domestically focused institutions that lack global reach. A weaker yen on Tuesday has also helped exporters.

The Kospi in South Korea advanced by 1.1 per cent to a fresh three-year high as foreign investors were net buyers on hopes the country was well positioned to exploit the global economic recovery.

Europe

Europe. Major exchanges were lower from the off as investors absorbed a big batch of earnings reports and Wall Street’s slide overnight. The FTSE Eurofirst 300 is off 0.1 per cent and London’s FTSE 100 is down 0.4 per cent as resource groups have a bad day. Banks are softer, tracking a heavy fall for US financials and after French investment bank Natixis fell more than 10 per cent on capital requirement concerns. Dublin is down 1.4 per cent.

Forex

Forex. The dollar is struggling to consolidate Tuesday’s advance as traders probably have one eye on the forex-policy rhetoric in the run-up to this week’s G20 meeting.

The US dollar index, which tracks the buck against a basket of its peers, is down 0.1 per cent at 77.74. The euro is flat at $1.3770 and the yen is down 0.9 per cent relative to the greenback at Y82.48.

The Chinese renminbi rose 0.1 per cent versus the dollar to Rmb6.6335, a fresh 17-year record.

Rates

Rates. Core sovereigns are again under pressure after the previous session’s sell-off caught investors off guard. The US 10-year benchmark yield is up 6 basis points to 2.72 per cent, an eight-week high that suggests the Federal Reserve’s second bout of quantitative easing had been well and truly discounted by the market.

The US will auction $24bn of 30-year notes later today. The yield on the “long bond” hit a five-month high on Tuesday as investors were seen fretting about the long-term inflationary effects of the Fed’s ultra-loose monetary policy. Thirty-year yields are today outperforming the broader trend and flattening the curve with a rise of just 1 basis point to 4.26 per cent.

Eurozone peripheral yields are moving higher and credit default swaps are widening as fears over Ireland’s position again bubble to the surface. Portuguese 10-year yields are up 20 basis points to 7.10 per cent after an auction of €1.2bn worth of 6- and 10-year bonds required higher yields.

UK 10-year gilt yields have jumped 12 basis points to 3.16 per cent after the Bank of England’s quarterly inflation report was considered more hawkish than expected.

Commodities. The complex is witnessing some selling as Tuesday’s reversal in precious metals reminds traders that some product prices may have become stretched following the rush to invest in hard assets after the announcement of QE2.

Many raw materials remain close to multi-year or record highs, however. The Reuters-Jefferies CRB index is off 0.2 per cent. Grain prices are a bit softer following Tuesday’s bounce. Oil is up 0.5 per cent at $87.08 a barrel.

Gold is higher following its late drop below $1,400 in the previous session when it retreated from a record of $1,424.1 an ounce. The yellow metal is up 0.7 per cent to $1,402, while silver is up 3.1 per cent to $27.67 an ounce following its sharp slide late Tuesday.

Follow the market comments of Jamie Chisholm in London and Telis Demos in New York on Twitter: @JamieAChisholm and @telisdemos
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source: www.ft.com