GLOBAL MARKETS-Stocks sink as economic outlook dims, bonds jump

he European Central Bank kept interest rates unchanged on Thursday, but traders said the central bank has been buying bonds of peripheral euro-zone countries in an effort to keep rates lower.

German Bunds gained, while Italian and Spanish government bond yields rose in volatile trade on Thursday, after a euro- zone monetary source said the European Central Bank was only planning to buy Portuguese and Irish bonds. For more see [ID:nR1E7IF024].

Markets were unconvinced the ECB bond buying will be effective in stopping contagion and some were disappointed that Italian and Spanish bonds, whose yields climbed above 6 percent recently, were not the target of the purchases.

"It wasn't a unanimous decision to (buy bonds). (ECB President Jean-Claude) Trichet looked really uncomfortable saying it," one trader said.

"The market obviously dismissed it pretty rapidly," another trader said.

Brent fell more than 2 percent and U.S. crude lost 3.2 percent to $89 a barrel. Copper pricesdropped 1.5 percent. (Additional reporting by Julie Haviv, Marius Zaharia and Emelia Sithole-Matarise; Editing by James Dalgleish and Jan Paschal)

FOREX-Yen down on Japan intervention but not likely to last

* Yen tumbles as Japan intervenes to sell yen vs dollar

* Analysts say safe-haven yen to keep gaining

* ECB keeps rates steady, Trichet says bond buying ongoing

(Updates prices, adds quotes)

By Julie Haviv

NEW YORK, Aug 4 (Reuters) - The yen slid on Thursday after Japan intervened to curb its strength to support the country's export-led economy, a move that should have a fleeting impact as global economic concerns keep demand for the safe-haven currency high.

Japan's intervention came one day after the Swiss National Bank unexpectedly cut interest rates to cap a soaring Swiss franc. While the yen tumbled during the Asian and European session, losses were later pared as risk-aversion reigned.

Constant yen selling versus the dollar by Japanese authorities during the European session briefly pushed the dollar above the psychologically key 80 yen level, traders said. Tokyo had been steady yen sellers in the Asian market.

"Japan and Switzerland can do all they want to slow appreciation, but they will not be able to stop it," said Peter Schiff, CEO of Euro Pacific Capital, based in Westport, Connecticut.

"Japan and Switzerland should not intervene because economic growth and a strong currency go hand-in-hand and history shows that," he said. "When America was a mighty industrial power, it also had the strongest currency in the world."

Euro Pacific Capital has $3 billion in client assets under advisement.

A voracious appetite for safety ensued as investors fret about sluggish global growth and peripheral debt woes, causing European and U.S. stocks to plunge and U.S. Treasuries to soar.

"It is a stupid thing when policymakers try to weaken their currency," Schiff said.

Japan's move had pushed the U.S. currency roughly 4 percent higher to a three-week high of 80.25 yen, according to electronic trading platform EBS. Gains were later sharply pared and it last traded at 78.98 yen, up 2.5 percent.

On Monday, the dollar hit a four-month low of 76.29 yen, close to its record trough of 76.25 yen hit in March after the earthquake.

Euro gains were also curbed and last traded at 111.74 yen, up 1.3 percent. Yen selling had earlier sent the euro zone single currency more than 3 percent higher against the yen.

Japan sold one trillion yen, or $12.5 billion. For more see [ID:nL3E7J41YW]. Finance Minister Yoshihiko Noda confirmed Tokyo had intervened, saying Japan had acted alone but was communicating with other countries on the move. [ID:nT9E7IP021]

"Japan is being very aggressive in their intervention and the process has been more aggressive than usual," said Brad Bechtel, managing director and head of sales at Faros Trading in Stamford, Connecticut.

"Japan was not only looking at the pace of appreciation of the dollar/yen, but also the cross rates with China and Korea as they are their biggest competitors."

The BOJ conducts intervention on behalf of the Ministry of Finance, which is in charge of currency policy.

Japan's intervention was its first since March 18 when the BOJ and other major central banks jointly intervened after the yen surged to a record high versus the greenback.

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Meanwhile, European Central Bank President Jean-Claude Trichet said that the bank's bond-buying program is continuing. [ID:nFAT007235] Trichet's comments followed the ECB's announcement it was keeping interest rates steady [ID:nL6E7J411S]

After a brief bounce, the euro fell below $1.42 against the dollar after trading above it as markets were disappointed that the ECB bought smaller amounts of peripheral bonds. It last traded at $1.4154, down 1.2 percent.

European traders had earlier said the ECB was in the market buying Portuguese and Irish sovereign debt. (Additional reporting by Naomi Tajitsu and Anirban Nag in London; Editing by Kenneth Barry)

The Relationship Between Stock Prices and Bond Prices

Recently, I had the opportunity to teach a session of OTA XLT Forex. In the class, we were identifying potential trades that were to play out in the next few days to weeks. One of the comments that I made in the class resulted in a flood of emails being sent to me from the students. I was discussing inter-market analysis and mentioned that bonds and stocks tend to move together in the same direction.
This came as a shock to most of the students who believed that the bonds and stocks should move in the opposite direction. In studying to become a Chartered Market Technician, I was required to study the relationships between asset classes, and as a trader, this has benefited me greatly. By understanding these relationships, a trader can identify potential shifts in trend and confirm support and resistance. Additionally, one can also profit from multiple asset classes as you are already doing the analysis and may see the opportunities.
Now to explain my statement, "Stock prices and bond prices should move in the same direction." Most traders believe that bonds are a direct substitute for stocks and are used as a flight to safety in times of trouble. That is partially true. When there are economic scares, the US Treasury stands as a safer investment than equities. This will cause a rise in bond prices when the initial shock of a possible stock decline hits. However, when one understands the relationship of bonds to the interest rates, you will see that this is just not possible for the long-term.
Bond prices are inversely related to their interest yield. If rates in general go up, then someone selling a bond in the secondary market with a lower rate must drop their price to make the overall yield for the bond comparable to new offerings with higher coupon rates. If the rates in the market go down, then someone can sell their bond for more money if it offers a higher rate than what is now available.

Businesses compete for investor money and also offer corporate debt (bonds) to finance operations. If the rates of Treasuries rise due to Fed action or a sell-off in the bond market in general, then a company that wants to raise capital must offer higher rates of return on their bonds offerings. This higher rate of return is a larger burden on their balance sheets and causes less profitability and therefore, lower EPS. Couple that with higher borrowing rates for business and the consumer alike and you will start to see a slowdown in business. That slowdown will result in the liquidation of share holdings in search of better investments.
The following chart shows the inverse relationship between bond rates and stock prices in the bull market from 1982 to 1999. You can see that during this time of market and economic prosperity, we had a rise in both equity and bond prices.