New Developments Abroad: Equity Markets Tumble

August 19, 2008

Many bourses have suffered losses of at least 1%.  Japanese Nikkei -2.3%.  Australia -2.4%.  South Korea -1.7%.  Indonesia -2.1%.  Germany -1.2%. France -1.4%. And Britain -1.0%.

The yen firmed 0.4% against the dollar, as the BOJ signaled that a rate cut is doubtful despite recessionary conditions now.  The U.S. currency otherwise advanced by 0.7% against the Australian dollar, 0.6% against the kiwi and Canadian dollar, 0.4% against sterling and 0.3% against the euro.  Swissy is flat.

A wide range of commodity prices are down on expectations that the dollar will extend its recovery and relief that Hurricane Fay will likely miss oil rigs in the Gulf of Mexico.  Oil is off 0.8% at $111.94 per barrel.  Gold also slid 0.8%, dipping back under $800/ounce to $799.50.

Most sovereign bond yields are lower despite some bad inflation news.  The 10-year JGB yield fell 1 basis point to 1.435% and touched 1.425%, just 1 bp above the recent four-month low.

The Bank of Japan by a unanimous vote kept its target rate at 0.5%.  The economic assessment was downgraded again, as such had been in July.  The assessment of exports in particular was downgraded, and overall activity was called “sluggish,” a euphemism for recessionary.  But officials stuck to their optimistic view that core inflation will moderate gradually and that economic activity would return to a sustainable positive growth path without policy intervention.  Governor Shirakawa downplayed the risk of a sharply declining economy.

Minutes from the August Reserve Bank of Australia policy meeting flagged a need for an early cut in cash rates and called the recent endogenous tightening of Australian financial conditions unwarranted.  The tone of the minutes seal the likelihood of some rate cut on September 2nd and elevate the chance that its size will be 50 basis points.  Markets are pricing almost even odds between 25 bps and 50 bps then.

Zimbabwe’s hyper-inflation accelerated to 11,270,000% on-year in June from 2,200,000% in May.

Producer input prices in New Zealand leaped 5.6% m/m in 2Q, most since 1980, and by 11.8% from 2Q07.  Producer output prices went up 3.5% from 1Q, most since 1985, and by 8.5% y/y.  This acceleration is not seen impeding the Reserve Bank of New Zealand’s stated intention to cut rates further this year.

German producer prices leaped 2.0% between June and July, the greatest on-month advance since the fourfold jump in oil prices at the start of 1974.  The PPI had been expected to rise just 0.7%.  On-year PPI inflation was at 8.9% in July, most since October 1981 and up from 6.7% in June and 1.1% in July 2007.

The German ZEW expectations index improved to a still very depressed score of -55.5 in August from -63.9 in July, but the ZEW index for current conditions fell sharply further to -9.2 from +17.0.  In an unusual reaction, market participants focused attention on current conditions, not expectations.  The feeling is that Germany is not about to make a turn for the better.  The BGA lobby of German wholesalers sees the present economic correction lasting well into 2009.

The Euroland ZEW expectations index mirrored the German index as it often does, improving to -55.7 in August from -63.7 in July.

The Financial Times today includes remarks by Swiss National Bank President Roth that point to no rate hike in September.  The bank will not follow the ECB’s lead, noting that activity is developing more slowly than anticipated when the last quarterly policy meeting was held and that oil prices have moved well below their peak.  Officials reserve the right to change their mind if wages climb to rapidly, but that has not happened so far.

South African GDP growth rose 4.9% at a seasonally adjusted annual rate in 2Q after a disappointing 2.1% pace in 1Q.  Such lifted year-over-year growth to 4.5% from 4.0%.

Tim Besley, one of the Bank of England’s inflation hawks, affirmed that an upward price spiral must be contained.  It’s looking like the September vote could have dissents in both directions, that is advocating a rate cut as well as a rate increase, while the majority elects to retain a 5.0% Bank Rate.  A barometer of expected inflation calculated by Barclays Bank climbed to a 16-year high near 5% in 3Q.

A Chinese government paper said growth of at least 9% can be sustained for years to come.  J.P. Morgan has broken a story that both a fiscal and monetary stimulus are being considered by Beijing officials.

The former chief economist of the IMF warned that a large U.S. bank could fail within a few months.

Greece’s current account deficit widened sharply further in 1H and could reach 15% of GDP this year.

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