New Overnight Developments Abroad: Banking Crisis Slams Into Europe

September 29, 2008

The Benelux governments nationalized Fortis, Belgium’s biggest employers which will sell off AMB Amro.  The British government nationalized the mortgage lender, Bradford and BingleyGermany’s Hypo Real Estate in a rescue, too. The third largest Icelandic bank was nationalized.   Money market strains in Europe intensified despite news that U.S. House of Representatives is likely to approve modified $700 billion package later today.

Wachovia Bank in the United States is said to be still looking for a buyer.

The dollar soared except against the yen, with gains of 2.3% against sterling, 1.9% against the euro and Australian dollar, 1.4% against the Swiss franc, 1.3% versus the kiwi, and 0.7% against the Canadian dollar.  The won fell over 3% to its lowest level (1199.8 per dollar) since end-2003.  It was not clear if the Bank of Korea had intervened, but there was plenty of talk in the market about intervention.

European stocks were clobbered.  The Dax and Ftse are 2.9% lower.  The Paris Cac is down 3.0%.  Earlier, stocks in Asia suffered sharp declines.  Hang Seng fell 4.3%.  Bourses fell by 4.7% in India, 2.9% in Thailand, 2.2% in Taiwan, 2.1% in Singapore and 1.3% in Japan.

Whereas the yield on 10-year-JGB’s rose 4.5 basis points to 1.49%, sovereign bond yields in Europe are substantially lower.

The Bank of Japan injected $18 billion in two operations.  The Reserve Bank of Australia injected $2.2 billion.  Central banks in Britain, Euroland and Switzerland continued to added large amounts of liquidity.  So did the Bank of Korea.  But rates moved higher.

Oil prices sank 3.3% to $103.41 per barrel.  Gold prices fell 0.8% to $881.70 per ounce.

Retail sales in Japan rose 0.7% in the 12 months to August, beating expectations.  Dollar/yen is unchanged.

Overall economic sentiment in Euroland fell to 87.7 in September, lowest since November 2001, from 88.5 in August and 97.6 in May.  Service sector sentiment had a zero reading after +1 in August.  Industrial sentiment fell to -12 from -9.  Consumer confidence was steady but depressed at -19.  Construction sector sentiment dropped 3 points to -16.  The Bloomberg retail sector PMI for Euroland worsened to 46.2 in September.  Such had been forecast to remain flat at 47.7.  The German retail PMI improved 0.5 to 44.6, but the French and Italian indices fell by 3.2 points and 2.0 points to 50.5 and 42.8.

Britain’s Hometrack housing price index fell 1.0% in September and by 6.2% from September 2007.  August had seen a 5.3% decline from a year earlier.

Bank of England lending data showed total net lending off 86.7% in August from August 2007 and the weakest levels of mortgage lending and mortgage approvals since at least April 2003.  The data were much worse than forecast.

Business sentiment and consumer confidence each worsened in Portugal this month.  Spanish retail sales fell 5.9%, but consumer price inflation receded to 4.6% from 4.9%.  Business sentiment in Finland sank to a 10-year low.  Belgian CPI inflation accelerated to 5.46% in September, defying the declines seen elsewhere.

Expected inflation in Euroland appears to have crested.  Consumers in Euroland anticipated less inflation over the coming year in September than in their August monthly survey.  So did businesses.

New Zealand household borrowing firmed 0.4% in August, and the trade deficit that month unexpectedly narrowed to NZ$ 750 million from NZ$ 808 million in July.

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