Markets React Sharply to EUR 750 Billion EU/IMF Sovereign Debt Rescue Package

May 10, 2010

European currencies and commodity sensitive currencies advanced strongly against the yen and dollar.  Stocks are much higher.  Gold is lower, but oil and other commodities have risen.  Sovereign bond yields dropped.

The dollar recovered 1.9% against the yen but declined by 2.0% against the euro, 1.7% relative to the Canadian dollar, 1.5% versus the Australian dollar, 1.2% against the kiwi, 1.1% versus sterling and 0.9% against the Swiss franc.  The euro at one point had appreciated 2.8% against the greenback to $1.3094, but it subsequently gave back three-tenths of that improvement.

The Paris Cac, British Ftse, and German Dax are trading 8.1%, 4.8%, and 4.4% higher than their closing levels before the weekend.  In the Pacific Rim, stocks gained 4.1% in Indonesia, 3.4% in India, 2.7% in Australia, 2.5% in Hong Kong, 1.8% in South Korea, 2.1% in Singapore, 1.4% in Thailand and 1.3% in Taiwan.

German 10-year bund yields rose 18 basis points, while their gilt counterparts are up 9 basis points.  The 10-year JGB yield firmed 3 basis points.

Gold prices slid 1.4% and are below $1200 at $1193.80 per ounce. Oil prices jumped 3.4% to $77.64 per barrel.

An enormous package of loans and loan guarantees to bolster sovereign debt of any Euroland countries, not just Greece, was announced after a 14-hour meeting of finance ministers.  The Bundesbank, Bank of Italy, and Bank of France have reportedly been buying peripheral bonds.  Sourcing this rescue package consists of EUR 440 billion in loans from EU countries, EUR 250 billion from the IMF, and EUR 60 billion from the EU budget.  This package represents a substantial war chest against short-term market pressure.  Long-term stability still hinges on credible austerity by the governments of Greece, Portugal, Spain, etc.  Currency depreciation continues to be a policy tool these countries cannot use to restore competitiveness, nor do they have the means by themselves to cut short-term interest rates or reflate monetary policy quantitatively.  The impetus for that would have to come from the ECB and implies debasement of the euro, something ECB officials will not be predisposed to doing.  Many internal inconsistencies persist in forging a way back to sovereign debt health.

As a further stability-promoting step, the Fed reopened currency swap lines with the Bank of Japan, ECB, Swiss National Bank, Bank of Canada, and Bank of England.  They had been closed earlier this year.

The Bank of England, after a delayed meeting, announced no change in either the 0.5% Bank Rate or the Gbp ceiling on its asset purchase program.  This show of steadiness makes sense after global financial markets have been riled up, and it contrasts with the sweeping change that accompanied the taking of power by the Labour Party in May 1997.  Within a week, after that election, the Bank of England had tightened 25 basis points, and the new Labour government of Tony Blair handed authority over interest rate policy to the central bank.  Flashing forward to the present, the Conservatives and Liberal Democrats are working hard to forge a coalition government, but they have not yet announced an accord.  In any case, Britain will have a minority government that will be susceptible to getting toppled prematurely and too weak to enact forceful budgetary consolidation.  Britain is not part of the weekend EU sovereign debt rescue package.

Euroland’s Sentix index of investor sentiment fell sharply to minus 6.4 in May from plus 2.5 in April.

French industrial production rose 1.0% in March and 1.6% in the first quarter.  Factory output gained 0.8% in March and 6.7% from a year earlier.  The Bank of France index of business sentiment unexpectedly dropped to 102 in April from an upwardly revised 104 in March.  Italian industrial production dipped 0.1% in March after being unchanged in February, but such was 6.4% greater than a year earlier.

Chancellor Merkel’s center-right CDU Party lost control of the state government in North Rhine Westphalia, Germany’s most populous state.  The other major party, the SDP, also suffered a drop in support.  The big winners were all the smaller parties.  The election has national political implications.  Indirectly, it was a vote of greatly diminished voter support for the CDU/FDP ruling coalition.  Directly, state elections determine the composition of the upper house of German parliament, the Bundesrat.  The combined popular vote of the CDU and FDP fell to 41.3% from 51.0%, and its corresponding number of seats in the state legislature will drop to 80 from 101.  It will be harder for Chancellor Merkel to pass structural reforms and budget cuts.

The German current account surplus nearly doubled to EUR 18.0 billion in March from EUR 9.3 billion in February.  The first-quarter surplus of EUR 31.7 billion was 40.3% wider than a year earlier.  Seasonally adjusted exports shot up 10.7% on the month after a 5.1% increase between January and February.  On-year export growth of 11.3% in 1Q10 compared to a 7.0% rise of imports between 1Q09 and 1Q10.

German real factory sales increased 2.7% in March and by 8.6% from a year earlier.  Sales rose 7.3% between 1Q09 and 1Q10.

Norwegian consumer prices rose 0.2% in April and 3.3% from a year earlier.  Core CPI inflation held steady at 1.7%.  Producer prices in Norway jumped another 3.5% last month and accelerated to a 12-month pace of 26.7% from 21.7% in the year to March.  Danish consumer prices firmed 0.2% in April and 3.3% from a year earlier. 

Industrial production in Finland increased 1.5% in March, reversing a 1.3% drop in February.  Turkish industrial output increased 0.9% in March and 21.1% from a year before.  Czech consumer prices rose 0.3% on month in April, same as in March, but the on-year comparison rose to 1.1% from 0.7%.  The Czech jobless rate was 9.2% last month.  Hungary’s trade surplus widened 34.4% on year to a euro-equivalent 653 billion in March.  The surplus in 1Q10 was 127% larger than a year earlier. 

South Korean producer prices rose 0.8% in April and 3.2% from a year earlier.

New Zealand house price inflation held steady at 6.1% last month.  Australian job ads fell 1.2% in April, still consolidating after a 19.1% surge in February.  Job ads were 14.9% greater than in April 2009.

Minutes from the Bank of Japan’s meeting of April 6-7 expressed greater optimism about economic prospects but reiterated that a very accommodative monetary policy would be continued to combat deflation.   The minutes noted that the output gap has begun to narrow, and there was a hint that a return to positive CPI inflation might occur sooner than expected.

China’s trade balance unexpectedly swung back into surplus in April by $1.68 billion from a deficit of $7.24 billion in March.  On-year export growth of 30.5% was greater than forecast.  Critics of Chinese currency policy seized upon the report as evidence that the moderating surplus and dip into deficit are temporary developments.  Opponents in China of appreciating the yuan say the big picture of a greatly reduced surplus underscore the need to keep the dollar/yuan relationship steady.

Canada releases housing starts and house price data.

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.

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