Spike in Risk Aversion Lifts Dollar

November 23, 2010

North and South Korea exchanged artillery shells on the disputed island of Yeonpyeong with casualties reported.  Stocks in the Pacific Basin slumped in response by 2.7% in Hong Kong, 2.0% in China and Singapore, 1.7% in Indonesia, 1.3% in India, 1.2% in New Zealand and Australia, 1.0% in Malaysia and 0.8% in South Korea.  Japanese markets are closed for Labor Thanksgiving Day.

In Europe, concern about Portugal and Spain has swelled, boosting bond yields in those countries even as the ten-year German bund slid four basis points.

The risks posed by Europe’s peripheral members and Korean hostilities outweighed any boost from better-than-forecast Euroland preliminary purchasing manager readings.  The dollar has risen 0.5% against the euro, 0.7% against the Australian dollar, 0.6% against the kiwi, and 0.2% relative to the yen, Canadian dollar, and sterling.  The Swiss franc, up 0.1%, also benefited from safe-haven demand.  The Chinese yuan held steady.

Ten-year gilt yields slid two basis points, as the British Bankers Association reported the lowest total of mortgage approvals last month since March 2009.  Such fell to a lower-than-forecast 30,766 from 31,058 in September, continuing a softening trend.  Among European equities, the Dax is trading unchanged, but the Paris Cac and British Ftse show dips of 0.6% and 0.4% so far.

Oil prices eased 0.5% to $81.34 per barrel.  Gold, however, was lifted by the Korean event risk and is 0.4% higher at $1362.90 per ounce.

The German services purchasing managers index shot up 2.6 points to 58.6, a 39-month high in November according to the preliminary report.  The manufacturing index of 58.9 and the overall composite reading of 58.8 represented four-month highs.  Labor market readings were the best in many years.

France’s manufacturing PMI rose 2.3 points to 57.5, a ten-year high.  Analysts were looking for a reading of 55.  The services PMI of 55.7 in France also surpassed expectations and resulted in a composite score of 56.8 versus 54.9 in October.  Production growth accelerated for the first time in four months, and there was not evidence that higher input prices are getting passed down to consumers.

Euroland’s flash purchasing managers indices had November readings of 55.4 on the composite index, up 1.6 points and a 3-month high, 55.5 for manufacturing, up 0.9 points and a 4-month peak, and 55.2 in services, up 1.9 points to a 3-month high.  Euroland’s expansion continues to be concentrated in Germany and France, with the rest of the currency union merely treading water.

German third-quarter GDP growth was confirmed at 0.7% (2.8% annualized after 9.5% in 2Q and 2.3% in 1Q).  GDP was 3.9% higher than in the third quarter of 2009.  A breakdown of sources of that 3.9% increase shows 1.1 percentage points (ppts) from net exports, 0.7 ppts each from personal consumption and machinery and equipment investment, 0.5 ppts each from inventory building and construction, and 0.3 ppts from government spending.

Norwegian mainland GDP (that is, excluding offshore oil) advanced 0.9% last quarter, nearly twice as much as in each of the previous two quarters.  Total GDP fell 1.6%.  A new survey of Swedish planned investment suggests such will rise 10% next year after declining 5% this year.

French business sentiment fell two points to 100 in November, hurt by recent strike activity.

German consumer confidence punched in at 5.5 versus an upwardly revised 5.0 last month and forecasts of a 5.0 reading.

Italian consumer confidence in November of 108.5 after 107.7 in October and 107.2 in September surpassed expectations.

Greece secured approval for the third tranche of its aid package from the EU and IMF.

Canadian consumer price data for October produced a substantial upside surprise.  On-year inflation accelerated from 1.9% in September to 2.4%, a two-year high.  Seasonally adjusted consumer prices advanced 0.7% on month, the most in 45 months.  Energy inflation accelerated to 9.1% on year from 5.6%, led by an 8.8% jump in gasoline after 3.1%.  Inflation excluding gasoline picked up to 2.1% from 1.8%.  Core inflation of 1.8% compared to 1.5% in September.  The Bank of Canada’s price target is 2.0%.  Seasonally adjusted core consumer prices firmed 0.3% last month, triple September’s increase.

South African GDP was 2.6% greater than a year earlier in the third quarter, which was weaker than assumed.  Turkish consumer confidence likewise slid to 89.0 in October from 90.4 the month before.

Taiwanese industrial production was 14.4% greater in October than a year earlier.

There is a big slate of U.S. releases today: revised GDP, existing home sales, the FOMC minutes, weekly chain store stales, the Richmond Fed manufacturing index, and weekly consumer confidence.  Canadian retail sales figures also arrive.  Poland’s central bank makes an interest rate announcement (should be that rates are being held flat), and Mexico (retail sales) and Brazil (current account) release new data.

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

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