Dollar Rises as Stocks Swoon to One-Month Low

May 23, 2011

The risk trade is off, boosting the dollar by 1.1% against the euro, 1.3% relative to the Australian dollar, 0.8% versus the kiwi, 0.6% against the Swiss franc, 0.5% versus sterling, 0.4% against the Canadian dollar, and 0.2% relative to the yen and yuan.

The Swiss franc set a new record high of 1.2323 per euro.

In Europe, the German Dax has dropped 1.8%, and the Paris Cac and British Ftse are down 1.7% each.  Earlier overnight, stocks fell by 2.4% in Indonesia, 3.2% in China, 1.8% in Singapore, Thailand, and India, 2.6% in South Korea, 1.9% in Australia, 2.1% in Hong Kong and 1.5% in Japan.

Ten-year yields on German bunds and British gilts each fell by four basis points.  The 10-year Japanese JGB yield edged one basis point higher.

Oil prices fell 2.7% to $97.42 per barrel.  Copper also slumped more than 2.0%.  Gold edged up 0.1% to $1510.80 per troy ounce.

More worrisome European debt news crossed the wires.  Spain’s ruling Socialist Party got walloped in regional elections, but Prime Minister Zapatero isn’t giving up power early.  Fitch downgraded Greek debt to B+, while S&P shifted the outlook status on Italian debt to negative from stable.  The Greek debt premium widened sharply at the end of last week to more than 1350 basis points vis-a-vis German  10-year bunds.

Preliminary purchasing manager survey readings for the euro area, Germany and France are much worse than April results and below market expectations.

  • The flash euro zone composite index sank to a 7-month low of 55.4 in May from 57.8 in April.  Services dropped 1.3 points to 55.4 and included to weakest business expectations since July 2009.  Manufacturing fell by 3.2 points to 54.8, including a drop in the production sub-index to 55.3 from 60.2.
  • Euroland April-May results still imply non-annualized GDP growth this quarter of around 0.7% versus a gain of 0.8% in the first quarter.
  • The German composite index of 56.4 was 2.8 points lower than in April and at a 7-month low.  Services fell by 1.9 points to an 8-month low of 54.9, while manufacturing printed at 58.2 after six straight readings of at least 60.0 including 62.0 in April.  One bright spot was the biggest monthly slowdown in input price inflation since end-2008.
  • The French composite PMI was 60.5, down from 62.4 in April but still above the March reading of 59.1.  Services (62.8) printed above market expectations, but manufacturing fell by 2.5 points to a four-month low of 55.0.

China’s flash manufacturing purchasing managers index sank to a 10-month low of 51.1 in May from 51.8 in April and 54.5 at the start of 2011, adding to concerns about future global growth.

Taiwanese industrial production was 6.9% higher than a year earlier in April.  Analysts had been expecting the rise to exceed 10%.  Taiwan’s 4.4% jobless rate last month also surpassed expectations.  Malaysian unemployment rose to 3.6% in March from 2.9% the month before.  Singapore CPI inflation slowed to a 5-month low of 4.5% in April from 5.0% in May.  First-quarter Thai GDP quarterly growth of 2.0% was the fastest pace in a year, and on-year growth of 3.0% surpassed expectations.  Hong Kong CPI inflation of 4.6% last month met expectations and was two-tenths of a percentage point above the 4.4% rate in March.

The Bank of Japan’s monthly economic assessment contained no surprises and reiterated what the statement on Friday following the Policy Board meeting had said.  While fairly strong downward pressure on production is projected for the time being, monetary officials expect a return to a moderate recovery path thereafter as supply-side constraints ease and output regains traction.  Slightly positive on-year core CPI inflation is also predicted.

Japan’s revised index of leading economic indicators printed at 100.1 in March versus 104.0 in February.  The composite index fell by 3.3 points to 103.5.  Expressed as diffusion indices where 50 is the breakeven line, the leading, coincident, and lagging  indices printed in March below that level at 45.5, 10.0, and 5.0, respectively.

Italian consumer confidence surprised on the upside, printing at 106.5 in May after 103.7 in April.  It was the best reading since December.  Icelandic wage inflation remained at 4.4% on year in April.

The Bank of Israel is widely expected to raise its key interest rate later today to 3.25% from the current 3.0% level.

The Chicago Fed releases its national activity index today.  Canadian markets will be closed for Victoria Day, which commemorates the queen’s birthday.

Copyright Larry Greenberg 2011.  All rights reserved.  No secondary distribution without express permission.

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