Intensified Worries about Portugal, Ireland and Spain

July 6, 2011

Just when the peripheral debt crisis in Europe appeared to be ebbing, a downgrade by Moody’s of Portuguese sovereign debt to junk status (Ba2) has stirred that pot of fear anew.  Peripheral bond spreads versus Germany have widened, and the euro is lower.  Another usual victim of risk aversion, commodity-sensitive currencies, have been surprisingly resilient.

The euro fell 0.6% against the dollar overnight and has a $1.43 handle.  The dollar has also gained 0.3% against sterling, 0.2% relative to the Canadian dollar, and 0.1% against the Swissy and Aussie dollar.  The Chinese yuan and Japanese yen are unchanged, and the greenback has edged 0.1% lower against the kiwi.

Stocks were mixed in the Pacific Rim, with gains of 1.1% in Japan, 0.6% in Malaysia, 0.5% in Taiwan and 0.4% in South Korea but losses of 1.1% in Thailand, 1.0% in Hong Kong, 0.9% in The Philippines, 0.5% in Singapore, 0.4% in New Zealand and Indonesia, and 0.3% in China.  The German Dax is unchanged in Europe, while the British Ftse and Paris Cac are 0.4% and 0.1% weaker.

Ten-year yields on German bunds and British gilts each fell by five basis points, while their Japanese counterpart edged one basis point higher.

Oil and gold prices firmed by 0.1% and 0.3% to $96.97 per barrel and $1516.80 per ounce.

The release of German industrial orders for May produced very strange results.  Domestic orders for capital goods soared 20.0%, while foreign demand for capital goods sank 8.3% on month.  Total capital goods orders rose 2.4%, and total orders went up 1.8% on month and 23.0% on year after a 7.2% advance between April 2010 and April 2011.  Overall domestic orders climbed 11.3%, while total foreign orders fell by 5.8%. 

The German construction purchasing managers index deteriorated to 50.9 in June from 53.7 in May, 55.8 in April and 61.8 in March.  This index had averaged a buoyant 59.3 during the first quarter but only 53.5 in 2Q.  Readings of less than 50.0 mean contracting construction.  June saw the weakest rate of rise of the first half of 2011.

The final estimate of euro area real GDP, a quarterly gain of 0.8% after 0.3% in 4Q10 and on-year growth of 2.5% versus 2.0% in 4Q, was unrevised.

Britain’s Halifax index of house prices increased 1.2% last month and posted a 3.5% on-year decline in the second quarter versus a 2.9% on-year drop in 1Q.

British shop prices were 2.9% greater than a year earlier in June, mostly reflected food price pressures.

Japan’s index of leading economic indicators highlighted a continuing rebound from the earthquake, rising to 99.8 in May from 96.2 in April, 99.6 in March and 103.8 in February.  The index of coincident indicators improved 2.4 points to 106.0, while the lagging index trailed at 91.5 after 90.8 in April.

Hong Kong’s composite purchasing managers index barely topped the 50 no-change threshold with a reading of 50.3 in June, down from 52.2 in May, 52.9 in April and 54.9 in March.  The advanced economies are not the only ones that were losing momentum toward mid-2011.

Producer prices in The Philippines rose 0.2% in May and were 1.4% above year-earlier levels.

Spanish industrial production in May was 0.4% lower than a year earlier.  In January-May, such rose on-year by 1.2%.  Danish industrial output increased 2.8% in May and 7.3% from a year earlier.  Icelandic trade posted a surplus in May of ISK 6.79 billion following surpluses of ISK 6.03 billion in April and ISK 6.28 billion in March.

The United States Institute for Supply Management releases the services PMI survey results at 14:00 GMT.  Canadian building permits also arrive today, and Poland’s central bank will reveal its latest interest rate decision.  Bank of England and ECB decisions will be revealed tomorrow.

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

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