Euroland Leaders Found Some Common Ground… Risk Assets Higher

October 27, 2011

Stocks rallied in relief.  In Europe, the German Dax and Paris Cac are 4.0% and 4.2% higher.  German Chancellor Merkel and French President Sarkozy will be speaking later today.  The British Ftse has so far climbed 2.4%.  In the Pacific Rim, equities advanced by 3.3% in Hong Kong, 2.8% in Singapore, 2.5% in Australia, 2.3% in Thailand, 2.0% in Japan and Indonesia, and 1.5% in South Korea. 

The dollar fell 0.8% against the euro and Swissie, 0.5% versus the yen and 0.2% against sterling.  Commodity-sensitive currencies were big winners in overnight trading.  The greenback has lost 2.1% against the Australian dollar, 1.5% versus the kiwi and 0.9% relative to the Canadian dollar.  The yuan dipped 0.1%.

Oil advanced 2.5% to $92.43 per barrel, whereas gold fell by 0.8% to $1709.20 per ounce.

The yields on ten-year German bunds and British gilts increased nine and seven basis points.  The 10-year Japanese JGB is one basis point firmer.

How long this relief rally holds is anybody’s guess. The key barometer to watch will be peripheral bond spreads relative to German bunds.  If they do not move inward substantially, trouble will return quickly.

E-zone leaders agreed to

  • A 50% writedown of Greek debt, accepted voluntarily by private holders.
  • Recapitalizing European banks by EUR 100 billion without involvement of taxpayer money.
  • The European Financial Stability Facility will be levered upward some fivefold to EUR 1.0 trillion in a way that does not involve the ECB as underwriter.

The Reserve Bank of New Zealand left its Official Cash Rate at a cyclical low of 2.5% as expected and released a statement that tightening will occur eventually if the the impact of the euro debt crisis proves mild on New Zealand’s economy.  New Zealand recorded a NZD 751 million trade deficit in September but a NZD 340 million surplus in 3Q11.

The Bank of Japan has left its overnight interest rate target range at 0-0.1% but voted 8-1 to boost its asset purchase program by another 5 trillion yen to JPY 55 trillion.  The sole dissenter wanted to lift such to JPY 60 trillion.  The agreed increment in the program will be consist entirely of JGB bonds.

The Bank of Japan Policy Board also released a new Outlook for Economic Activity and Prices, which cuts projected growth and core inflation.  Officials still predict moderate economic recovery and an eventual restoration of positive price stability, that is inflation of around 1%, but now say that more time is needed for such to happen.

Japanese retail sales were disappointing in September.  Total sales fell 1.5% on month and 1.2% on year.  Large-store sales were 3.6% lower than a year earlier.  That meant that large-store sales in the third quarter dropped 1.7% on year after declines of 1.6% in the year to 2Q, 2.6% in 1Q, 0.5% in 4Q10 and 1.6% in 3Q10.

South Korean GDP growth slowed to 0.7% in 3Q from 0.9% in 2Q, and the on-year change remained at 3.4%.  South Korean consumer confidence edged up to 100 in October from 99 in September.

The Swedish Riksbank left its repo rate at 2.0%.  Two of the policymakers, however, recommended a 25-bp rate cut.  Officials released a lower future rate guidance path.

Euroland reported better sentiment indices in October than anticipated.  Their rate of deterioration slowed even before today’s agreement.

  • Overall economic sentiment printed at 94.8, down just 0.2 after a 3.4-point decline in September.
  • Consumer confidence of negative 19.9 was just 0.8 points lower than in the prior month after a decline of 2.6 points in September.
  • Industrial confidence fell to negative 6.6 from minus 5.9 in September and minus 2.7 in August.
  • Retail confidence (minus 9.8) was unchanged from September.  Such had previously fallen from minus 8.7 in August.
  • Service-sector and construction-sector confidence actually improved by 0.2 and 1.3 points in October.
  • The business climate index printed at minus 0.18, a shade better than forecast, after minus 0.06 in September.

Euro area M3 growth accelerated to 3.1% in the year to September from 2.7% in October.  M3 in 3Q was 2.6% higher than a year earlier.  The improved expansion involved faster M1 growth of 2.0% and an acceleration of the growth in marketable instruments (M3-M2) to 7.3% from 5.3%.

Four German states reported October CPI data.  It looks like inflation may be a shade above expectations of 2.5%.  While consumer prices fell 0.3% in Germany’s most populous state, Hesse, Saxony and Brandenburg reported increases.  Belgian consumer prices firmed 0.2% on month and 3.6% on year in October.  Greek producer prices increased 0.8% on month and 8.3% on year in September.

The CBI survey of British retail trends produced a better-than-forecast reading of minus 11% after minus 15% in both August and September.  Analysts had looked for a 2-point further deterioration.

Spanish retail sales volume in September was 5.5% lower than a year before after an on-year decline of 3.8% in August.

South African producer prices fell 3.3% on month and rose 10.5% on year last month.

Investors will get their first reading on 3Q U.S. GDP growth at 12:30 GMT today.  There will be additional interest in the latest weekly jobless claims data and in monthly pending home sales. Canada reports average weekly earnings.

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

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