Fear Persists of Euro Crisis Contagion

June 19, 2012

At the G20 Summit in Los Cabos, Mexico, IMF resources to handle Europe’s crisis was raised sharply to $456 billion, but markets still doubt if contagion can be stopped.  A new Greek government has still not been fleshed out. Spanish auctions of 12- and 18-month T-bills raised as much capital (EUR 3 billion) as sought but resulted in significantly higher interest rates.  The 10-year Spanish sovereign debt yield remains above 7%, having reached as high as 7.25%.  German Chancellor Merkel has been subjected to considerable peer pressure to take a more compromising stance in resolving the crisis. Bank of Japan Governor Shirakawa complained that Japan’s prospects are being hurt by Europe’s mess through the impact on the yen and other channels.  Germany’s Constitutional Court ruled that parliament was not sufficiently informed about the use of the European Stability Mechanism, which is scheduled to become operational next month.

ZEW data on investor perceptions about Germany and Euroland were much worse than anticipated.  The ZEW expectations gauge for Germany worsened by 27.7 points on month to a reading of minus 16.9 in June.  That was the largest monthly deterioration in 14 years.  Analysts had expected the index to print at about zero.  The German ZEW current conditions index fell 11.9 points to 33.2.  Euroland’s ZEW expectations index was minus 20.1 in June, down from minus 2.4 in May and +13.1 in April.  The current situation in the euro area printed at minus 73.2 after minus 60.2 in May and minus 49.0 in April.  Greek and Spanish developments have clearly weighed heavily on investor confidence.

Construction output in Euroland slumped 2.7% in April and was 5.0% lower than a year earlier.  Such had fallen by 4.0% between the last quarter of 2011 and the first quarter of this year and by 6.4% from 1Q11 to 1Q12.  April-on-March declines amounted to 6.0% in Germany, 4.4% in Italy, 6.7% in Portugal, 2.3% in Spain and 1.3% in the Netherlands.

The dollar is lower, with declines of 0.4% against the euro, Swiss franc and kiwi, 0.3% relative to the yen and Aussie dollar, 0.2% versus the loonie and 0.1% against sterling.  The Chinese yuan is steady.

Equities fell by 0.9% in China, 0.8% in Japan, 1.0% in Vietnam and 0.3% in Australia.  The Paris Cac is 0.1% lower, but stocks are up 1.4% in Spain, 0.8% in Britain, and 0.5% in Germany.

Sovereign debt yields are mixed, with a rise of six basis points on 10-year German bunds but a dip of two bps in Japanese JGBs.  British gilts are steady.

Gold prices firmed 0.3% overnight to $1631.60 per ounce, while oil prices have edged 0.1% lower to $83.17 per barrel.

The French business sentiment index compiled by the INSEE government statistical agency printed lower at 92 in June after readings of 93 in May, 95 in April, and 98 in March.  92 matches the recent low in January.

British consumer prices were softer than expected in May, dipping 0.1% on month and to a 12-month increase of 2.8% from 3.0% in April, 3.5% in March and a peak of 5.2% last September.  This report has reinforced speculation that Bank of England policymakers may be poised to undertake new quantitative easing.  Core CPI was at 2.2% last month.  The 12-month increases in the RPI and RPIX indices both fell to 3.1% from 3.5% in April.

The British ONS house price index, formerly the Department of Communities and Local Government index, was 1.4% higher than a year earlier in April.  That increase followed a 0.4% on-year dip in March and rises of 0.6% in both January and February.

Minutes from the Reserve Bank of Australia’s June 9 meeting observed deterioration in global demand, lower commodity prices, a softer Australian dollar, but an absence of evidence that Australian domestic conditions are collapsing.  Officials foresee inflation hovering around the floor of the 2-3% target range for the coming year.  Calling factors guiding policy “finely balanced,” policymakers agreed to cut the Official Cash Rate by 25 basis points, half as much as the reduction undertaken in May.  The minutes leave future policy decisions ambiguous and data-dependent.

Japan released an upwardly revised April index of leading economic indicators that at 95.6 was still below 96.6 in March and at a 3-month low.  The coincident index was also revised higher to 96.9 but at its lowest level since January.  The lagging index was revised lower to 85.9 and matched February’s reading. 

Swedish unemployment rose unexpectedly to 8.1% in May from 7.8% in April and 7.7% in March.  Portuguese producer prices fell by 0.5% in May and to a 12-month advance of 3.2% from 3.6% in April.

The FOMC meeting begins today, but a decision and press conference will not occur until Wednesday.  Scheduled U.S. economic data today feature housing starts, building permits, the JOLTs index of job openings and layoffs, and weekly chain store sales.  Canada reports wholesale turnover figures.

Copyright 2012, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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