Market Pessimism Returns
June 9, 2016
Central bank action overnight accentuated the negative.
- ECB President Draghi made another plea for badly needed structural reform and fiscal support, and he warned of lasting damage to potential growth in the region of prolonged very weak growth with persisting deflationary risks.
- ECB Governor Villeroy defended very low interest rates as necessary to counter insufficient growth and too low inflation.
- There was a surprise 25-basis point cut in the Bank of Korea’s main interest rate to 1.5%. This was the first change in a year, and officials cited greater downside growth risks than perceived at the April review.
- The kiwi jumped 1.3% against its U.S. counterpart after the Reserve Bank of New Zealand left its Official Cash Rate at 2.25%, a record low. The policy rate will remain accommodative amid significant downside risks, and further policy easing may be required. The rate was not cut today because officials expect inflation to drift higher in part on a depreciation of the kiwi. The response of the currency today goes against the wish and seemingly makes further monetary easing more likely.
- Bank of Japan Deputy Governor Nakaso strongly defended negative interest rates in a speech that seemed to foreshadow more stimulus measures getting unveiled after next week’s Board meeting.
- Brazil’s monetary policy committee, Copom, left its Selic interest rate unchanged at 14.25% in spite of political pressure to lend more support to Brazil’s very severe recession. But inflation is over 9.0% and twice as much as the target.
- The National Bank of Serbia retained a 4.25% interest rate level. Such was cut most recently in February and stood at 8.0% prior to March 2015.
There was some gloomy data reported.
- Japanese broad liquidity growth slowed to an on-year increase of 2.1% in May from 2.7% in April and 3.4% in the first quarter. M2 money rose 3.4% on year.
- German exports and imports in April were respectively unchanged and down 0.2% from their March levels. The seasonally adjusted trade surplus in April was EUR 23.9 billion versus a monthly average of EUR 20.8 billion in 1Q. Germany’s current account surplus of EUR 28.8 billion in the latest month is symptomatic of the government’s ill-advised failure to reflate fiscally, a stance that is dampening global and regional growth.
- Britain posted excessive deficits of GBP 10.526 billion on its merchandise trade balance and GBP 3.294 billion on its goods and services balance in April.
- Japanese core private domestic machinery orders plunged 11.0% in May and were 8.2% lower than a year earlier. Between April and May, government orders sank 35.7%, and export orders fell 6.9%.
- Japanese machine tool orders recorded on-year drops of 25.0% in May and 26.3% in April, which were larger than the slides in the first quarter of 2016.
- The British Royal Institute of Chartered Surveyors’ house price balance index fell to 19% in the latest reported month from 39% previously.
- As proof of the ongoing deflation risk, in the year to May consumer prices fell 0.9% in Greece, were unchanged in The Netherlands and Ireland, ticked 0.1% higher in the Czech Republic and rose all of 0.3% in Portugal.
- Real GDP in South Africa slumped 1.2% last quarter compared to 4Q15.
Investors were also depressed by the U.S. presidential campaign and the fast-approaching British referendum on whether to remain in the European Union. Opinion polls there have not been helpful in alleviate concerns that voters may choose to leave.
Aside from the aforementioned 1.3% drop against the New Zealand dollar, the U.S. currency is down 0.5% against the yen but up 0.5% versus the Aussie dollar and euro, +0.3% relative to the Swiss franc, loonie and sterling and unchanged versus the yuan.
Share prices closed down 1.0% in Japan, 0.8% in Indonesia, 0.7% in India and Singapore, 0.3% in New Zealand and 0.2% in Australia. Markets in China, Taiwan and Hong Kong were shut for the Dragon Boat Festival holiday. In European trading, stocks have lost 1.2% in Germany, 0.9% in France and the U.K., 0.8% in Switzerland, 0.7% in Italy, and 0.2% in Spain.
The 10-year Treasury yield in futures trading is off 2 basis points at 1.68%, and the Japanese JGB is a basis point deeper below zero at -0.14%. The South Korean 3-year sovereign debt yield dropped to a record low on the unexpected Bank of Korea interest rate cut. Bund and gilt yields are steady.
West Texas Intermediate crude oil dropped back 0.9% to $50.78 per barrel. Gold dipped 0.1% to $1,261.20 per ounce, and copper fell by 0.5%.
U.S. jobless claims, Mexican consumer and producer prices and Canadian home price data will be reported later today. Peru’s monetary policymakers are holding an interest rate meeting.
Copyright 2016, Larry Greenberg. All rights reserved. No secondary distribution without express permission.