Markets Less Fearful

June 7, 2017

The troubled Banco Popular in Spain is being acquired by Banco Santander, easing concerns about the banking system in Euroland’s fourth largest economy.

Donald Trump announced the nomination of a former assistant attorney general from the Bush43 administration, Christopher Wray, to be FBI Director. The timing of this revelation one day before the highly awaited congressional testimony of former FBI Director Comey may be intended to distract attention from that event and to present a business-as-usual front.

A report is out that tomorrow’s ECB meeting, statement and press conference will unveil a lower inflation outlook, thus implying no imminent change in the central bank’s highly accommodative stance.

Australian GDP data for the first quarter were not weaker than forecast, a risk market participants had feared. The Aussie dollar rose 0.6% in response to a near 5-week high.

Japanese and Chinese international reserves increased robustly during May according to data released overnight. Japan’s stock of reserves advanced $9.57 billion, bringing the year-to-date rise to $35 billion. China’s reserves increased $24.1 billion last month after a $20.4 billion climb in April. The two Asian economies hold $4.3 trillion dollars between them.

Two central banks held policy meetings today. The National Bank of Poland left its reference rate unchanged at 1.5%, and the Reserve Bank of India kept its repo rate at 6.25% for a fourth straight time but noted that a sharp deceleration in inflation momentum in April is being watched carefully to see if the development proves transitory or not.

The dollar climbed 0.4% overnight against the euro and Swiss franc but declined 0.1% against the yen and sterling. A 0.2% uptick in the New Zealand dollar was not as sharp as the aforementioned 0.6% rise of its Aussie counterpart. The U.S. currency is 0.1% firmer against the peso and loonie and unchanged relative to the Chinese yuan.

Comex gold settled back 0.4%. West Texas Intermediate crude oil fell 0.4% in reaction to evidence of abundant U.S. inventories.

Share prices closed unchanged in Japan but 1.2% higher in China. There were also gains of 0.3% in India and 0.2% in Indonesia. Among European markets, equities have risen 0.9% in France so far, 0.8% in Italy, 0.3% in Germany and 0.2% in Switzerland, but the British Ftse is off 0.1% on the day before parliamentary elections. Regardless of the outcome, Prime Minister May’s decision to call snap elections 3 years before such needs to be done has been seen by the electorate as a sign of weakness, not strength, just as when Gordon Brown called elections earlier than needed in 2010.

Ten-year sovereign debt yields are up a basis point in Japan and the U.K. and flat in Germany. U.S. futures suggest a 1-bp increase.

Backing up expectations of a continuing ECB accommodative policy,

  • German industrial orders sank 2.1% in April, seven times faster than forecast.
  • Italian retail sales dipped 0.1% in April.

1Q GDP data were reported in several economies. Australian GDP went up by an as-expected 0.3% on quarter and 1.7% on year, helped by a further recovery of its terms of trade (export/import price ratio). Growth from the first quarter of 2016 to the first quarter of 2017 amounted to 5.6% in Romania and 4.2% in Hungary. However, Hungary’s industrial production unexpectedly dropped 0.8% on month in April.

Likewise, Swedish industrial output in May fell 2.4% and was just 0.8% greater than a year earlier. Danish industrial production posted a 0.2% on-year decline in April.

British house price inflation according to the Halifax index slowed to 3.3% in May from 3.8% in March and April and 6.5% last December.

Australia’s construction purchasing managers index, which jumped 4.8 points to a 32-month high of 56.7 in May, also relieved investors about that economy.

Japan’s index of leading economic indicators fell 1.2 points to a 5-month low of 104.5 in April, but the index of coincident Japanese economic indicators went up 3.3 points to 117.7, highest since February 2008, and was labeled by officials to be continuing in an improving trend.

The OECD, an organization of developed economies based in Paris, revised its projected 2017 global GDP forecast upward by 0.2 percentage points to 3.5% and forecasts 3.6% growth next year. Some individual 2017 growth forecasts are 2.1% for both the OECD collectively and the United States, 1.8% for the euro area, 1.4% for Japan, 2.8% for Canada, 1.6% for the U.K., 7.3% for India, and 6.6% for China. British growth is expected to slow to 1.0% next year.

U.S. consumer credit and Canadian housing permits data will be released later today.

Copyright 2017, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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