New Developments Abroad: Global Equity and Dollar Sell-off

July 15, 2008

Equities are down sharply by 2.0% in Japan, Germany, Indonesia and France .  Fresh losses amount to 3.8% in Hong Kong, 4.1% in China, 4.5% in Taiwan, 3.3% in Thailand, 2.1% in Australia, and  1.7% in Britain.

The dollar hit 2008 lows of $1.6038 per euro, Sing$ 1.3465,  and 0.9832 per Australian dollar.  The dollar is down by 1.4% against the yen, 1.3% against the Swiss franc, 1.1% against the Aussie dollar, 1.0% versus the kiwi, 0.9% against sterling, and 0.6% against the Canadian dollar and euro.  There’s been a comparatively large daily drop against the Chinese yuan as well.

The yield on 10-year JGB’s touched 1.53%, a 3-month low, and is 3.5 basis points lower on balance.

Gold and oil climbed 1.0% and 0.9%, respectively, to $983.20/ounce and $146.44 per barrel.

The Bank of Japan Policy Board voted 7-0 to retain a 0.5% target on overnight uncollateralized call money.  Two vacancies remain on the Board.  New forecasts were unveiled by the central bank of 1.2% for FY08 growth, revised from 1.5%, and 1.5% for FY09 growth, revised from 1.7%.  At the same time, forecasts of core CPI inflation were bumped upward to 1.8% for FY08 from 1.1% and to 1.1% for FY09 from 1.0%.  The central bank also unveiled several changes to make the communication of its thinking process more transparent.

Minutes from the Reserve Bank of Australia meeting on July 1st showed concern that inflation will be too high in the short run but confidence that demand is slowing to a sufficient degree.  The 7.25% cash rate is considered appropriate; however, considerable uncertainty continues to be associated with the outlook.  Gist of the minutes points to no policy change for quite a while.

Consumer prices in New Zealand rose 1.6% in 2Q08 and by 4.0% from 2Q07, double its on-year pace of 2.0% in mid-2007.  Although the gain was more than anticipated, analysts still look for the Reserve Bank of New Zealand to begin cutting rates as soon as September.

The German ZEW expectations index fell to -63.9 in July, lowest since at least 1991, from -52.4 in June.  Current conditions fell to +17.0 from +37.6.  This deterioration surpassed downbeat forecasts.  The ZEW expectations index for Euroland fell to -63.7 from -52.7.  As Germany goes, so goes Euroland.

British consumer prices climbed 0.7% in June and accelerated to a 3.8% on-year pace from 3.3% in May and 2.5% in March.  Core firmed to 1.6% y/y from 1.5%.

The RICs British house price diffusion index had a balance of -88 in June, only slightly better than May’s balance of -92.2. It remains near a 30-year low.

Like-for-like retail sales reported by the British Retail Consortium slid 0.4% in June versus a 1.9% advance in May.

South Korean import price inflation of 49% in June, a 10-year high, elicited remarks from the Finance Ministry signaling greater resignation to the need for higher interest rates.  Rates have been steady for the past 11 months.

Italian harmonized consumer prices rose 0.5% in June, lifting their 12-month rate of climb to 4.0% from 3.7% in May.

The Bank of France index of business sentiment sagged further to 95 in June from 96 in May, but monetary officials did not change their economic growth forecast as a result.  They look for 2Q08 growth of 0.2%, which seems too high.

Chinese GDP growth in 1H08 was reportedly 10.4%, down from 11.9% in full-2007.  Officials wanted a slowdown but not by too much, especially since CPI inflation has tapered off to 7.1% from 8.7% y/y in February.

The Bank of Canada unveils its latest rate decision at 13:00 GMT.  No change is expected.  Fed Chairman Bernanke testifies before the Senate at 14:00 GMT.


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