New Overnight Developments Abroad: Global Flight to Safety

September 5, 2008

Equities Sold off in Asia and Europe.  Nikkei -2.8%.  Hong Kong -2.2%.  China -3.0%.  India -2.8%. Vietnam -2.1%. Indonesia -2.5%.  European bourses down by 1.3 -1.5%.  The 10-year JGB yield sank 8.5 basis points to 1.435%.  Other sovereign bond yields are lower across the board.

The dollar jumped another 1.4% against the Australian dollar and 1.0% relative to the kiwi.  The dollar also rose 0.7% against the euro and Swiss franc and is 0.4% higher against sterling.  Only against the yen has the dollar declined (-0.7%) as carry trades were unwound on heightened risk aversion.

Commodities fell.  Oil is off 1.2% at $106.58 per barrel, and gold lost 0.4% to $799.90 per ounce.

In Japan, the quarterly Ministry of Finance business survey revealed an unexpected 6.5% on-month year drop in investment.  A 2.5% gain was expected. Profits and sales fell 5.2% and 0.7% y/y.  The data suggest that 2Q GDP fell even more than its initially indicated drop of 2.4% saar.  Revised data due September 12.

Japanese reserves fell $7.9 billion in August.

Australia’s construction industry PCI index recovered to 43.1 in August from 41.6.  That is still the sixth sub-50 reading in a row.

Central banks in South Korea, India, and Malaysia intervened, selling U.S. dollars against local currencies.

The central bank of Chile boosted its key rate as expected by 50 basis points to 8.25%, highest since late 1998, in the fourth monthly increase in a row.  Inflation there is running at 9.5% compared to a target of 3%.  Central bank meetings next week are expected to result in a 25-bp rate cut in New Zealand but a 25-bp rate increase in South Korea.

German industrial production sank 1.8% in July, more than three times greater than had been forecast.  Factory output and construction each dropped 2.0%.

The French budget deficit widened 7.1% to EUR 51.4 billion in January-July from the first seven months of 2007.

Italy’s trade balance swung from a surplus of EUR 395 million in June 2008 to a deficit of EUR 1.03 billion in June 2007. The 1H shortfall narrowed 1.7%.

ECB officials reiterated the hawkish tone of yesterday’s press conference.

The OECD index of leading economic indicators for the G7 fell 0.7 points, with Europe deteriorating more than either Japan or the United States.

The Republican National convention ended, striking a message of “country first” and promised “reform” in Washington.  Markets await monthly labor statistics from the United States and Canada today.


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