New Overnight Market Developments Abroad: Markets React Sharply to Bailout of GSE's

September 8, 2008

The U.S. Treasury took control of Fannie Mae and Freddie Mac over the weekend.  Sovereign bond yields and equities soared.  Carry trading resumes.

Stocks in Japan, Germany, Hong Kong, Australia, Thailand, India, Britain, and the Philippines up at least 3%.  Paris and Singapore stocks up more than 4%.  South Korean exchange advanced over 5%.

Ten-year Treasury yield showing gain of about 15 basis points.  Double-digit gains also in Australia and Britain.  10-year JGB climbed as high as 1.55% and holding gain of 6.5 basis points at 1.525%.

Aided also by further intervention, the South Korean won recorded its biggest gain in 10 years, reversing all of last week’s losses.

The dollar leaped 1.2% against the yen and 1.0% versus the Swiss franc, traditional financing currencies for carry trades.  The dollar climbed 0.6% against the Australian dollar but lost 0.8% versus the kiwi.  The greenback shows a gain of 0.2% relative to the euro and 0.1% against the C-dollar and sterling.

Oil spiked as high as $109.12/barrel on fears that Hurricane Ike will damage Gulf of Mexico installations but has settled back to a net gain of just 1.0% at $107.27.  Iran is calling for a production cut ahead of Opec’s meeting Tuesday in Vienna.

Gold is also 1.0% higher at $810.5 per ounce on moral hazard associated with GSE bailout.

A new USA/Gallop poll shows McCain emerging from the convention season with a 4-point 50% to 46% lead over Obama.

August inflation figures from several countries show greater-than-forecast deceleration.  British PPI-O fell 0.6% m/m, biggest decline in at least 22 years.  The 12-month rate of rise decelerated to 9.7% from 10.3% in July.  PPI-I slumped 2.0% m/m.  Latvian CPI fell 0.4% m/m.  Greek CPI slumped 0.9% m/m.

In semi-annual parliamentary testimony, the Governor of the Reserve Bank of Australia defended the need for prior tightening but indicated room for further rate cuts ahead following a 25-bp reduction last week.  Markets see high chance of a move in October.  Australian job adds fell 4.9% in August.

The Reserve Bank of New Zealand is likely to cut its rates on Thursday.  The New Zealand Treasury looks for negative GDP growth continuing in 2Q08 and 3Q08.  Construction work done slumped 6.6% y/y in 2Q after dropping 5.9% in 1Q.

Japan’s Economy Watchers’ Index slid to a new 7-year low of 28.3 from 29.3 in July.  A 29.0 reading had been expected for this gauge of service-sector activity.

Corporate bankruptcies in Japan climbed 4.2% y/y in August, their third consecutive advance.  Japanese M3 and M2 accelerated to 12-month gains of 3.7% and 2.4% in August.  Bank lending held at 1.8%.  M1 showed another on-year drop of 0.6% after -0.8% in the year to July.

Chinese car sales fell 6.2% y/y in August, restrained in part by the Beijing Olympics last month.

The South Korean consumer expectations index rose for the first time in 8 months, reaching 93.3 in August after 85.9 in July.

Portugal’s trade gap widened 20.7% to EUR 5.78 billion in 2Q08 from 2Q07.  2Q Growth rates in Portugal and Finland were positive at 0.3% and 0.2%. 


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