New Overnight Developments Abroad: AIG Rating Downgraded, Stocks Plunge

September 16, 2008

Both Moody’s and S&P reduced ratings on troubled AIG, which needs to raise a huge amount of capital today.

Fed and U.S. Treasury have not stepped in to help AIG. Markets are pricing in a 25-basis point Fed ease after today’s FOMC meeting.

Short-term money markets are under heavy strain.  Scant interbank lending.  Rates sharply higher in Asia, prompting liquidity injections of $23.7 billion by the Bank of Japan, $1.3 billion by the Reserve Bank of India, and $1.4 billion by the Reserve Bank of Australia.  Verbal reassurances have been offered by authorities in Hong Kong, South Korea, Japan, Taiwan, New Zealand, Germany, Britain, the EU, India, Australia, Indonesia, Hong Kong, Taiwan, Korea, the Philippines, Middle Eastern oil producers, and Brazil.  The Central Bank in Indonesia cut its overnight lending rate to 10.25% from 12.25%.

Stocks plunged in Asia: Japan -5.0%.  Hong Kong -5.4%.  China -3.7%.  Taiwan -4.9%.  South Korea -6.1%.  Australia -1.4%.  Thailand 03.0%.  India -0.7%.  Singapore -1.1%.  Malaysia -1.9%.  The Philippines -4.5%.  And Vietnam -4.4%.  Some of these markets, for example Japan, had been closed Monday.

In Europe, stocks are down 1.3% in Germany, 2.1% in Britain, and 1.4% each in Italy and Switzerland.  Paris Cac off only 0.8%.

Amid risk aversion, the yen gained a further 0.3% against the dollar, which otherwise rose 0.8% against sterling, 1.1% against the kiwi, 0.5% relative to the euro, 0.3% against the Canadian dollar, and 0.1% against the Swiss franc.  The South Korean won slumped 4.4% to 1160.5/$.

The yield on 10-year JGB’s slumped initially to 1.375% but recovered to 1.465%.   The Bank of Japan began a two-day policy meeting that is expected to end in a decision to leave the overnight rate target at 0.5%, where such has been since February 2007.  Focus will be on Governor Shirakawa’s press conference.

Oil fell another 3.4% to $92.42/barrel overnight.  Gold slid 0.8% to $780.60 per ounce.

Minutes from the Reserve Bank of Australia‘s policy meeting earlier this month justified the 25-basis point rate cut as a needed move to avoid a sharp slowdown but was cautious about how quickly inflation might recede.  Remarks were balanced all in all.

Euroland headline CPI inflation in August was confirmed at 3.8% down from 4.0% in June and July, but core inflation edged up to 2.6% from 2.5%.  Energy fell 3.0% month/month, and food prices dropped 0.4% on the month.  Total CPI dipped 0.1% from July, but core CPI moved 0.3% higher on the month.  The rise in core gives ammunition to ECB hawks resisting a rate cut.

Japanese consumer confidence slid to 30.1 in August, lowest since at least mid-1982, from 31.4 in July.  This was the fifth drop in a row.

The ZEW Institutes index of investor sentiment in Germany improved surprisingly much to -41.1 in September from -55.5 in August on weakening trends in oil costs and the euro.  Current conditions rose to -1.0 from a -9.2 reading in August.  Analysts were unimpressed, however.  These scores do not reflect the latest money market meltdown around the world, and they at best represent a bounce from overstated declines in prior months.

Euroland’s ZEW index mirrored Germany’s, rising to -40.9 from -55.7.  New car registrations in Europe fell by a greater 15.6% in the year to August.  January-August registration slid 3.9% from a year earlier.

British consumer prices firmed 0.6% in August, lifting the 12-month pace to 4.7%, most since April 1992, from 4.4% in July.  A letter of explanation by Bank of England Governor King predicted a further near-term acceleration to 5.0% and then a very gradual decline.  He warned of increased risks of second-order inflation that must be countered.  Core inflation of 2.0% year/year was the highest in 14 months.

German CPI inflation in August was confirmed at 3.1%  after 3.3% in July.  There was a 0.3% drop from July. 

Chinese corporate goods price inflation slowed to 8.2% in August from 9.4% in July and a recent peak of 10.3% in April.

U.S. TIC capital flow data will be released at 13:00 GMT.  Canadian monthly manufacturing figures arrive at 12:30 GMT.


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