New Overnight Developments Abroad: Further Central Bank Initiatives

October 9, 2008

Markets on Thursday have reversed many trends from Wednesday, but nervousness remains very high.  Sovereign bond yields rose 7-11 basis points in Japan, Europe and North America.  The yield on JGB’s rebounded to 1.485%.  The dollar advanced 0.9% against the yen and is back above 100.  The dollar also fell 4.5% against the Australian dollar and 2.4% against the kiwi.  Stocks are up in Europe: German Dax +0.5%, Paris Cac +2.3%, and British Ftse +1.1%.  Stocks in Asia were mixed: Japanese Nikkei was down 0.5% but bourses rose in  Hong Kong +3.3%, South Korea +0.6%, and Thailand +1.6%. Stocks fell in China  by 1.5%, Taiwan by 1.5%, Australia by 1.5%, Sri Lanka by 1.5%, and Taiwan also by 1.5%.

Oil firmed 0.4% to $89.35 per barrel, whereas gold dropped 1.6% and is again below $900 at $891.80 per ounce.

The Bank of Korea, which had tightened by 25 basis points in early August, reversed that move in its benchmark, trimming its rate by 25 bps to 5.0%.

The central bank in Taiwan also cut its key interest rate by 25 bps to 3.25%.

The Reserve Bank of New Zealand extended its liquidity-injecting operations by agreeing to accept a wider range of collateral and raising the amount of daily operations. Some analysts were disappointed by the lack of a rate cut, but a meeting set for October 23rd is likely to mandate a big drop.

The ECB lifted its overnight deposit rate by 50 bps to 3.25% and cut its marginal lending rate by a similar amount to 4.25%, thus halving the band between these two rates to 100 bps from 200 bps.  The range continues to be centered around the weekly refinancing rate.  For the time being, the ECB said auctions would be at a fixed 3.75% instead of variable-rate tenders as is the usual custom.

Officials in Iceland took control of their country’s largest bank.  This was the third such acquisition.

France, Belgium, and Luxembourg officials guaranteed loans from the Dexia Group.

The IMF warned of a major world recession.

A story in the New York Times quotes government sources that the Treasury is considering the recapitalization of many U.S. banks.

Central banks in Australia, Euroland, Switzerland, Japan, injected more dollar liquidity.  Overnight dollar borrowing rates stayed as high as 7% in Asia, but the marginal rate for the ECB’s $100 billion overnight tender slid to 5% from 9.5% yesterday.

Japanese core domestic machinery orders slumped 14.5% m/m and 13.0% y/y in August. Analysts were looking for a drop of 3.5% from July. Core domestic orders in July-August were 9.6% lower than the 2Q average level.  Stock and bond transactions last week generated a Y 1819 billion outflow following a Y 4038 bln outflow in the week to September 27th.

Australian labor market data for September were weaker than expected.  The jobless rate rose two-tenths to 4.3%, and employment firmed just 2.2K with a 15.4K decline in full-time workers.

German wholesale prices fell 0.6% in September, trimming the 12-month rate of rise to 5.8% from 7.4% in August and 9.9% in July.  Real manufacturing sales recovered 4.0% in August and climbed by 2.2% from August 2007.  German seasonally adjusted exports and imports posted monthly declines in August of 0.5% and 2.5%.  Exports were forecast to rise, and they also fell 2.5% from August 2007.  The seasonally adjusted trade surplus in August was EUR 13.1 bln after EUR 11.6 bln in July and EUR 16.8 bln per month in 2Q08.  Both foreign and domestic demand are shrinking, as Germany stays in recession.

In Britain, the Halifax house price index fell another 1.3% in September and dropped 12.4% in the year to 3Q08.  August U.K. trade data were very poor. The merchandise deficit was Gbp 8.198 billion in August after Gbp 8.238 bln in July. 

Swedish consumer prices rose 1.0% in September and by 4.4% from a year earlier.  These changes exceeded expectations.  Nonetheless, Sweden joined yesterday’s coordinated round of central bank rate cuts.


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