New Overnight Developments Abroad: Money Market Tensions Ease a Little Further

October 20, 2008

Stocks rose in most Asian markets and Europe, and the dollar and bond yields are lower amid a further drop in money market spreads. There has been a positive response to a report that some large U.S. banks have lent funds to European counterparts.

The dollar fell 1.4% against the Australian dollar, 0.8% versus sterling, 0.6%% against the kiwi, 0.4% against the euro, 0.3% against the Canadian dollar and 0.1% relative to the Swiss franc. Typical of lessening risk aversion, the yen dipped 0.2% against even the dollar.

The Nikkei climbed 3.6%.  Most other Asian bourses rose: Hong Kong 5.3%, Singapore +3.5%, South Korea +2.3%, China +3.6%, India +2.5%, and Indonesia +2.0%. Three exceptions were the Philippines (-1.7%), Vietnam (-3.1%) and Thailand (-1.2%). In Europe, the British Ftse (1.7%), Paris Cac (+1.6%) and German Dax (+1.1%) are each trading higher, too.

The 10-year JGB yield firmed one basis point to 1.60%. Sovereign bond yields in Europe are higher.

Oil prices rose 2.5% to $73.64 per barrel. Similarly, gold prices recovered to $804.50 per ounce, up 2.1%. Opec is holding an emergency meeting this week.

The State Bank of Vietnam cut its base rate to 13% from 14%.

The Reserve Bank of India reduced its short-term interest rate to 8% from 9%, reversing 50-bp increases in July and June.

There has been a EUR 10 bn ($13.4 bn) cash infusion to the Dutch bank, Ing.

China reported slower 3Q08 GDP growth of 9.0% compared to 10.4% in 1H08. Analysts were forecasting a 9.7% growth rate. China also reported drops in CPI inflation to 4.6% in September from 4.9% y/y in August and in PPI inflation to 9.1% from 10.1%. These results were less than anticipated. Industrial production grew 11.4% y/y in September, down from 12.8% in August, but retail sales growth held steady at 23.2%. Also, fixed asset investment accelerated unexpectedly to 29.0% from a 12-month pace of  27.4%.

Australian producer prices jumped 2.0% between 2Q and 3Q, twice as much as forecast. The on-year pace of PPI inflation climbed to 5.6% from 4.7% in 2Q and 2.4% in 3Q07. Import price pressures related to Aussie dollar deprecation have emerged, and analysts are scaling back their expectations regarding how fast Australia’s central bank might reduce its interest rates further following a 100-bp reduction to 6.0% early this month.

Japanese department store sales fell 4.7% in the year to September.  The Bank of Japan’s quarterly meeting of branch managers cut the assessment of all nine regional economies. Consumer spending and industrial production weakness was reported to be more widespread. Remarks by BOJ Governor Shirakawa, however, conveyed no lessening of the reluctance by officials to cut the 0.5% overnight rate target. Markets are discounting a probability of only about one in four that this happens before yearend.

Stimulus packages were unveiled by South Korea ($130 bn) and Sweden ($2.0 bn). The won continues to be weak.

Obama retains a lead in national polls of about five points. He was endorsed Sunday by Colin Powell, the former Secretary of State for Bush.

In Britain, the Rightmove house price index fell 4.9% in the year to October after an on-year decline of 3.3% in September. The Council of Mortgage Lenders reported a 42% on-year drop in gross mortgage lending, worst since 1991. The public-sector net cash requirement was 45% greater in September than a year earlier and the largest deficit for any September since at least 1984. The PSNB deficit widened 69.5% y/y.

Nigerian consumer price inflation accelerated to 13.0% in September from 12.4% in August.


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