New Overnight Developments Abroad: More Asset Liquidations As Risk Aversion Surges

October 22, 2008

The low-yielding yen soared 1.6% against the dollar and by much more against other currencies.  The U.S. dollar hit new 2008 highs against sterling, the euro, the Swiss franc, and the Canadian dollar. In the pound’s case, the low represents a five-year trough. The dollar is up respectively against those four currencies by 1.8%, 1.3%, 0.9% and 1.9%. It also gained 1.4% against the kiwi and reached a 6-1/2 year high against the South African rand. The Indian rupee hit a record low.

Capital is flying out of emerging markets. The Ukraine and Pakistan await IMF aid packages. The South Korean won slumped as much as 5.7% and is trading down 3.1% on balance. The central bank in Hungary lifted its two-week benchmark deposit rate by 300 basis points to 11.5% to defend the forint, which had dropped 14% this month, but pressure on that currency diminished only slightly. Hungarian share prices are down over 35% this month.

Stocks plunged in Asia and Europe. The Nikkei lost 6.8%. Stocks also fell 5.2% in Hong Kong, 5.2% in Singapore, 5.0% in India, 5.1% in South Korea, 4.2% in Indonesia, and 2.6% in China. Stocks are down 3.2% in South Africa and by 3.4% in Australia. In Europe, the German Dax, Paris Cac, and British Ftse have fallen by similar magnitudes of 3.2%, 3.0%, and 2.9%.

Oil dropped 3.8% to $69.47 per barrel even though OPEC is expected to cut production quotas on Friday. Gold fell 1.4% to $757.40/oz. Copper sunk to its lowest cost since December 2005.

The yield on 10-year JGB’s sank 5.5 basis points to 1.525%. Sovereign bond yields are also sharply lower in Europe and the United States.

Australian consumer prices rose 1.2% in the third quarter, lifting the 12-month pace to 5.0% from 4.5% in 2Q08 and 1.2% in 2Q07. Core inflation rose to 4.7% y/y from 4.4% in 2Q and 4.2% in 1Q. Although the figures for last quarter were slightly higher than anticipated, expectations of 25-50 basis point further cut in early November of Australia’s cash rate to 5.5-5.75% remain unshaken.

Japan’s all-industry index fell by 1.8% in August and was 0.6% lower in July-August than in 2Q08. The result would have been even worse if construction had not recovered 1.9% in August. Industrial output and service-sector activity fell by 4.1% and 1.4%. The all-industry index was 3.4% lower than in August 2007.

Authorities in Australia and New Zealand imposed limits on depositor guarantees.

Money market spreads continue to recede, but recession concerns are exploding. Central banks continue to inject heavy amounts of dollar and local liquidity.

Minutes from the Bank of England decision to cut its repo rate on October 8th showed a 9-0 vote in favor of the 50-bp reduction, the first unanimous vote of 2008. Substantial deterioration in activity is now seen constraining the risk of second-order inflation. Instead of worrying about above-target inflation persisting in the near term, policymakers found common ground in identifying a growing danger of sub-2% inflation in the medium term. Governor King has meanwhile said Britain is probably in a recession and promises prompt counter-measures. Another rate cut in November appears very likely.

The Reserve Bank of New Zealand is likely to announce a deep cut in its 7.5% cash rate at 20:00 GMT.


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