New Overnight Developments Abroad: Severe Market Turbulence and Bad European Data

October 24, 2008

The dollar plunged 5.0% against the yen but has soared otherwise by 8.6% against the Australian dollar, 7.6% against the New Zealand kiwi, 4.9% against sterling, 3.0% against the euro and 1.6% against the Canadian dollar.  Dollar/Swiss is unchanged. Huge risk aversion play.

In Asia, Japan’s Nikkei tumbled 9.6% to 7,649. Stocks also tumbled 11.0% in India, 10.6% in South Korea, 8.3% in Hong Kong, 7.0% in Thailand and 6.9% in Indonesia. In Europe, share prices are down 9.0% in Germany, 8.0% in Sweden, 7.3% in Britain, 8.1% in France, and 6.2% in Switzerland. U.S. stock futures are down by their limit.

Sovereign bond yields are sharply lower amid flight to safety. 10-year JGB off 4.5 basis points to 1.47%.

Opec ministers will cut production by 1.5 mb/d in November. Nonetheless, oil has fallen another 4.8% to $64.57/barrel. Gold dropped 4.1% to $685.60/oz. From their record peaks earlier in 2008, oil and gold have plunged 56.2% and 33.6%.

Money market rates have edged somewhat higher, ending a string of daily declines.

British GDP fell 0.5% in 3Q, its deepest decline since 4Q90 and first drop since 2Q92. Services posted a 0.4% decline, most since 3Q90. Manufacturing tumbled 1.0%, and construction fell 0.8%. Overall GDP was up only 0.3% from 3Q07, the smallest on-year increase since 2Q92.

Euroland’s flash composite PMI score dropped to a record low of 44.6 in October from 46.9 in September. Factory PMI slumped to 41.3, lowest since at least 1997. Orders index sank to 36.2 from 41.7 in September. Services PMI slid to 46.9, worst since October 2001, from 48.4 in September and 55.8 a year ago.

The German composite PMI fell to 43.3 (lowest since October 2001 and 2.7 points weaker than forecast) from 47.4. The French composite PMI index dropped two points to 45.1, lowest since at least May 1998. The flash PMI’s were much worse than assumed. Silver lining was a drop in Euroland price components to 51.7 from 63.3 on input prices and to 51.3 from 54.9 on output prices. These results remove all remaining doubt that Euroland is in recession and ensure that the ECB will cut rates further in early November.

In Italy, business sentiment fell to a record low of 77.7 in October from 81.8. Consumer confidence slid to 102.2 from 102.8.

The Reserve Bank of India left its bank rate at 8.0% as expected. The Danish central bank lifted its key lending rate by 50 basis points to 5.5% in order to support the krone and alleviate the need for heavy intervention.

German import prices fell 1.0% in September on top of an 0.8% drop in August. On-year import price inflation was reduced to 7.6% from 9.3% but remained above the 1.3% import price inflation rate in the year to September 2007.

One of the Bank of England’s policy hawks now concedes that a severe recession is more likely.

Canadian consumer prices rose 0.2% seasonally adjusted in September and by 3.4% from a year earlier. That was only a tenth off the 3.5% cyclically high gain in the year to August and somewhat above forecasts. Core CPIX inflation held at 1.7%. These data will not impede further central bank easing.

Real GDP growth in South Korea slowed to the third quarter. A 0.6% rise from 2Q was the smallest quarterly gain in four years and lowered on-year growth to 3.9% from 4.8% in the second quarter and 5.7% in the final quarter of 2007.


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