New Overnight Developments Abroad: Yen Lower and Stocks Mostly Higher

October 28, 2008

Today has been a day of counter-trend market movements. The U.S. dollar rose 2.2% against the yen and 0.6% against the Swiss franc  but fell sharply against commodity currencies like the Australian dollar (-2.4%), New Zealand kiwi (-1.5%) and Canadian dollar (-0.6%). The USD also eased 0.3% against sterling but is unchanged against the euro. The Japanese Nikkei (+6.4%) and German Dax (+8.4%) rose sharply. Stocks also jumped 14.4% in Hong Kong, 5.6% in South Korea, 4.1% in Singapore, 3.1% in China, and 2.7% in Thailand, but bourses fell additionally in Indonesia, Malaysia, India and Vietnam. The British Ftse is 2.2% higher.

Sovereign bond yields advanced sharply in sympathy with the appreciation of equities. Despite good 20-year JGB auction results in Japan, the yield on 10-year government bonds jumped 8 basis points to 1.55%.

Oil firmed 0.7% to $63.69/barrel, and gold edged up 0.2% to $744.50/ounce.

Apparently as a conditions of an agreement for Iceland to get $2.1 bn from the IMF, the central bank of Iceland’s policy rate was lifted by 600 basis points to 18%, highest since 2001. The move more than reverses a 350-bp pro-growth cut on October 15th. Higher interest rates presumably will lend support to the beleaguered krona, but rate hikes demanded by the IMF for aid in other countries have often failed to end forex market pressure in the past.

Japanese total retail sales in September fell by 0.5% from August and by 0.4% from a year before. Large-store retail sales dropped 3.3% y/y, led by clothing. Both on-year drops were the biggest declines since July 2007. Department store sales weakened 4.6% y/y.

Korean, Australian, and Indonesian monetary authorities engaged in continuing intervention to support their currencies. Indonesia’s president promised action to support the rupiah.

French housing starts fell 8.1% in the year to 3Q08. French consumer confidence sagged to -47 in October following readings of -44 in September, -47 in July and -46 in June. A quarterly survey of industrial demand revealed a sharp deterioration in the manufacturing expected next-quarter component to -28 from -9 in July and +6 in April. Demand in the prior quarter also deteriorated to a reading of -19 from -7.

Italian wages rose 4.1% y/y in September, down from 4.2% y/y in August. Wages in January-September were 3.4% greater than a year before.

Business conditions in Australia weakened to -4 in the third quarter from +6 in 2Q08.

German consumer confidence edged up a tenth to 1.9 in November, showing unexpected resilience, but were still well below a reading of 4.7 a year ago.

Norwegian industrial confidence fell to a 5-year low of -6 in 3Q08 from +1 in the second quarter. Swedish retail sales fell 0.6% in the year to September and by 0.5% from August.

Prime Minister Aso of Japan reportedly will not call early lower house elections, creating the possibility that the political opposition may stall passage of measures to stimulate the recession. A new U.S. national opinion poll gives Obama only a 4-point lead over McCain. The election is one week from today.

A heavy slate of U.S. data today includes consumer confidence, the Case-Shiller house price index, weekly chain store sales and the Richmond Fed manufacturing index.


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