New Overnight Developments Abroad: Nikkei Jumped 10% Amid BOJ Rate Cut Speculation

October 30, 2008

The Bank of Japan is expected to halve its overnight rate target tomorrow to 0.25%. Central banks eased yesterday in the United States, China, and Norway. Central bank rate cuts have occurred today in Taiwan of 25 basis points to 3.0%, Hong Kong of 50 bps to 1.5% and Bahrain of 125 bps to 3.5%. Brazil’s central bank kept its key rate at 13.75%, a 2-year high, breaking a streak of hikes at its prior four meetings. Cuts of 50 bps are expected next week in Australia, Britain, and Euroland. Money market rate premiums continue to subside. The Fed has created four more swap lines of $30 bn each with Singapore, Mexico, Brazil, and South Korea.

Equities provided further evidence of lessening risk aversion and bargain hunting. Stocks in Asia rose 12.8% in Hong Kong, 12.0% in South Korea, 10.0% in Japan, 7.8% in Singapore, 6.3% in Thailand, 5.4% in Indonesia, and 4.7% in the Philippines. Australia’s bourse recovered 4.0%. In Europe, the German Dax is up 3.0% but the Paris Cac and British Ftse show smaller gains of less than 1%. Stocks are up by  4.4% in Sweden, 1.7% in Switzerland, and 1.3% in Italy.

The equity/currency relationship continued in which good news for stocks has seen a weaker yen and dollar, and vice versa. The dollar is up 0.8% against the yen and up 0.3% versus the Swiss franc. Otherwise, the buck has lost 2.2% against the Aussie dollar, 1.8% versus the New Zealand kiwi, 2.0% against the Canadian dollar, 1.2% against sterling, and 1.1% against the euro. The won shot up 14.2% against the dollar despite news of a sharp drop to 62.6 from 81.6 in a gauge of sentiment among big South Korean firms. South Korea’s current account in January-September was in deficit by $10.9 bn, a shift from a surplus of $7.0 bn in the first nine months of 2007.

The 10-year JGB yield closed unchanged at 1.495%. Sovereign bond yields are higher in North America and Europe.

Oil and gold prices have each advanced 1.7% to $68.65/barrel and $767.0 per ounce.

Overall economic sentiment in Euroland slumped much more than expected to 80.4 in October from 87.5 in September. A separate business climate measure worsened to -1.34, worst since November 2001, from -0.82. Consumer sentiment slid five points to -24, while industrial sentiment fell six points to -18. Services sentiment posted a score of -6, near to the record low of -7. Sentiment fell by five points in retail trade and by four points in construction. There was one silver lining in the data: firms are expecting less inflation, which boosts the ECB’s leeway to reduce interest rates.

The picture of broad sectoral weakness was reinforced by the Bloomberg monthly retail PMI scores, showing Italy’s diving to 34.8 from 42.8 and the French index dropping two points to 48.5. Germany’s index firmed 2.1 points but remained under 50 at 46.7.

French producer prices slid 0.4% in September, twice as much as forecast, and rose 6.1% from a year earlier. South African producer prices fell 3.5% in September but were still 16.0% higher than a year earlier. That on-year pace was down from 19.1% in August.

German seasonally adjusted unemployment dropped 26K in October, more than was assumed, and to a 16-year low of 7.5% versus 8.6% in October 2007. Jobs advanced by 21K between August and September and by 1.2% in the year to September, somewhat less than on-year growth of 1.5% in both 3Q and 2Q. Labor market data will deteriorate sharply in coming months.

Household borrowing in New Zealand rose just 0.2% in September. The on-year increase was 6.8%.

Japan’s government unveiled a Y5 trillion fiscal stimulus (roughly $51 bn). Plans to call lower house parliamentary elections have been scrapped. Such must be held by September of next year. Prime Minister Aso’s approval ratings are sinking.

In Britain, the Nationwide index of house prices sank 1.4% in October and by 14.6% from October 2007, the most since at least 1974.

Spanish CPI inflation decelerated a whole percentage point to 3.6% in October from 4.6% in September. Retail sales volumes sank 5.6% y/y in September. Norway also reported lower retail sales last month.

At 12:30 GMT, the advanced U.S. third-quarter GDP data and latest weekly jobless claims figures will be released. Growth is expected to be marginally negative. A much deeper drop will occur in 4Q08, however. There was a 30-minute all-channels Obama political ad in prime time last night. With less than a week until the election, he continues to hold a lead over McCain in national opinion polls.


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