New Developments Abroad: Sharply Lower European Stocks Lift Dollar

December 5, 2008

The weakness in European share prices has continued. Equities down 2.7% in France, 2.6% in Germany, 2.3% in Sweden, 1.9% in Italy, 1.4% in Switzerland and 1.1% in Britain. Asian stocks were mixed earlier in the day. The Nikkei edged down 0.1%. Stocks rose 2.6% in Hong Kong, 1.5% in China, and 0.9% in Singapore but fell by 2.3% in Sri Lanka, 2.9% in India and Vietnam, and 1.2% in Australia.

The dollar advanced 1.1% against the Swiss franc, 0.5% against the Canadian dollar and euro, 0.3% against the kiwi and 0.2% against the Australian dollar. The dollar is up just 0.1% against the yen and flat against sterling compared to Thursday’s closing level in New York.

Oil hit a new low of $43.39/barrel but is now 1.5% higher on net at $44.52/barrel. Gold climbed 0.8% to $771.40.

The 10-year JGB yield dipped 1.5 basis points to 1.355%. Bond yields in Europe are lower, too.

Speculation has escalated that the Fed and Bank of England are moving closer to quantitative easing as Japan did earlier this decade. Even the ECB might end up doing such as well.

U.S./Sino talks produced a joint commitment to spend $20 billion to promote trade, but there was also apparent tension as the U.S. complained about yuan policy and Chinese officials worried publicly about what the U.S. government is doing to protect the value of China’s extensive holdings of dollar-denominated assets.

The OECD released its October leading economic indicators. The G7 component fell to 94.8 from 95.9 in September, 96.9 in August and 100.7 a year ago. But the big news was the weakness in major developing economies. China’s index was at 93.4, down from 95.1 in September and 96.8 in August. Russia was at 92.4 versus 96.4 in September and 99.1 in August. India was at 94.8, down from 95.9 in September and 97.0 in August. All scores below 100 connote activity below the long-term trend. Obviously, the November readings will be much weaker still.

German industrial orders plunged 6.1% in October on top of an 8.3% drop in September and were 17.3% lower than in October 2007. Domestic and foreign demand fell by similar amounts. Domestic orders for capital goods, a leading indicator of business capital spending, was 8.6% lower than the 3Q08 average level after having fallen 14.7% saar last quarter.

The German Bundesbank revised its forecasts. That central bank looks for GDP to drop 0.8% next year and for consumer price inflation to be less than 0.5% around mid-2009 and possibly below zero at that time. Norbert Walter, chief economist of Deutsche Bank claims that German GDP could fall as much as 4% next year. Considering there has not been a year in the last 59 years with worse growth than 1%, Walter’s forecast, if proven out, would spell disaster.

Russian officials let the rouble drop for the fourth stochastic adjustment in a month. The rouble is experiencing a controlled devaluation.

A gauge of European inflation fell to a 33-month low of 101.9 in October from 105.3 in September. Spain’s component is at a 12-year low.

Indonesia’s central bank cut its benchmark rate yesterday by 25 basis points to 9.5%.

Japanese reserves jumped $25.14 billion last month to $1.003 trillion.

Australia’s construction PCI index fell in November to 32.0 from 36.4 in October. Sub-50 readings connote contracting activity.

Markets are awaiting a U.S. employment report at 13:30 GMT, with upwardly revised estimates of a 350-400K drop in nonfarm employment and “whisper” estimates that such could be worse than -500K.

Turkey is said to be near agreement on an IMF aid deal.

Smaghi of the ECB asserted that comparisons of Italy with Argentina are “goundless.” The story here is that he even felt compelled to issue such a denial.

Consumer prices in the Philippines fell 0.6% in November and to a 12-month rise of 9.9% from 11.2% in the year to October.

Norwegian factory output fell 0.4% in Octobere and rose 1.0% from a year earlier.

The Bank of Canada and Reserve Bank of South Africa seem poised to cut interest rates by 50 bps or more next week.


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