New Overnight Developments Abroad: Planned Fiscal Stimulus Extends Recovery in Stocks

December 8, 2008

A strong rise in Asian and European stocks has sent the yen and dollar lower. The U.S. currency gained 0.6% against the yen but has dropped 2.5% against the Australian dollar, 1.7% against the kiwi, 1.5% versus the Canadian dollar, 1.3% relative to sterling, 1.0% against the euro and 0.7% against the Swiss franc.

The Nikkei jumped 5.2%, stock markets advanced by 8.7% in Hong Kong, 4.1% in Australia and China, 7.5% in South Korea, 4.5% in Thailand and 2.2% in India. In Europe, the German Dax is up 5.5%, while stocks are trading up 6.0% in France, 4.2% in Britain, 5.0% in Italy, 3.4% in Switzerland, and 5.4% in Sweden.

The 10-year JGB yields climbed 3.5 basis points to 1.39%. Sovereign bond yields increased sharply in North America and Europe.

Oil prices rose 5.4% to $43.03/barrel, while gold prices shot up 3.0% to $773.80 per ounce.

Announced fiscal stimulus plans provided the impetus for these counter-trend market moves. Obama has pledged the biggest infrastructure project since the 1950’s interstate highway system, and a bailout for Detroit’s automakers moved closer. Germany is considering more fiscal support. India’s government announced $4 billion of extra fiscal spending this financial year. Over weekend, the Reserve Bank of India cut its key rate by 100 basis points to 65%. French president Sarkozy, EU Commissioner Barroso, and British Prime Minister Brown met in Europe to discuss fiscal issues. Officials in China convened a special planning meeting to discuss additional initiatives to keep growth from slipping under 8%. Australia began to implement and A$ 8.7 billion program (almost 1% of GDP) of cash payments for child allowances and pensioners to stimulate holiday shopping. Various officials from the ECB implied that more rate relief is possible.

Japan’s current account surplus fell 56.5% on-year to Y 960.5 billion following a drop of 48.8%.  The merchandise trade surplus dived 87.2% y/y. Seasonally adjusted exports and imports plunged 9.4% and 12.3% between September and October. Direct and portfolio investment generated net outflows of Y 2.419 trillion and Y 4.153 trillion, respectively in October.

Japanese corporate bankruptcies rose 5.3% y/y in November. The economy watchers’ index, a gauge of service sector activity that is a good barometer of consumption, did not quite slide as much as forecast in November but was at a record low at 21.0 after 22.6 in October. The outlook component eased to 24.7 from 25.2.

Bank lending accelerated in Japan to 3.6% (3.2% including Shinkin banks) in a sign that the corporate paper market has dried up. Broad liquidity fell 0.4% in the year to November, and M3 rose just 0.6% y/y.

New job ads in Australia plunged 42.7% in the year to November.

Euribor rates eased still further. The three-month rate is at 3.49%, down from 4.34% on November 11th.

The Sentix gauge of investor sentiment in Euroland worsened to a record low of -42.3 in December from -36.4 in November and -27.8 in October.

German industrial production fell by 2.1% between September and October and by 3.8% from October 2007. Output had dropped 4.3% saar in the third quarter and was 3.2% lower than the third-quarter level (not annualized) in October. Production of capital goods posted the second consecutive plunge of 3.1%.

Russia’s central bank sold $66.7 billion and 6.3 billion euros in October-November to support the rouble. To slow the depletion of reserve, the currency has been allowed to fall in four stochastic steps recently.

GDP in Finland grew just 0.1% last quarter, down from 0.5% in 2Q08, and by 1.3% from 3Q07, down from 4.1% in the year to 3Q07.

House prices in New Zealand fell by 6.8% in the year to November.

South Korean producer prices sank 2.3% m/m in November, their biggest monthly decline in 55 years, and to a 12-month pace of 7.8% from 10.7% in October and 11.3% in September. The Bank of Korea is expected to cut rates again on December 11th.

British output producer prices slid 0.7% on month in November and to a 12-month increase of 5.1%, down from 6.7%. The core PPI-O edged 0.2% higher. Producer import prices fell 3.3% m/m and halved to a 12-month climb of 7.5%, pointing the way to additional rate reductions. The Bank of England’s 2.0% benchmark rate has never been lower than that level in the history of the bank dating back to its founding in 1694.


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