New Overnight Developments Abroad: Plunge of Chinese Equities Fanning Risk Aversion

August 19, 2009

The Shanghai Composite equity index fell 4.3%, at one point showing a 20% cumulative drop from its 2009 peak, i.e. the condition for declaring a bear market. China’s CSI 300 closed down 5.0% on the day.  Elsewhere in Asia, stocks dropped 2.5% in Indonesia, 1.4% in Thailand and India, 1.8% in Singapore, 1.7% in Hong Kong, and 0.8% in Japan.  In Europe, stocks have so far declined 0.8% in France and Britain and by 1.2% in Germany.  U.S. futures point to a lower open.

Commodity prices, especially metals like copper (-1.9%) and nickel, have weakened.  Oil and gold have dropped 0.3% to $69.00/barrel and 0.4% to $935.60/ounce.  Commodity-sensitive currencies have declined against the U.S. dollar.  The kiwi and Aussie dollar are off 0.8%, and the loonie has lost 0.6%.

The dollar’s biggest rise against a major currency is 1.0% versus sterling, which was depressed by the Bank of England minutes showing three dissenting votes in favor of a bigger expansion of the bond purchase program.

Typical of a risk averse day, the yen has appreciated 0.5% against the dollar and by even more against other currencies.  The U.S. currency had edged up 0.2% against the euro and 0.1% against the Swiss franc.

Sovereign bond yields are lower in Japan, Europe and North America.

Hurricane Bill was upgraded to a Category 4 storm with sustained 135 MPH winds in the Atlantic.  Eventual landfall is expected fairly north on the East Coast.

Dollar strength today occurred in spite of predicted depreciating trends from Warren Buffett in a New York Times article and from the Pacific Investment Management Company.  The fallout of exploding Federal Debt and money growth were cited reasons for the negative outlook.

Construction output in Euroland fell 1.1% in June and by 8.8% from a year earlier.  The second quarter saw construction drop 1.5% and by 7.0% from 2Q08.

Euroland recorded a seasonally adjusted EUR 5.3 billion current account deficit in June.  The 2Q deficit was EUR 11.5 billion, down from EUR 44.4 billion in 1Q.

Three of the Bank of England’s nine monetary policymakers voted to increase the asset purchase program by Gbp 75 billion to Gbp 200 billion, including Governor King who was joined by David Miles and the hawkish Tim Besley.  The six-person majority settled on a Gbp 50 billion increase to Gbp 175 billion, which will be done in three even monthly amounts to be completed by the time of the Bank’s November quarterly inflation report.  Not long ago, markets had been assuming that the Bank of England would be among the first central banks to tighten.  Today’s Bank of England minutes clear up that misconception and weighed on the pound.  These minutes arrive a day after the release of higher-than-forecast consumer price figures.

Britain’s industrial group, the CBI, released its monthly survey of industrial trends, which showed mixed results.  The output balance improved more than expected to -5 in August from -14 in July.  However, export orders remained weak at -48, and overall orders of -54 after -59 were weaker than assumed.

German producer prices fell much more sharply than assumed in July, dropping 1.5% from June and by 7.8% on-year, the largest 12-month decline since at least 1949.  Non-energy producer prices slid 0.2% and by 3.6% from July 2008.

Japan’s all-industry index firmed just 0.1% in June, less than forecast, and fell 8.2% from a year earlier.  The index rose 1.8% at a seasonally adjusted annual rate in the second quarter, only half as much as real GDP reported this past Monday.  The all-industry index is a monthly approximation of GDP collected from the supply side, rather than demand side, of the economy.  In June, services also firmed 0.1%, blunting a 2.3% increase in industrial production.  Construction fell 2.6% in the month, and public sector spending dipped by 0.2%.

Malaysian consumer prices firmed 0.1% in July but fell 2.4% from a year earlier.

New Zealand producer output prices fell 0.7% in the second quarter and rose 2.3% from 2Q08.

Australia index of leading economic indicators improved to a seven-month high of minus 3.3% in June from minus 5.3% in May.  The result suggests that the weakest point of the business cycle is now in the rear-view mirror.

Canadian consumer prices fell 0.3% on a seasonally adjusted basis last month, tripling the 12-month decline to 0.9%.  Canada’s index of leading economic indicators will also be reported today.  U.S. scheduled data include weekly oil inventories and mortgage applications.

Copyright Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.


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