Risk Aversion Up as Chinese Central Bank Lifts Reserve Requirements

January 13, 2010

The People’s Bank of China raised reserve requirements by a half-percentage point to 16% for large banks and 14% for smaller ones.  The backdrop for today’s sooner-than-anticipated onset of tightening was soaring bank lending, which increased 9.2 trillion yuan in January-November of 2009 ($1.35 trillion) and the fear of an asset bubble and higher general inflation.  This action points to more substantive monetary tightening including higher interest rates before too long, plus the growing chance that the yuan will resume the appreciating trend that was halted in July 2008.

The yen and dollar are lower, typical of a risk-averse market.  The dollar gained 0.4% against the yen but fell by 0.6% against the sterling, 0.5% versus the Australian dollar, 0.4% against the Canadian dollar, euro and kiwi, and 0.3% relative to the Swiss franc.

Likewise, stocks and commodity prices have eased.

  • Equities fell 3.2% in China, 2.6% in Hong Kong, 1.6% in South Korea, 1.4% in Taiwan, 1.3% in Japan, 1.0% in Indonesia and Singapore, and 0.6% in Australia.  Markets in Europe show greater resilience, with the British Ftse off 0.4%, the Paris Cac down 0.2%, and the German Dax actually 0.1% firmer.
  • Oil slid below $80.00 to $79.90, 1.1% lower on balance. Gold eased 0.3% to $1132.30 per troy ounce.

The 10-year JGB yield slipped 2 basis points to 1.34%, but gilt and bund yields firmed 3 and 1 basis points.

Indicators of European activity released today were softer than assumed.

  • German GDP fell 5.0% in 2009, implying stagnation in the fourth quarter after positive gains in the second and third quarters.
  • Italian industrial production advanced 0.2% in November, a fifth as much as had been forecast, and showed an on-year drop of 7.9%.
  • Dutch industrial output growth of 0.4% in November was two-thirds of what had been expected.  Output was also 2.0% less than a year earlier, while industrial sales recorded a 2.5% on-year decline.
  • Czech retail sales slid 2.9% in November and by 4.9% from a year earlier, more than twice the 12-month drop that was being predicted.
  • The Dutch trade surplus narrowed to EUR 3.1 billion in November from EUR 3.9 billion in October.  Real exports and imports were 2% and 8% lower than a year earlier.
  • British factory output was flat in November for a second consecutive month and 5.4% less than a year earlier.  Analysts had projected a 0.2% rise.  Industrial production, however, rose 0.4% on month and fell 6.0% on year after a drop of 8.4% in the year to October.
  • Icelandic unemployment climbed to 6.7% last quarter from 6.0% in 3Q.
  • Moody’s warned of the peril to the Portuguese and Greek economies of mounting government debt service burdens.

French consumer prices rose 0.3% last month and by a ten-month high of 0.9% in year-on-year terms.  Energy costs accelerated.  The French current account deficit narrowed to EUR 3.8 billion in November from EUR 4.2 billion in October.

Portuguese consumer prices edged up 0.1% on month and down 0.1% on year in December.

Sterling got a lift from a Guardian interview by Bank of England policymaker Andrew Sentance, who indicated that asset buying will end soon and suggested that interest rates might go up before end-2010.  Plosser and Fisher, presidents of the Dallas and Philly Fed, made upbeat remarks overnight.

Haiti suffered a devastating 7.3 earthquake near the capital with deaths likely to run into the thousands.

Thailand’s central bank kept its key interest rate at 1.25% as anticipated.

Australian commercial finance and personal credit rose 4.0% and fell 1.0%, respectively, in November.  The New Zealand commodity price index increased 2.6% last month on top of a 10.5% advance in November.

South Korean unemployment held steady at 3.5% in December.

Japanese bankruptcies in December were 16.6% lower than a year earlier, with an associated 57.5% plunge in associated liabilities.  Bankruptcies fell 1.1% in 2009 as a whole after increasing 11% in 2008.

China was also in the news, as Google threatened to abandon the country’s internet market if hacking attacks on the gmail accounts of human rights activists do not stop.

The U.S. December federal budget figures and the Fed’s Beige Book will be released later today.

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.



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