Risk Aversion Surges Following Unilateral German Ban on Short-Selling

May 19, 2010

Stocks are plunging in response to yesterday’s unilateral action by German regulators to ban short-selling of euro area government debt and credit default swaps.  The ban extends to end-1Q11. German Chancellor Merkel seeks broader Euroland action, endorsing need for a financial transaction tax.  Equities tumbled 2.5% in Singapore, 2.7% in India, 3.7% in Indonesia, 1.9% in Australia, 1.0% in New Zealand, 1.8% in Hong Kong, and 1.2% in South Africa.  The blood-letting intensified in Europe, where stocks have dropped 3.5% in Italy and Spain, 3.0% in France, 2.8% in Germany and 2.5% in Britain.  These violent declines are clearly not the greater market orderliness that regulators sought.

Commodity-sensitive currencies have been clobbered, too.  The greenback shows gains of 2.7% against the kiwi, 2.1% relative to the Australian dollar and 1.2% versus the Canadian dollar.  Oil prices fell 1.7% to $68.26 per barrel.  Somewhat surprisingly, gold has also eased, falling 0.7% to $1205.80 per ounce.

The euro touched a new low of $1.2141 but is just 0.3% lower than yesterday’s closing level.  The dollar is also up 0.3% against the Swiss franc and shows a 0.6% advance against sterling.

All countries want a weaker currencies in this kill-or-be-killed risk averse environment, but that of course is not possible.  A big target for capital continues to be Japan, where the yen rose 1.3% overnight against the dollar and even more against other currencies.  The yen may have been also aided by further confirmation of a strengthening recovery.  Chinese monetary officials have become increasingly concerned about large inflows into its economy.

A flight into Treasuries and other sovereign bonds has seen 10-year gilt and bund yields decline by 8 and 6 basis points.  10-year Greek bond yields softened six basis points further to 7.48%.  The yield on JGBs is off 2 basis points.

In the market’s stampede to safety, two pieces of good data released today are being overlooked.

  • Japanese industrial production for March got revised to a monthly increase of 1.2% from 0.3% reported initially.  Production jumped 7.0% last quarter after gains of 5.9% in 4Q09, 5.3% in 3Q09 and 6.5% in 2Q09.  March output was 31.8% greater than a year earlier.  Industrial shipments advanced 29.9% over the last 12 reported months, and the inventory ratio fell by 29.5%.  Capacity usage is 45.3% higher than in March 2009.
  • Construction output in the euro area increased 7.6% in March, reversing February’s drop of 7.2%.  As a result, output showed a much smaller 5.2% decline from a year earlier than the 14.8% decreased between February 2009 and February 2010.  Construction in Germany soared 26.7% between February and March.

Minutes from the Bank of England’s May policy meeting, which left settings unchanged, revealed another unanimous 9-0 vote.  Near-term inflation risks were raised in response to firmer oil prices and a weaker pound, but officials also perceived a greater danger of spread from euro area problems.

The case of a pause in monetary tightening in Australia was strengthened by two data releases there.  Non-bonus wages showed a 10-year low on-year advance of 2.9% in the first quarter of 2010, down from 3.0% in 4Q09, 4.2% in 1Q09, 4.1% in 1Q08, 4.1% in 1Q07 and 4.0% in 1Q06.  Also, a gauge of consumer confidence fell 7% in May, its greatest monthly decline in 19 months.

In neighboring New Zealand where the fiscal budget due tomorrow is expected to include a higher sales tax, the central bank governor said today that tighter fiscal policy is needed imperatively.

Primary elections in the United States confirmed rampant anger among voters.  Tea Party favorite Rand Paul of Kentucky won, and Senator Arlin Specter lost in Pennsylvania.  Street protests in Thailand have ended.

A streak of 13 consecutive on-year declines in South African retail sales ended with news of a 1.0% rise in March.  Sales in 1Q10 were 0.6% lower than in 1Q09, however.

Russian industrial production shot up 3.4% in April and was 10.4% greater than a year earlier. 

Serbia’s central bank left its two-week repo rate steady at 8.0%.

U.S. consumer prices and Canadian wholesale sales data arrive today.  So do minutes from the last FOMC meeting.

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

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