Cynicism Over Euro Area Debt and Beijing’s Yuan Policy Sends Stocks Lower

June 22, 2010

Equiites fell by 1.2% in Japan and Australia, 0.7% in India, and 0.5% in South Korea, Singapore, Sri Lanka and New Zealand.  Downward pressure intensified in Europe where stocks so far show losses of 1.8% in Madrid, 1.6% in Paris and and London, and 1.0% in Frankfurt.  U.S. futures are lower, too.

The yuan trimmed Monday’s advance in half.  China’s weekend policy announcement is now being viewed in a negative light as

  • A ploy to deflect attention at the upcoming summit of G-20 leaders in Toronto,
  • A shift to two-way currency risk rather than a straight upwardly crawling peg,
  • A pre-emptive view to ensure that any appreciation is very gradual, and
  • A portent that domestic Chinese demand, not exports, will bear the brunt of any slowdown in Chinese growth.

Investors are braced for a very austere revised British budget, which will stress the priority of reducing the U.K. deficit sharply.  Indirectly, this event reminds everyone of Continental Europe’s significant sovereign debt problem.

Risk aversion is also being fed by the ongoing Gulf of Mexico oil spill, a poster child for the stumbling limitations of both the private sector and government.

The dollar has risen 0.3% against the euro, 0.2% relative to sterling and the kiwi, and 0.1% against the Aussie dollar.  the greenback lost 0.6% against the yen, 0.3% versus the Canadian dollar and 0.1% against the Swiss franc.

Sovereign bond yields are off by 7 basis points in Germany, 4 basis points in Britain, and 2 bps in Japan.

Oil and gold prices shed 1.6% and 0.4% to $76.58 per barrel and $1236.10 per troy ounce.

A two-day FOMC meeting begins today.  Policy settings are not expected to change, but a downgraded assessment of the U.S. economy is plausible, even reasonable in light of the data since policymakers last met.

Canadian CPI inflation fell but not quite as much as forecast.  The total consumer price index slid by 0.1% between April and May and decelerated to a 12-month rate of 1.4% from 1.8%.  Most of the drop reflected energy costs, which rose 6.2% on year after 9.8% in the 12 months to April.  Core inflation settled back to 1.8% from 1.9%.  The Bank of Canada’s April Policy Report assumed core inflation of 1.9% in 2Q10.

Germany’s IFO Institute released business climate figures, suggesting a recovery that is no longer accelerating.  The current business situation improved 0.7 points to a greater-than-forecast 101.1, but expectations for the coming six months dropped to a lower-than-assumed 102.4 reading in June from 103.7 in May and 104.0 in April.  The overall index of 101.8 compares to 101.5 in May, 101.7 in April, and 98.2 in March.  The retail sector score of minus 10.1 followed readings of minus 8.1 in May and minus 3.7 in April but was better than minus 12.3 in March.  The IFO services index was also reported.  Such was 15.5 after consecutive readings of 15.0 in April and May and a score of minus 5.0 in June 2009.

The euro area’s seasonally adjusted current account swung to a deficit of EUR 5.1 billion in April, worst since September, from a EUR 1.5 billion surplus in March.  Merchandise exports slid 2.9% on month, while imports edged 0.3% higher.  Analysts were looking for a surplus around EUR 1.0 billion.  The unadjusted current account recorded a EUR 6.9 billion deficit in the latest month, but the deficit of EUR 35.1 billion in the twelve months to April was 77% smaller than in the previous twelve months.  Portfolio investment inflows in the last 12 months amounted to EUR 297.6 billion, down from EUR 397.4 billion in the 12 months to April 2009, while direct investment outflows fell to EUR 76.8 billion from EUR 164.6 billion.

The Swiss trade surplus dropped sharply to Chf 818 million last month from Chf 2.02 billion in April.  Imports surged 13.2% on month.  Spain’s trade deficit widened slightly more than 16% on month to EUR 5.0 billion in April.  Danish consumer confidence weakened to minus 1.5 in June from +3.3 in May.

Hong Kong CPI inflation ticked up a tenth in May to 2.5%.  Core CPI likewise edged up to 1.4% from 1.3% in April. Taiwanese unemployment was 5.14% in May.

South Korea and Japan extended their $3 billion bilateral swap line to 2013.  S&P reaffirmed Japan’s AA sovereign credit rating but also kept a negative outlook.

Scheduled U.S. data include the FHFA house price index, the Richmond Fed index, existing home sales, and weekly chain store sales.  A preliminary estimate of consumer confidence in Euroland is also due.

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

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