Stocks Suffer Further as Third Quarter Begins

July 1, 2010

The Nikkei lost another 2.0% to 9192.  Japanese stocks have plunged 10.2% since June 21 and 18.5% since April 15, roughly reversing half the prior recovery from the low in early March 2009.  Elsewhere in the Pacific Rim, stocks fell overnight by 1.4% in Indonesia and China where a disappointed PMI reading was announced, 1.5% in Australia, 1.1% in India, 1.3% in New Zealand, 1.0% in Taiwan, 0.7% in South Korea, and 0.6% in Hong Kong.  In Europe, equities are off 1.0% in Spain, 1.4% in France, 0.9% in Great Britain and 0.6% in Germany. 

No rise or drop occurred in the Chinese yuan overnight.  The U.S. dollar fell for a second straight day against the euro, losing 0.9% and is also down by 0.8% against the yen and Swiss franc, and 0.3% relative to sterling.  Dollar/yen now as an “87” handle.

Commodity currencies weakened.  The Aussie, New Zealand and Canadian dollars are 0.6%, 0.3%, and 0.1% weaker against the greenback.  Oil prices dropped another 1.2% to $74.71 per barrel, and gold edged 0.2% lower to $1243.00 per troy ounce.

The yield on 10-year Japanese government bonds (JGBs) fell by a further three basis points to 1.08%, but European yields were fortified by a better-than-expected Spanish bond auction.  British gilts and German bund yields rose a basis point each.

Moody’s placed Spain under review for a possible additional downgrade of its credit rating.

The Bank of Japan’s quarterly business survey results were considerably better than the March report and what street analysts were anticipating (see my review).

Among the many manufacturing purchasing managers surveys released today, China’s drop to 50.4 in June from 52.7 in May, 55.2 in April and 57.0 in March has drawn the most attention.  The trend indicates that policy restraint is indeed cooling off the overheated Chinese economy.  While the report predicts growth of 9% in the second half of 2010, investors fear the pendulum may swing further in the direction of slower growth.  Other PMI results were as follows:

  • The British PMI index only lost a half-point to a still-robust 57.5 from 58.0 in both May and April.
  • Australia’s score fell 3.4 points to 52.9.
  • Euroland had a reading of 55.6, same as its preliminary indication but a four-month low with the weakest orders component of 2010.  Within the euro area, the German PMI of 58.4 was three-tenths better than the flash indication and surprisingly level with the May reading.  France’s score of 54.8 was a full point below May’s score and the lowest since December.  Italy’s reading of 54.3 returned to April’s level from 54.0 in May.  the Spanish index slid three-tenths to 51.2 but remained above the 50 line between contraction and expansion.  Ireland suffered one of the bigger deteriorations, falling to 51.8 from 54.1.  The Dutch PMI fell 0.6 points to 55.9, and woeful Greece scored a 42.2 after 41.8, signified continuing deep recession.
  • The Swiss PMI-manufacturing index continues to convey considerable strength.  Although 0.7 points lower than in May, the 65.7 reading compares to 42.3 a year earlier.
  • The Swedish index also surpassed 60 but, at 62.4, was 3.6 points lower than in May.  Denmark’s PMI edged closer to 50, rising 0.8 points to 49.3.
  • Hungary’s PMI fell under 50, hitting 49.5 after 50.5 in May, 51.6 in April and 55.9 in February.  Poland’s 53.3 was up by 1.1 points and at the highest levle since August 2007 when the world financial crisis began.  The Czech Republic had an unchanged and healthy reading of 57.6. Russia’s index rose 1.6 points to a 14-month high of 52.6.
  • India’s PMI fell 1.7 points to 57.3 from a 27-month high in May.  Turkey’s 53.2 was 3.3 points below May’s record.  South Africa’s index was 50.4, down from 52.7 in May, 55.2 in April, and 57.0 in March.
  • Like China and India, the South Korean and Taiwanese PMI reading fell last month.  South Korea’s reading decreased by 1.3 points to 53.3, while Taiwan’s score of 53.8 was a third consecutive drop and 3.6 points below May’s levels.  Rather than weakness, these reports suggest a constructive entry of these economies into a normalization phase after very rapid activity that would threaten demand-pull inflation if sustained.

Canadian markets will be closed for Canada Day.

Australian retail sales rose only 0.2% in real terms in May.  Although the increase was expected, it still confirms a slowdown after gains of 0.6% in April and 0.8% in March.  Sales were just 0.6% above year-earlier levels.  Building permits in Australia sank 6% on month but posted on-year growth of 26.6%.

New Zealand’s commodity export index slid 1.2% in May because of a weak kiwi but were still 53% higher than a year earlier.

South Korea’s trade surplus widened 71% compared to April, reaching $7.472 billion in May.  On-year export growth of 32.4% surpassed expectations, while imports grew less than forecast.  Indonesian exports in May were 36.0% greater than a year earlier, and CPI inflation accelerated more than anticipated from 4.2% in May to essentially 5% in June.  Both statistical findings suggest it may not be long before Bank Indonesia begins to raise interest rates.

The Swedish Riksbank did just that, hiking its repo rate for the first time, an as-expected 25 basis point move to 0.5%.  Swedish officials at the same time lowered the future likely flight path of its reference interest rate, citing a weak euro area economy.  Sweden is one the very few countries with a central bank that forecasts its own interest rate level far in advance.

The Bank of England quarterly credit survey revealed an unexpected slip in mortgage demand but little change over the past three months in credit availability.  Default rates fell.

German real retail sales rose 0.4% in May, the first increase since February.  Sales were 2.4% lower than a year earlier, and April and May together showed unchanged sales from the first-quarter average level.

French producer prices were steady in May, but the 12-month rate picked up to 4.3% from 4.0% in April and 2.0% in March.

An unexpected 13K rise in U.S. jobless claims to 472K lifted the four-week smoothed average to 466.5K.  The U.S. economy is no longer expanding rapidly enough to improve the labor market.  Other scheduled U.S. data today include the ISM’s manufacturing PMI reading, auto sales, and construction spending.  Investors fear the worse from tomorrow’s June labor report.

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

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