A Frenzied Wave of Risk Aversion

June 16, 2011

Could Greece be another Lehman Brothers collapse?  That’s the central theme of international markets where stocks, commodities, and sovereign debt yields are tumbling.  Protesting Greeks in the streets have compelled Prime Minister Papandreou, an Amherst grad, to form a new cabinet and seek a vote of confidence from parliament in further austerity that will be a necessary quid pro quo for further aid.  He reportedly said he’d step down if that would facilitate a functional grade coalition.

Equities fell 2.0% in Taiwan, 1.9% in South Korea and Australia, 1.8% in Hong Kong, 1.7% in Japan, 1.5% in China, 1.4% in Indonesia, 1.1% in Singapore and 1.0% in Sri Lanka and Thailand.  The Paris Cac, British Ftse, and German Dax have lost 1.4%, 1.3%, and 1.2% so far today.

Ten-year U.S. Treasury and German bund yields are each below 2.95% and down by three and two basis points today.  The 10-year British gilt yield fell four bps to 3.20%, while the 10-year Japanese JGB also dropped 4 bps to 1.12%.

Oil is hovering at $95 per barrel, down roughly a nickel since Tuesday. Gold dipped 0.1% to $1525.0 per ounce.

The Swiss franc and Japanese yen, which generally thrive at times of risk aversion, appreciated by 0.4% and 0.3% against the dollar overnight.  The U.S. currency otherwise advanced 0.8% against the kiwi, 0.7% relative to the Canadian dollar, 0.5% versus the euro, and 0.4% against the Australian dollar and sterling.  They Chinese yuan was raised 0.1%.

In Britain, where the severest budget cuts in the G-7 have begun, consumption is stagnating.  The volume of U.K. retail sales slumped 1.4% on month in May, erasing April’s advance and leaving sales in March-May just 0.1% higher than in the prior three months and 0.1% below the level last September-November.

Euro area consumer prices were unchanged in May and 2.7% higher than a year earlier.  Such matches the preliminary estimate and represents a dip in the on-year pace from 2.8% in April.  Core CPI in May was at 1.7% by one measure and at 1.5% by another; each gauge was a tenth less than in April.  Energy prices sank 0.6% on month, helping to contain total inflation.  On-year CPI inflation ranged from 2.2% in France and 2.4% in Germany to 3.7% in Portugal, 3.4% in Spain, 3.1% in Greece, and 3.0% in Italy. 

Euroland jobs failed to grow last quarter and were only 0.1% greater than in the first quarter of 2010.

The Reserve Bank of India repo and reverse repo rates were lifted by 25 basis points to 7.5% and 6.5%.  This were the tenth round of increases in inflation-prone India and expected by analysts.

The Swiss National Bank, which sets monetary policy quarterly, kept its three-month Libor target pinned at the cyclical low of 0.25%.  This was the expected outcome.  Officials expressed mounting concern about the potential drag of franc appreciation.  Swiss industrial production slumped 9.2% in the first quarter, cutting its on-year increase to 5.0% from an upwardly revised 6.4% in the year to 4Q10. 

The ECB Bulletin was released, rehashing the hawkish stance that President Trichet adopted at last week’s press conference on both peripheral debt restructuring and the need for another interest rate hike.

Japanese stock and bond transactions generated a JPY 744 billion outflow in the week of June 11 versus a JPY 1.02 billion outflow in the previous week.

China’s indices of leading and coincident indicators improved 0.2% and 1.3%, respectively, in April.  Hong Kong’s jobless rate remained at a low 3.5% in May.

At the other extreme, Greek joblessness increased 1.7 percentage points to 15.9% in 1Q11 from 14.2% in 4Q10.

Expected CPI inflation in Australia remained at 3.3% according to the June survey.  New motor vehicle sales in Australia fell 7.6% on month and 14.5% on year in May.  New Zealand’s business purchasing managers index printed at 54.7 in May, a 10-month high and up 2.7 points.  New Zealand consumer confidence jumped to a reading of 112.0 in May from 97.9 in April.

Italian consumer prices edged up 0.1% on month and continued to show a 12-month 2.6% rate of increase.  Dutch retail sales rose 3.7% in April but were 0.9% lower than in April 2010.  Spain’s index of leading economic indicators rose 0.3% in April, while the coincident index stagnated.

A heavy slate of U.S. data releases continues today, including housing starts and permits, weekly jobless insurance claims, the Philly Fed factory index, and the quarterly current account.  Canada will be reporting monthly international security purchases and sales.  Draghi, Mersch, and Trichet of the ECB are scheduled to speak publicly.

Al-Zawahri, who is an Egyptian surgeon and former top Bin Laden lieutenant, has been formally chosen to head the Al Qaeda terrorist organization.

Copyright Larry Greenberg 2011.  All rights reserved.  No secondary distribution without express permission.

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