Tsunami of Risk Aversion

July 12, 2011

Stocks fell by 3.1% in Hong Kong, 2.2% in South Korea, 2.0% in Taiwan, 1.9% in Australia, 1.8% in China, 1.5% in Sri Lanka, 1.7% in India, 1.4% in Thailand, Japan, and Indonesia, and 1.3% in Singapore.  In Europe, the Paris Cac, German Dax and British Ftse have so far lost 2.4%, 1.9%, and 1.3%.

Peripheral bond yield spreads versus German bunds are all wider.  Italian bond yields poked above 6.0% to the highest levels since 1997.  Rumors circulating that the ECB is buying Italian sovereign debt, something monetary officials had been reluctant to do.  Ten-year British gilts are seven basis points lower.  Their German and Japanese counterparts have each dropped four basis points.  In addition to fear of contagion spreading to Italy, another worry about Spanish savings banks was triggered by reports that several banks in that economy failed the stress tests.

The dollar sliced through the $1.4000 per euro barrier easily on safe haven-seeking capital flows.  The yen and Swissy, like the dollar, have benefited in this intensifying storm of risk aversion.  The dollar fell 0.8% against the yen and 0.3% overnight versus the Swiss franc but shows gains of 1.5% relative to the kiwi, 0.8% against the euro, and 0.6% against sterling and the Canadian dollar.  The dollar also firmed 0.1% against the yuan.

Oil fell 1.0% to $94.25 per barrel.  Gold strength is showing resilience, however, with a quote of $1547.20 per ounce.

A variety of price data releases reflected softening pressure.

The Bank of Japan voted unanimously to leave policy unchanged with a targeted zero to 0.1% range for overnight money rates.  The BOJ remains confident about a return to a moderate recovery path in 4Q11 and 1Q12, ironically citing “improved overseas economic conditions.”  New growth and price forecasts were announced for fiscal 2011 and FY12.  These were almost identical to those unveiled three months ago.

Bank Indonesia as expected left its key interest rate steady at 6.75%.

China released more data.

  • International reserves increased $153 billion to $3.2 trillion in the second quarter.  There had been a $199 billion advance in 1Q11.
  • New bank lending picked up in June to 633.9 billion yuan from 552 billion yuan in May.  The latest gain slightly exceeded expectations.
  • Money growth accelerated, too.  M2 was 15.9% higher in June than a year earlier, up from a 15.1% on-year increase in May and a forecast rise of 15.3%.  M1 grew 13.1%, up from a 12.7% pace in May.

Japan’s tertiary index of service-sector activity climbed 0.9% in May after a 2.5% increase in April.  The April-May level was nonetheless 1.0% below the first-quarter level.  The tertiary index had dropped 2.4% in 1Q11 after small increases of 0.6% in 3Q10 and 0.3% in 4Q10.  May’s level was 0.4% lower than a year before.

Japanese domestic corporate goods prices dipped 0.1% in June but were 2.5% higher than a year earlier.  Import and export prices fell by 1.8% and 0.7%, respectively. 

Indian on-year industrial production growth of 5.6% in May was less than anticipated.

German full CPI data for June confirmed the preliminary release results.  Consumer prices went up 0.1% and by 2.3% on year.  That’s the same 12-month pace as in May and just off April’s cyclical high of 2.4%.  The CPI in June 2010, by contrast, was just 0.9% above its year-earlier level.  Between June 2010 and June 2011, energy prices rose 9.1% and food climbed 2.6%.

French consumer prices were steady on a seasonally adjusted basis in June and were 2.1% above a year earlier in unadjusted terms.

British CPI inflation unexpectedly eased to 4.2% in June from 4.5% in both April and May.  Prices dipped 0.1% between May and June.  Retail price inflation dipped to 5.0% from 5.2%, and core CPI slid to 2.8% from 3.3% in May and 3.7% in April.

The British Retail Consortium reported a 0.6% on-year drop in same store sales.  Total sales were 1.5% higher than a year before.  The Royal Institute of Chartered surveyors reported its house price balance index, which printed in June one point higher than May’s level at minus 27.  Britain’s index of leading economic indicators rose 0.6% in May after a 0.4% increase in April.  The Department of Communities and Local Government house price index fell 0.5% on month in May and by 1.6% from a year earlier.

U.K. trade data were disappointing.  The goods and services deficit widened to GBP 4.06 billion in May from GPB 3.14 billion in April.  The goods deficit jumped 10.9% to GBP 8.48 billion as imports increased 5.8% on month.  The goods deficit had averaged GBP 7.41 billion during 1Q11.

Hungarian CPI inflation eased to 3.5% in June from 3.9% in May.  Czech CPI inflation slid as well to 1.8% from 2.0%, and the Czech jobless rate ticked down to 8.1% from 8.2% in May.

Greek import prices fell 1.8% in May and slowed to a 12-month increase of 6.5% from 8.0% in April.  Portuguese consumer prices dipped 0.2% on month in June instead of firming 0.1% as forecast.

Swedish consumer prices eased 0.2% on month and slowed to 3.1% in June from 3.3% in May.

The United States and Canada will be releasing trade data today.  The U.S. JOLTS and IBD/TIPP indices arrive, too, along with weekly chain store sales and minutes from the last FOMC meeting. 

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

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