A Further Spike in Risk Aversion Amid More Signs of Coming Recession

September 22, 2011

Yesterday’s FOMC announcement citing “significant downside risks to the economic outlook” but not including more quantitative easing received a poor market reaction in the United States and has seen sentiment deteriorate considerable further overnight.

The dollar rose 2.5% against the kiwi, 2.1% relative to the Australian dollar, 1.8% against the Canadian dollar and Swiss franc, and 0.9% versus the euro.  Smaller advances occurred of 0.5% against sterling and 0.1% versus the yuan.  The dollar dipped 0.1% against the yen, however.

The Swiss franc retreated further to 1.2335 per euro, putting nearly 3% between its level and the Swiss National Bank’s pegged euro minimum.

Following Wednesday’s 2.5% drop in the DOW, equities in the Pacific Rim plunged 8.9% in Indonesia, 4.9% in Hong Kong, 3.8% in Thailand, 4.1% in India, 3.1% in China and Taiwan, 2.6% in Australia, The Philippines and Singapore, and 2.9% in South Korea.  The bloodbath carried into European trading, where share prices have fallen by 4.4% in France, 4.3% in Great Britain, 3.7% in Germany, 3.1% in Italy, and 2.5% in Switzerland.

Commodities are slumping heavily.  Oil sank 3.5% to $82.92 per barrel, and gold dropped 2.7% to $1758.60 per ounce.

Ten-year German bund and British gilt yields fell by eight basis points each.  30-year and 10-year Treasury yields are indicated at 2.88% and 1.79% in the wake of the Fed’s operation twist unveiling.

Markets are giving a thumbs down to the strategy of tough fiscal love.  The Greek government has accelerated its budget cuts in a dash to secure aid on this day of runaway risk aversion.

Euro area industrial orders dropped 2.1% in July on top of a 1.2% decline in June.  July orders showed annualized growth of merely 0.1% from the February level.  Orders posted a 12-month increase of 8.4% between July 2010 and July 2011, down from a 21.0% increase in the year to February.

Europe’s “flash” purchasing manager survey results for September were even worse than the somber expectations of analysts.

  • Euroland posted sub-50 scores (implying contraction) in both manufacturing (48.4 after 49.0 in August and 50.4 in July) and services (49.1 after 51.5 in August and 51.6 in July).  A composite reading of 49.2 after 50.7 in July was the worst score since July 2009 and suggests zero economic growth this quarter.  Moreover, substantial deterioration in forward-looking elements like new orders and service sector business expectations point to even weaker activity in the final quarter of 2011.
  • The French services PMI fell by 4.3 points to 52.5, while the manufacturing French PMI reading of 47.3 was 1.8 points lower than in August.  The composite 50.7 reading was at a 26-month low. 
  • Germany’s PMI score of 50.8 also showed the smallest margin of expansion.  The manufacturing PMI of 50.0 was at a 24-month low, and the services punched in at a 26-month trough of 50.3.

China’s preliminary purchasing managers index in manufacturing dropped further below 50 to a 2-month low of 49.4.  Production was also at a two month low.

In Britain, the CBI monthly industrial trends survey revealed a renewed slide to minus 9 in September following readings of +1 in August and minus 10 in July.

Revised Dutch and Irish second-quarter GDP figures were released.  In the Netherlands, growth was cut to a fourth of the first-quarter pace, edging up 0.2% on quarter and 1.6% on year.  Irish GDP fell 1.6% between 1Q and 2Q but was 2.3% higher than a year earlier.

The Swiss ZEW index of investor expectations toward that economy worsened additionally to minus 75.7 from minus 71.4 in August.

Danish consumer confidence worsened to minus 3.6 in September from negative 2.2 in August.  Spain’s trade deficit of EUR 1.65 billion in July was less than half as big as the June deficit.

GDP in New Zealand eked out a gain of only 0.1% last quarter, a fifth as much as had been projected.  GDP was only 1.5% greater than in 2Q10.  Net exports exerted a substantial drag.

Wholesale turnover in South Africa plunged 3.6% in July, more than halving the 12-month rate of increase to 3.0%.

Icelandic wages in August showed further acceleration to a 12-month rise of 8.0% from 7.8% in July and 7.1% in June. 

Hong Kong CPI inflation slowed to 5.7% in August from 7.9% in July.  Hong Kong’s current account surplus narrowed to HKD 4.6 billion in 2Q from 37.3 billion Hong Kong dollars the quarter before.  The Filipino current account surplus, in contrast, more than doubled between those quarters to USD 2.1 billion.

Central banks will report their latest interest rate decision today in South Africa and the Czech Republic.

Scheduled U.S. data include weekly jobless insurance claims and the monthly FHFA house price index and index of leading economic indicators.  Euroland reports a preliminary reading for consumer confidence, and Canada releases retail sales.

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

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