Debt Concerns Intensify

November 21, 2011

Investors began this week is a risk-off mood, fanned by

  • An expected admission from the U.S. congressional super-committee of failure to strike a budget cutting deal, which will trigger automatic across-the-board reductions and a possible additional U.S. credit rating downgrade.
  • A warning from NYU Professor Roubini that an Italian debt restructuring will be unavoidable.
  • The resounding defeat of Spain’s government in Sunday elections, yet expectations that Spain too will need aid to handle its debt problems.
  • Higher peripheral bond yields despite more forceful ECB buying and wider spreads versus German bunds.
  • A warning by Moody’s of intensifying debt service strains in France.
  • Downgraded German economic assessments by the Bundesbank and Finance Ministry of that country.

Stocks were again walloped in Asia and Europe, dropping by 2.6% in Taiwan and India, 2.0% in Indonesia, 1.9% in Thaiand, 1.4% in Malaysia and Hong Kong, 1.2% in Singapore, and 1.0% in South Korea.  Japan’s Nikkei lost only 0.3%, but share prices have plunged 2.5% in Germany and France and are 1.9% lower in Britain.

Ten-year German bund and British gilt yields fell by nine and seven basis points.  The 10-year Japanese JGB yield firmed a basis point.  Treasury bond prices and U.S. equities are signaled lower at the open.

Commodity prices have fallen significantly, with drops of 1.9%, 1.4%, and 1.0% in copper, oil, and gold.  Against commodity-sensitive currencies, the dollar has advanced 1.3% relative to the Australian dollar, 1.0% against the kiwi, and 0.7% versus the loonie.

The dollar otherwise firmed 0.9% against sterling, 0.3% versus the Swissie, 0.2% against the euro, and 0.1% relative to the yen and yuan.

The French index of leading economic indicators sank 0.6% in September.  That same month, Dutch consumer spending was 2.0% lower than a year earlier.

Japan’s all-industry index, a monthly proxy for GDP compiled from the supply side of the economy, fell by 0.9% in September, indicating a loss of momentum in a quarter where the index nonetheless climbed 2.0% versus 2Q.  In September, the all-industry index was also 0.8% weaker than a year earlier.  In comparisons to August, industrial production, services and public spending posted drops of 3.3%, 0.7%, and 0.1%, while construction grew 2.2%.

Minutes from the Bank of Japan’s October 27 Policy Board meeting, which voted to increase asset buying from JPY 50 trillion to JPY 55 trillion, showed that member Ryuzo Miyao recommended an increase to JPY 60 trillion, citing significantly heightened downside risks.  

Japan’s index of leading economic indicators was revised to a reading of 91.5 in September from an initial score of 91.6.  Expressed as a diffusion index, where a reading of 50 is neutral, the LEI dropped sharply to 30 in September from 70 in August.  The coincident index was 20 after readings of 70 in August and 100 in July, while the lagging index of 80 embodied greater strength shown earlier in the summer.

Japan’s customs trade balance swung to a deficit of JPY 274 billion in October from a surplus of JPY 813 billion a year earlier.  The seasonally adjusted deficit widened very sharply to JPY 458 billion from JPY 97 billion in September, as exports sank 3.5% while imports rose 2.8%.  Export volumes were 4.0% lower than in October 2010, while import volumes were up 6.0% on year.

Spanish general elections on Sunday saw the Conservatives take 186 seats to the Socialists 110.  There are 350 seats in all.  Fringe parties did well.  Zapatero is out as prime minister, and Rajoy becomes the new prime minister, promising hard times.

Britain’s Rightmove house price index tumbled 3.1% on month in November and continued to show a 1.2% on-year advance.

Euroland posted a EUR 0.5 billion seasonally adjusted current account surplus in September.  Such had been in deficit previously.  Indeed, the deficit over the twelve months to September cumulated to EUR 59.3 billion in non-adjusted terms, almost twice as much as the EUR 30.9 billion deficit in the 12 months to September 2010.

Swiss M3 money grew 8.2% in the year to October.

Staff at the German Bundesbank now project only a 0.5-1.0% rise in real German GDP next year.

Thai GDP increased 0.5% in the third quarter and by a smaller-than-projected 3.5% from a year earlier.  Revised Singapore GDP advanced 1.9% last quarter and was 6.1% higher than in 3Q10.  Singapore also reported a 1.6% drop of wholesale turnover last quarter; such was 1.8% greater than a year earlier.  Taiwanese export orders in October were 4.4% greater than a year earlier.

Scheduled North American data releases today include the Chicago Fed National Activity Index (CFNAI), U.S. existing home sales, and Canadian wholesale turnover.  German Chancellor Merkel and Lockhart of the Federal Reserve will be speaking today.

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

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