Rising Possibility of Greece Leaving EMU Sends Euro to Multi-Month Lows as Stocks Also Plunge

May 14, 2012

The euro fell to its weakest dollar level ($1.2861) since January 19 and lowest yen value (102.94) since February 16.

Share prices have tumbled 2.4% in Paris, 2.2% in Frankfurt and 1.8% in London.

Ten-year German bund and British gilt yields sank by seven and nine basis points.  The 10-year Treasury futures suggests an opening yield below 1.80%.

Spanish and Italian sovereign debt prices are sharply lower.  Their yield spreads versus German bunds are more than 25 basis points wider than before the weekend.

Oil prices fell 2.1% to $94.11 per barrel and are 11.4% lower than the close on May 1.  Gold prices dropped 1.4% to $1562.5 per ounce, lowest since late December and 18.3% below last August’s peak level.

Equities in the Pacific Rim fell by 2.2% in Vietnam, 1.5% in Indonesia, 1.4% in the Philippines, 1.2% in Hong Kong, 0.8% in China despite a reserve requirement reduction, and 0.5% in India.  The Japanese Nikkei edged up 0.2% but still closed below 9,000.

The dollar rose 0.7% against the kiwi, 0.4% relative to the loonie, euro and Australian dollar, 0.3% versus the Swiss franc, and 0.1% against the yen.  The yuan slid 0.2% and is softer than its end-2011 level.  The yuan increasingly faces two-sided directional risk.

Greece still lacks a governing coalition, increasing the risk of another election next month and, more significantly, leading to mounting speculation that a Greek exit from the common currency area may be only weeks away. 

Germany’s governing coalition of Christian Democrats and Free Democrats suffered a big defeat in North Rhine Westphalia state elections yesterday.  Germany’s most populous region will continue to be governed by the Social Democrats and Greens, who together picked up 38 more seats in the state legislature.  The CDU won just 26.3% of the vote, lowest since the second world war, while the SPID took 39.1%.

Industrial production in the euro area fell 0.3% in March.  Analysts were looking for a rise of about 0.5%.  Output plunged 9.0% in The Netherlands, 2.7% in Ireland, 1.8% in Spain, 1.0% in Greece and 0.9% in France, easily offsetting the boost from a 1.3% rebound in Germany.  Industrial output was 2.2% lower than in March 2011.  Output in 1Q12 fell 1.9% at an annualized rate versus 4Q11 after having fallen 7.9% annualized in the prior quarter.

A cut in the People’s Bank of China reserve requirement ratio for large banks to 20.0% from 20.5% was perceived as too little too late.  This was the third such reduction in six months.  The action followed disappointing data released last Friday and had been anticipated for some time.  Chinese interest rates still have not been reduced.

Japanese domestic corporate goods prices firmed 0.3% in April but were 0.2% lower than a year before.  Export prices sank 0.8% on month and 2.8% on year.  Take away higher energy costs, and Japan is still grappling with significant deflation.

New Zealand retail sales declined 1.5% in volume terms last quarter.  Australian home loans and investment loans respectively firmed 0.3% and fell by 1.0% in March.

The Reserve Bank of India seemingly has less maneuvering room to ease policy following an unexpected acceleration of Indian WPI inflation to 7.2% in April from 6.9% in March.  Food prices were 10.5% greater than a year before.

German wholesale prices posted their smallest monthly rise of 2012, a gain of 0.5% in April, and were 2.4% higher than in April 2011.  The WPI climbed 7.5% on average in 2011 and continues to reflect elevated energy costs.

Italian consumer prices rose 0.5% last month and 3.3% from a year earlier.  Finnish consumer price inflation edged up to 3.1% in April from 2.9% in March.  Greek import prices increased 1.3% on month and 6.6% on year in March. Switzerland’s combined PPI/import price index dipped 0.1% in April and posted a larger 2.3% on-year drop. 

The French current account deficit of EUR 4.1 billion in March was not as large as anticipated and 22.5% smaller than the February shortfall.  Capacity usage in Sweden rose 0.7 percentage points to 88.4% last quarter.  Dutch retail sales were 2.7% greater than a year before in both February and March.  On-year Finnish retail sales growth slowed to 5.3% from 5.7% in volume terms in March but remained at 9.0% on a nominal value basis.  Ireland’s construction purchasing managers index weakened 1.3 points to another sub-50 reading of 45.4 in April.

No U.S. data releases are scheduled Monday in an otherwise busy week.  Mexican industrial production and Canadian auto sales will be reported, however.  EU finance ministers are meeting.

Copyright 2012, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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