Share Prices Rally Despite Lack of Progress Resolving European Debt and Banking Crisis

June 6, 2012

Share prices have risen 2.9% in Spain, 1.8% in France and Japan, 1.5% in Germany, 1.2% in Britain (after Monday-Tuesday closure), 3.3% in Indonesia, 2.7% in India, 1.4% in Hong Kong, 1.3% in New Zealand and Vietnam, 1.1% in South Korea, 0.8% in Taiwan and The Philippines, 0.6% in Malaysia, and 0.3% in Australia.  Chinese stocks dipped 0.1%.

Amid this new appetite for risk, however fleeting, the yen fell 0.6% against the dollar, which otherwise dropped 2.2% against the Australian dollar, 0.9% versus the kiwi, 0.6% relative to the loonie and sterling, 0.4% against the euro and Swiss franc and 0.1% versus the yuan.

Gold and oil prices rallied 1.1% and 1.0% to $1634.50 per ounce and $85.10 per barrel.

The 10-year British gilt and German bund yields are higher by 13 and 5 basis points, and the 10-year JGB has edged up a single basis point.

Yesterday’s phone conference among Group of Seven finance ministers produced no announced joint steps to defuse Europe’s sovereign debt crisis nor action to recapitalize Spanish banks and other ailing financial institutions in the region.  Germany still is resisting the floatation of euro bonds and the eurofication of all banks.  Spain’s Treasury minister indicated that Spanish banks could use some financial support but stopped short of seeking a general bailout for his country.  Moody’s downgraded the credit rating on seven German banks.

Hopes persist for a breakthrough forced by market circumstances.  Investors eagerly await today’s ECB press conference with a minority of around 20-25% of analysts thinking there will be an immediate interest rate cut.  Even more look for a strong hint of a cut at July’s meeting.  Beyond today’s ECB meeting, markets are waiting for June 17 elections in Greece and France and for the G20 Los Cabos summit.

German industrial production sank 2.2% in April, reversing the increase in March and leaving April’s level 1.0% lower than the 1Q12 average and 0.7% below the level in April 2011.  Production of capital goods and consumer goods respectively fell by 3.6% and 3.7% between March and April.

Spanish industrial output adjusted for working day variations was 8.3% lower in April than a year earlier.  That drop is about 25% greater than forecast.  Czech industrial production edged 0.1% higher on month and rose 2.2% on year in April.  The Czech trade surplus of CZK 22.0 billion in April was 40% smaller than in March.

Revised Euroland GDP data showed no growth in the first quarter and a dip of 0.1% from a year before.  On-year growth had been reported initially as zero.  Between 4Q11 and 1Q12, consumer spending was unchanged.  Business investment fell by 1.4% and depressed GDP growth by 0.3 percentage points.  Government spending edged up 0.2%.  Net exports augmented growth by 0.4 percentage points, but inventories depressed such by 0.2 percentage points.  Between 1Q11 and 1Q12, GDP advanced 1.2% in Germany but fell by 6.2% in Greece, 2.2% in Portugal, 1.4% in Cyprus, 1.3% in Italy and Holland, and 0.4% in Spain.  French GDP was unchanged on quarter and up only 0.3% on year.

Australian real GDP advanced 1.3% in the first quarter and by 4.3% from 1Q11.  The quarterly increase was twice as much as predicted.  Investment and consumption respectively climbed by 2.9% and 1.4% from 4Q11, but net exports exerted a significant drag as the terms of trade fell.

German and British purchasing manager surveys for construction in May were reported. Each showed weakening inflows of new business.

  • The German index printed at 44.7, down from 49.8 in April and 55.7 in March.
  • The U.K. index slid to 54.4 from 55.8 in April and 56.7 in March. 

Ireland’s service-sector purchasing managers index, moved below a reading of 50 for the first time since January, falling 3.3 points on month to 48.9 in May.

British shop prices, a leading indicator of inflation, rose 1.5% in the year to May, up from an on-year increase of 1.3% in April.

In a state election with national implications, Wisconsin’s Conservative Governor Walker won a challenge to recall him by a margin of 6-7 percentage points.

The ECB and National Bank of Poland make interest rate announcements today.  ECB President Draghi’s press conference starts at 12:30 GMT.  The U.S. releases data on productivity, unit labor costs, oil inventories, and the Fed’s Beige Book on regional economic conditions.

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

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