European Stocks and the Euro Suffer Setback

September 18, 2012

Share prices in Europe are having their worst session in two weeks.  Such have so far slumped by 2.3% in Italy, 1.8% in Spain, 1.3% in France, 1.1% in Germany, and 0.9% in Britain.

The euro declined 0.4% against the dollar, which otherwise is unchanged against the Swiss franc, sterling, kiwi and yuan.  Another relative weak currency today is the Aussie dollar, down 0.5% against its U.S. counterpart after published Aussie central bank meeting minutes that cited Aussie dollar strength as a negative growth risks and that left the door open to further monetary easing in the future.  The Australian 3.5% Official Cash Rate is at the top of the developed economy rankings.

The market tone has soured mostly on concern about dissension among euro area officials over when to activate the ESM bailout facility and how much to empower the European Central Bank with regional regulatory supervision of the area’s banks.  A further downer has been the Spanish government’s continuing waffling over whether to request aid from the ESM and submit to externally mandated austerity as a quid pro quo.

ECB data show that euro area banks have not reduced assets as much as intended.  Spain’s bad loan ratio hit a fresh record high of 9.9% in July.

And a third depressant on sentiment toward the euro area today has been the ZEW Institute investor survey results.  While these showed lessening worry about the future, they also revealed a further deterioration in investor sentiment regarding current economic conditions in German and Euroland. 

  • For Germany, the expectations index rise to a reading of negative 18.2 from minus 25.5 in August and minus 19.6 in July.  However, the current situation deteriorated to a score in September of 12.6 from 18.2 in August, 21.1 in July and 40.7 in April.  April had been the previous last month to show a rise in the expectations component, which punched in at +23.4 that month.
  • The euro area’s current conditions index of minus 76.3 in September was just 1.2 points better than in August and the fourth consecutive reading that was worse than minus 70.  Euroland’s expectations index increased to a four-month high of minus 3.8 from minus 21.2 in August.

Equities in the Pacific Rim fell overnight by 1.0% in China, 0.7% in Indonesia, 0.4% in Japan, the Philippines, Taiwan, and Singapore, and 0.3% in India and Hong Kong.

The yields on ten-year British Gilts and German bunds fell by four and two basis points.  Spain’s 10-year sovereign yield broke temporarily above 6.0% for the first time in two weeks.  The 10-year Japanese JGB increased two basis points to 0.82%.

The Bank of Japan’s Policy Board began a two-day meeting that is likely to result in new stimulus.  The yen remains excessively strong, growth prospects have worsened, and the ECB and Fed initiatives earlier in the month have thrown down the gauntlet for the Bank of Japan to do something, lest it invite more intense tailwinds behind the yen.

Gold and oil prices are 0.7% and 0.4% softer today at $1758.60 per ounce and $96.28 per barrel.

Sri Lanka’s central bank left its key interest rates unchanged as was expected.  The repo rate is 7.75%, 200 basis points lower than the reverse repo rate level.

Turkey is also holding an interest rate policy meeting today.  Polish central bankers will be meeting, but interest rate policy is not on its agenda.

There’s been a new potential gaffe in the Mitt Romney campaign, as a leaked video shows the candidate speaking before key donors and essentially writing off 47% of the U.S. electorate as self-perceived victims looking for a government handout.

Britain’s royal family won a French court ruling banning the publication of topless photos of Princess Kate.

British consumer price inflation decelerated further to 2.5% in August from 2.6% in July, 3.0% in April, and a peak of 5.2% last September.  The drop was in line with expectations and accompanied by news of a decline in the core CPI rate to 2.1% from 2.3% in August.  Retail price inflation slowed to 2.9% last month from 3.2% in July and a crest in September 2011 of 5.6%.  The RPIX an RPIY indices recorded 12-month increases of 2.9% in the latest reported month.

The ONS British house price index was unchanged on month in July and 2.0% higher on year.  This used to be calculated by the Department of Communities and Local Government.

There was disquieting property market news from China, where house prices rose in fewer cities in August than July and on the whole posted only a 0.1% on-month advance and a 12-month drop of 1.4%.  Hong Kong’s jobless rate held steady at 3.2%.  Filipino joblessness edged up to 7.0% last quarter from 6.9% in 1Q12.

New car registrations in the 27-nation European Union were 8.9% lower in August than a year before.  That’s a bigger on-year drop than the fall of 7.8% in July.

Irish and Portuguese producer price inflation accelerated in August to 6.0% and 4.0% from 4.5% and 3.0%, respectively, in July.  Greece’s current account swung to a surplus of EUR 0.64 billion in July from a deficit in the prior month.

The U.S. Commerce Department reports the second quarter current account deficit today, while the Treasury Department will be releasing its monthly capital flow figures.  The National Association of Home Builders index and weekly U.S. chain store sales are due as well.

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

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