Disastrous Day for Share Prices in Asia and Europe

May 23, 2013

Japan’s Nikkei-225 index plunged 7.3%, the most for any single session since March 15, 2011 and the second greatest daily drop since October 24, 2008.

Elsewhere in the Pacific Rim, stocks fell by 2.5% in Hong Kong, 2.0% in Australia, 1.9% in Taiwan and India, 1.8% in Singapore, 1.7% in Indonesia, 1.3% in China, 1.2% in South Korea, 1.0% in the Philippines, 0.6% in Malaysia and 0.5% in New Zealand.

Equity market losses in Europe amount to 2.8% in Germany, 2.6% in Britain, 2.4% in France and Italy and 1.7% in Spain.

The 10-year Japanese JGB yield was extremely volatile overnight, initially soaring as high as 1.0%, a level above which such hasn’t closed since early April 2012, then dropping back to 0.91% for a net advance of five basis points.  The JGB yield was as low as 0.45% just seven weeks ago.  The 10-year German bund and British gilt yields, by contrast, dropped three basis points today, and U.S. treasury yields are lower in futures trading.

The yen soared from a multi-year low of 103.75 per dollar on Wednesday to a high today of 100.83 and shows a net change since the Wednesday close of +1.1%.  The dollar also fell 1.1% against the Swiss franc but shows smaller net movements elsewhere — losses of 0.3% against the loonie, kiwi, and sterling, 0.2% versus the euro and 0.1% relative to the Australian dollar and an uptick of 0.1% against the yuan.

Gold rebounded 1.6% to $1389.40 per ounce, whereas oil continued retreating, falling by 0.9% to $93.40.  Copper plunged 2.6%.

There are a number of catalysts for today’s volatile market trading.

  • Bernanke’s testimony set the stage, with investors more convinced than before that QE3 will be reduced later this year.  I believe markets are over-reacting here.  The lesson of Japan’s experience these past two decades is that it’s not what monetary officials might hope to do but what economies will tolerate that ultimately dictates interest rate normalization.  With U.S. fiscal policy substantially restrictive, it will be hard for Fed officials to cut back stimulus, however gradually, and not jeopardize the economic recovery and efforts to lift inflation back to its 2% target.
  • China’s preliminary manufacturing purchasing managers index had a sub-50 reading in May for the first time since October, falling by 0.9 points to 49.6.  Sub-50 scores connote a contraction of activity.
  • Euroland “flash” PMI estimates for May suggest that GDP will post its seventh straight quarter-on-quarter decline in 2Q13.  The size of the drop seems likely to be about the same as the 0.9% annualized contraction between 4Q12 and 1Q12.
  • Disappointment that the Bank of Japan is not taking more active action against JGB volatility.

Revised British GDP data left growth at +0.3% between 4Q12 and 1Q12 and +0.6% from the first quarter of 2012.  Growth last quarter was led by personal consumption and inventory building.  Service-sector output rose 0.6% on quarter and 1.5% on year.  But construction slumped 2.4% on quarter and 5.7% on year, and production only rose 0.2% on quarter while dropping 2.3% from the first quarter of 2012.  Britain, a strong proponent of the misguided view that severe fiscal austerity will set people free, had a 0.8% decline in government consumption between 1Q12 and 1Q13.

The U.K. services index rose 0.6% on quarter in 1Q and by 1.5% on year.  Those results show an improvement from 4Q12, when the index was unchanged on quarter and up 1.2% on year but not back to the pace of 3Q12, when the index increased 1.2% on quarter.

The composite French purchasing managers index printed at 44.3 in May, the same reading as in April but above each of the readings in the first quarter.  Readings this low make a GDP contraction in 2Q unavoidable, even though the manufacturing component was at a 9-month high of 45.5.  Adverse pressure continues in the labor market and on operating profit margins.

The composite German PMI scored a 49.9 after 49.2 in April and 50.6 in March.  Germany may not be contracting but neither is it growing.  Also, some of the stability in 2Q reflects a weather-induced boost to construction that won’t be sustained.

Euroland’s composite PMI of 47.7 was at a three-month peak, but the April-May average score of 47.3 remained appreciably beneath the 50 threshold and even a tad below the first-quarter average of 47.7.  Weakness was shared by manufacturing (47.8) and services (47.5), and more deflationary tendencies are evident in the latest data.  The confidence of businesses in the service sector weakened in May despite the ECB’s rate cut, which was widely considered insufficient to end the region’s recession.

Expected inflation in Australia ticked up 0.1 of a percentage point to 2.3% in May. 

For the first time in a month, Japanese investors were net sellers of foreign bonds last week to the tune of JPY 804 billion, and bond and stock transactions in the latest week altogether generated a significant JPY 1.675 trillion net capital inflow.  As first learned on Wednesday, the BOJ upgraded its economic assessment for the fifth straight month.  The full assessment was released today.

Industrial production in the year to April rose 4.7% in Singapore, beating expectations, but fell 0.9% in Taiwan, which was a little more than the projected drop.  Singapore GDP in the first quarter was merely 0.2% greater than a year before, a marked deceleration from 1.5% in the year to 4Q12.

Italian retail sales posted drops of 0.3% on month and 3.6% on year in March.  Danish retail sales recorded a smaller-than-anticipated 1.5% on-year drop in April after falling by 4.4% in the year to March.  German real construction orders were 9.2% lower in March than a year before.  The 1Q13 on-year drop was 4.8%.

South Africa’s Reserve Bank will reveal its latest interest rate decision.  The key 5.0% rate is unlikely to be changed.

Scheduled U.S. economic data today included the FHFA house price index, new home sales, the Kansas City manufacturing index, a preliminary manufacturing PMI report, and weekly jobless insurance claims. 

Copyright 2013, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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