Festering Concerns about a Chinese Credit Crunch, European Banks, and Fed Tapering

June 24, 2013

Another steep drop in Asian and European share prices opened the final week before mid-2013.

  • Equities plunged 6.1% in China, 3.4% in the Philippines, 2.2% in Hong Kong, 1.9% in Indonesia, 1.6% in Singapore, 1.5% in Australia, 1.3% in Japan, South Korea and India, and 1.0% in Malaysia.
  • Stocks are down so far by 1.1% in France and Spain, 0.8% in Germany, and Italy, and 0.6% in Britain.

European bond prices have also slumped.  Ten-year Spanish sovereign debt yields rose above 5.0% in to a near 3-month high.  Italian, British and German 10-year yields have risen 10, 8 and 5 basis points.

Gold fell 0.8% to $1281.50 per ounce. Oil dropped 0.4% to $93.36 per barrel.

Risk-off psychology lent continuing support to the dollar, which climbed 0.7% against the kiwi, 0.6% versus the Canadian and Australian dollars, 0.5% relative to sterling, 0.2% vis-a-vis the yen, euro, and yuan, and 0.1% against the Swiss franc.

Moody’s warned that a credit crunch will hurt all but the largest of Chinese banks, and Goldman Sachs revised projected Chinese GDP growth in 2013 downward to 7.4%.

Negotiations among EU finance ministers collapsed on Saturday over forging a banking union.  German Bundesbank President Weidmann in a published interview had hawkish comments on the matter.

The Greek governing coalition lost one of its junior partners over the weekend, cutting its majority in parliament to just 3 seats and creating new uncertainty that promised fiscal cuts will be delivered.

In addition to these fresh sources of market agitation, investors continue to react to Chairman Bernanke’s press conference last Wednesday.  He indicated that if economic trends proceed as the Fed projects, that is sustained growth, falling unemployment and higher inflation, the central bank will start reining in its quantitative easing soon and eliminate such entirely by mid-2014.

The German IFO Institute released results of its June business climate survey, which were largely as anticipated.  The overall business climate ticked up 0.2 points to an 3-month high of 105.9 even though current conditions were 0.6 points lower than in May.  Improvement in June was concentrated in manufacturing.  Construction had a similar reading to May, and the wholesale and retail sectors produced sub-zero readings after positive ones in May.

The expectations component of the IFO German services climate survey fell six points to 3.6, a 7-month low, dragging the overall service-sector climate down 3.4 points to 11.6.  That reading compares to 20.4 in March and is even below those of 12.6 last October, when the business climate index bottomed, and 17.2 in June 2012.

Italian consumer sentiment unexpectedly spiked upward to a 15-month high of 95.7, and May’s reading was revised upward by 0.5 points to 86.4.

Dutch business sentiment edged 0.1 higher to a reading of minus 4.1 in June.

Economic sentiment in the Czech Republic rose by 0.5 points to minus 3.1 in June.  The improvement was shared roughly equally between consumers and businesses.

Finnish producer prices fell 0.2% in May, resulting in another 12-month decline, this time of 0.4% after a drop of 0.5% in the year to April.  Austrian industrial production rose 2.7% on month in April but just 0.7% on year.

CPI inflation in Singapore ticked upward to 1.6% in May from 1.5% in April.  Vietnamese consumer prices in June were 6.7% higher than a year earlier.  The Hong Kong current account deficit widened 30-fold to HKD 9.5 billion in the first quarter.

Scheduled U.S. economic data releases today include the Dallas Fed manufacturing index and the Chicago Fed National Activity index.  Mexico’s jobless rate and index of leading economic indicators will be reported, and the Bank of Israel announces its monthly interest rate decision.

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

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