Return to Risk-Off Market Psychology

July 10, 2014

European equities and bond prices were sold off pretty hard.  The yen has firmed.  Gold spiked higher, and oil continues to slide.

The catalyst for this fresh wave of risk aversion was the failure of the parent company of Portugals Espirito Santo Financial to make a debt payment, but there are other causes, one being building fear that markets had become over-bought technically and some weak data released overnight.

Central bank interest rate policy decisions were announced today in Britain, Malaysia, Serbia, South Korea, and Indonesia.  Only Bank Negara Malaysia changed its rate, hiking such to 3.25% from 3.0%.

The yen climbed 0.3% against the dollar, which otherwise has risen by 0.4% versus the Aussie dollar, 0.3% relative to sterling, 0.2% vis-a-vis the loonie, euro, and kiwi and 0.1% against the yuan and Swiss franc.

Share prices in Europe have declined so far today by 2.6% in Spain, 2.5% in Italy, 1.7% in France, 1.6% in Germany, 1.1% in Switzerland and 0.9% in Britain.  Japan’s Nikkei fell by 0.6%.  Share prices declined 0.3% in India and China but rose 1.5% in Indonesia, 0.3% in Hong Kong, 0.2% in Australia and 0.1% in New Zealand.

The ten-year British gilt yield slumped eight basis points.  The German bund fell two basis points, while the Japanese JGB remained at the recent low of 0.54%.

Gold climbed 1.5% to $1,343.80 an ounce on the Comex.  The price of oil is down 0.5% at $101.75 per barrel.

The Bank of England’s Bank Rate was left at 0.5%, the level since March 2009, and the asset purchase program limit remains at GBP 375 billion.  No revelations about the MPC meeting were disclosed.  Minutes will be released on July 23rd.

Bank Negara Malaysia’s policy interest rate, which had been at 3.0% since a hike in May 2011, was raised to 3.25% in what was characterized as a normalizing move amid elevated inflation and a preemptive step against the risk of broader economic and financial imbalances.

The National Bank of Serbia, which had engineered 50-basis point interest rate cuts in both May and June, left its key policy tool at 8.5% this month.

The Bank of Korea kept its seven-day repo rate at 2.5%, the level since cuts of 25 basis points each in November 2012 and May 2013.  Projected South Korean growth and inflation were revised downward for 2014 and 2015.

As expected, Bank Indonesia reference interest rate was retained at 7.5%.

China’s trade surplus narrowed to $31.6 billion in June from $35.9 billion in May.  On-year export and import growth of 7.2% and 5.5% were both less than forecast, and so was the size of the surplus.

French industrial production posted monthly and on-year declines in May of 1.7% and 2.3%.  Italian industrial output dropped 1.2% in May and by 1.8% compared to May 2013.  All of these slides exceeded expectations.  Likewise, French consumer prices remained unchanged on year in June, a tad below street forecasts.

Japanese machinery orders were very disappointing, enough so to prompt a downward reassessment by officials.  Core private domestic machinery orders plunged 19.5% on month and 14.3% on year in May.  In April-May combined, such were 9.5% lower than the 1Q mean.  Foreign machinery orders dived even more sharply, dropping 45.9% on month.

In other Japanese data, consumer confidence rebounded 1.8 points to a reading of 41.1 in June, highest since December.  Consumer sentiment had been below 40.0 for the prior four months.  The tertiary index of service-sector activity only rebounded 0.9% in May following a 5.7% plunge in April, leaving such 2.5% below its year-earlier level.  Domestic corporate goods prices edged up 0.2% in June but was a hefty 4.6% higher than a year earlier, thanks to a monthly 2.9% leap in April when the consumption tax was raised.  Export prices were 1.1% lower than in June 2013, while import prices were up 0.6%.

Australia reported mixed June labor statistics.  The jobless rate climbed 0.1 percentage point to a 4-month high of 6.0%.  But employment increased 15.9K, marginally more than analysts were expecting.  The labor participation rate also edged up to 64.7% from 64.6%.

New Zealand’s business purchasing managers index improved for the first time since March, rising 0.7 points to a reading of 53.6.

Greek unemployment failed to dip in April as hoped but instead remained at 27.3%.

Britain’s goods and services trade deficit of GBP 2.418 billion in May was 17.8% wider than in April, thanks to a GBP 392 million increase in the merchandise trade deficit to GBP 9.2 billion.  The Royal Institute of Chartered Surveyors reported a slight drop in its house price balance index to 53 in June from 56 in May.

House prices in the euro area fell 0.3% in the first quarter both on quarter and on year.

Finnish industrial production slipped another 0.2% in May and recorded a 3.1% 12-month decline.  Dutch industrial output dropped 1.9% between May 2013 and May 2014.  Malaysian industrial production, by contrast, advanced 0.6% in May and 6.0% from a year before.

Consumer prices in the year to June fell by 0.4% in Portugal and rose just 0.2% in Sweden, 0.4% in Ireland, 0.7% in Romania, 0.9% in the Netherlands, and 1.9% in Norway.

U.S. jobless insurance claims will be released shortly for last week.

Copyright 2014, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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