Extremely Volatile Markets

December 16, 2014

A  650-basis point hike in the Central Bank of Russia’s one-week auction rate to 17% stemmed the ruble’s plunge only momentarily, and the currency posted its greatest daily drop since the 1998 default.  Earlier today, it approached 80 per dollar, having only traversed the 40 level in October.  There is talk that capital controls or even another default are not far away.  The 10-year Russian bond yield rose 317 basis points, and Russian share prices dived about 15%.

More than 125 people, mostly young students, were killed by Taliban militants at a Pakistani military school.

West Texas Intermediate oil plunged by a further 3.3% to $54.05 per dollar.  The price has tumbled in half since June.  As the decline accelerates, presumptions of tightening even by the FOMC need to be considered more critically. 

The 10-year U.S. Treasury yield in futures trading fell another 7 basis points to 2.05%, nearly a full percentage point under its year-earlier level and down 27 basis points in the past month.  Other 10-year sovereign debt yields are off 10 basis points in the U.K., 8 bps in Canada and a basis point to just 0.35% in Japan.

Fading confidence that Greece will remain in the euro area saw the 10-year Greek yield firm another two bps to 8.57%, 794 bps greater than the German bund.

The Japanese Nikkei sank 344 points or 2.0%.  In other Pacific Rim stock markets, equities fell by 2.4% in Singapore, 2.0% in Indonesia, 1.6% in Hong Kong, and 0.9% in South Korea but rose 2.7% in China after news that foreign direct investment in that economy was 22.2% higher in November than a year earlier after 12-month rises of just 1.3% in October and 1.9% in September.

However, China’s manufacturing purchasing managers index slipped below the no change 50 threshold in December for the first time since April, printing 0.5 points lower at 49.5.  With the subindex for inflation below 50 and lower than October’s level, this report increases the likelihood of another interest rate cut soon by the People’s Bank of China.

Equities in Europe shows losses so far today of 1.7% in Spain, 1.2% in France, 1.1% in Switzerland and Italy, and 0.9% in Germany.

The British Ftse is unchanged, helped by the Bank of England’s reported bank stress tests.  All banks except one were found to have more capital than the required threshold to weather a shock.  In subsequent comments, Governor Carney highlighted the mounting risk that plunging oil prices could depress expected inflation excessively.

British consumer prices, which had been forecast to be unchanged in November, instead fell 0.3%, cutting the 12-month rate of increase to a 146-month low of 1.0%.  Core CPI inflation dropped 0.3 percentage points to 1.2%, and RPIX inflation declined by 0.4 percentage points to 2.0%.  Producer output prices recorded a 0.1% on-year drop, and producer input prices plunged by 8.8% in the year to November.  Finally, the DCLG gauge of U.K. house price inflation declined 2.1 percentage points to 10.4% in October.

The Swedish Riksbank left its repo rate at zero, revised future core inflation downward, moved the likely timing of a first interest rate increase further into the future (2H16), and indicated that additional unconventional measures of monetary stimulus are being considered.

Hungary’s key central bank interest rate was left at 2.1% as expected.  CPI inflation is below zero.

The market repercussions started by the free-fall of oil prices has halted the dollar’s prior uptrend.  Compared to Monday’s close, the dollar has fallen 1.6% against the yen, 1.0% relative to the kiwi, 0.9% viv-a-vis the euro and Swissie, 0.7% against sterling but just 0.1% versus the loonie and not at all against the yuan.

Preliminary PMIs were reported for Japan, Euroland, Germany and France.

  • Japan’s manufacturing purchasing managers index printed 0.1 point higher at 52.1 in December, with jobs growth at a 4-month high.
  • Euroland’s composite PMI score of 51.7 was above November’s 16-month low of 51.1 but otherwise the weakest reading of 2014.  The fourth-quarter average score, 51.6, was the weakest quarter since 3Q13 and 0.7 points below the 3Q14 mean.  The forces of disinflation remain relentless.  Manufacturing touched a 5-month high of 50.8, and services registered a 2-month high of 51.9.  The report would have been worse if not for the best performance by peripheral economies in the monetary union since July.
  • The German composite PMI fell 0.3 points to an 18-month low of 51.4.  Manufacturing was at a 2-month high of 51.2, but services hit a 17-month low of 51.4.  The data’s momentum suggests the possibility of negative GDP growth returning in the first quarter of 2015.
  • The French composite PMI rose 0.2 points to 49.1, which has been below the 50 threshold since May.  Services (49.8) were at a 4-month high and connoting near stabilization, but manufacturing dropped to 47.9, a 4-month low.

Measures of investor sentiment reported by Germany’s ZEW Institute were more upbeat than the above PMI reports that reflect the perceptions of purchasing managers.

  • The German ZEW expectations index improved sharply to a 7-month high of 34.9 in December from 11.5 in November and -3.6 in October.  Current conditions went up 6.7 points to a reading of 10.0, a 3-month high.
  • Euroland’s ZEW expectations index advanced 20.8 points to 31.8, a 5-month high, but current conditions deteriorated to negative 62.8 from -59.7.

The euro area posted a larger trade surplus in October.  On a seasonally adjusted basis, such widened 8.4% to EUR 19.4 billion.  The unadjusted EUR 24.0 billion surplus followed a EUR 18.1 billion surplus in September.

The EUR 5.397 billion Italian trade surplus in October was more than twice the size of September’s surplus and 2.7 times bigger than expected.  The surplus in January-October exceeded its year-earlier size by 47%, as exports firmed 1.6% while imports contracted 1.8%.

Minutes from the Reserve Bank of Australia’s policy meeting earlier this month provided no surprise and convey the message that no policy change is in the immediate offing. 

U.S. housing starts and building permits, respectively 1.6% and 5.2% smaller in November than October, also fell somewhat short of analyst forecasts.  The FOMC’s two-day policy meeting begins today.  There’s a press conference and new forecasts tomorrow.  If there’s to be a surprise, it would be retention of the “considerable time” forward guidance that perhaps could be based on the slide in oil prices if one expected such to last more than a year.

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

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