Concerns about Europe

February 16, 2016

European markets had rallied Monday, spurred by upbeat remarks from ECB President Draghi regarding the economic outlook and the readiness of central ban policymakers to act further to stimulate growth and boost inflation closer to target.  But Tuesday saw a return of risk aversion related to concerns about the health of European banks and the release of new data underscoring how far investor sentiment in the region has deteriorated recently.

Share prices are down so far by 1.1% in Greece and 0.4% in Germany.  The British Ftse rose 0.6%, in contrast. 

The German ZEW Institute reported a 16-month low in its German investor expectations index, which fell to +1.0 in February from +10.2 in January and +16.1 in December.  This data series long-term average is 24.6.  The drop in investor expectations was accompanied by a 12-month low in perceptions of current conditions, which printed at 52.3, 7.4 points lower than in January.  The ZEW expectations index for all of the eurozone dropped to 13.6 from 22.7 in January and 33.9 in December, and such was associated with a 0.5-point slide in current conditions to a reading of minus 8.0.

Share prices in China jumped 3.3% on better-than-expected money and loan growth data.  New yuan loans surged to a record high in January of CNY 2.51 trillion, helped by the Lunar New Year which generates a need for cash.  On-year M2 money growth accelerated to 14.0% in January, higher than any month’s reading in 2015.  M1 growth shot up to 18.6% from 15.2% in December, and M0 grew 15.1%, up from 4.9% the month before.

In other markets around the Pacific Rim, equities rose 1.8% in Taiwan, 1.6% in Hong Kong, 1.4% in Australia, South Korea and Singapore but fell 1.4% in Singapore and 1.5% in India.  The Japanese Nikkei edged up only 0.2% after Monday’s leap of more than 1000 points.

Oil officials of Saudi Arabia and Russia have reached a tentative accord to hold their oil production at January’s levels.  Before discipline in the oil market can be restored, however, other producers will need to be brought into the fold.  Inventories need to be trimmed, and global demand has to incline.  January levels are probably too high to accomplish this in a timely manner.  West Texas Intermediate oil rose 1.4% today but remains below $30 at $29.85 per ounce.

Comex gold bounced 0.4% following Monday’s steep decline and is quoted at $1,214.40 per troy ounce.

Ten-year sovereign debt yields fell four basis points in Japan but rose 3 bps in Britain and a basis point in Germany.  A higher U.S. Treasury yield and U.S. share prices at the open are indicated in futures trading.

The Japanese yen recovered 0.6% against the dollar, a sign of safe haven-seeking capital flows.  The dollar also fell 0.5% and 0.4% against the Australian and Canadian dollars.  But the greenback is up 0.3% relative to the yuan, 0.5% against the kiwi and 0.1% vis-a-vis sterling.

Weak New Zealand data revived speculation of a further central bank easing there.

  • Retail sales volume fell 1.2% last quarter, trimming the year-over-year increase to 5.3%.
  • A measure of expected inflation over the coming two years fell to a 22-year low of 1.63% this quarter.

The Bank of Korea kept its seven-day repo rate at 1.50%, but there was a dissenting vote cast in favor of a rate cut.  The won fell 0.7%.

Subdued British price statistics were reported.

  • Consumer prices dropped 0.8% on month in January and were just 0.3% higher than a year earlier compared to a 2% Bank of England target.  Core inflation eased to 1.2% from 1.4%.
  • Producer output prices dipped 0.1% on month and fell 1.0% between January of 2014 and January 2015.  Core PPI-O inflation eased to zero from 0.1%.  Producer input prices fell 0.7% on month and 7.6% on year.  Its core rate was negative 8.2% in January.
  • The house price index compiled by the Office of National Statistics slid 0.2% in December, cutting the 12-month rate of increase to a 3-month low of 6.6% from 7.7%.

Minutes from this month’s Reserve Bank of Australia Board meeting retained an easing policy bias but express a disinclination to act on such unless growth and/or inflation evolve below policymakers’ expectations.

Norwegian real GDP shrank 1.2% last quarter and ticked up just 0.1%, excluding North Sea energy activity.

Danish producer price inflation moved more deeply into the red in January, posting a 12-month drop of 2.1%.

Italy’s trade deficit in December of EUR 6.02 billion surpassed expectations by over 50% and followed a November deficit of EUR 4.4 billion.

On-year Czech GDP growth slowed to 3.9% last quarter from 4.7%.

Scheduled U.S. data releases today are the Empire State manufacturing index, the National Association of Home Builders index, and Treasury-compiled capital flows.  Philadelphia Federal Reserve President Harker, who recently replaced Plosser, speaks publicly today.  Canadian existing home sales get reported, too.

Copyright 2016, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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