Move Out of Risk Assets Extended

March 23, 2018

Stocks slumped 974 points, or 4.5%, overnight in Japan. Equities in the Pacific Rim also lost 3.4% in China, 3.2% in South Korea, 2.8% in Hong Kong, 2.0% in Australia and Singapore, 1.7% in Taiwan, 1.2% in India, and 1.0% in New Zealand. The sell-off continued in Europe with drops thus far today of 1.6% in Germany, 1.5% in France, 1.1% in Spain, and 0.7% in the U.K., Greece and Switzerland.

Gold, which generally thrives on risk aversion, advanced 1.1% overnight. Oil firmed 0.4%, but copper slipped slightly.

The 10-year JGB yield dropped two basis points and at a mere 0.01% is closely aligned with the Bank of Japan’s target of “around zero percent.” The 10-year British gilt yield also has dipped two basis points, but the 10-year German bund yield, which had fallen 7 bps yesterday, remains steady at 0.52%.

Compared to bonds and stocks, foreign exchange movements have been muted. The main theme continues to be yen strength. Japan’s currency rose past the 105 per dollar level and shows a net overnight advance of 0.4% against the U.S. currency. The dollar also fell 0.2% against the kiwi, yuan, and Swiss franc and by 0.1% relative to the euro and Australian dollar. The U.S. dollar firmed 0.2% against the peso and 0.1% vis-a-vis the loonie and sterling.

The People’s Bank of China yesterday engineered the first short-term interest rate hike of 2018, albeit just a 5-basis point increase in its one-week reverse repo to 2.55%. The move was the first change under a new governor, Yi Gang, and was a typical response to this week’s change in the federal funds rate.

Today, the Bank of Russia’s one-week repo was cut by another 25 basis points. The reduction follows recent decreases of 50 basis points each last September and December and 25-bp cuts in October and February. Russian inflation is at a record low and running at only about half the central bank’s medium term target. More cuts in the central bank interest rate are expected.

Japanese total CPI inflation rose 0.1 percentage point in February to 1.5%, most since March 2015. Core CPI, which omits fresh food costs, also edged up a tenth of a percentage point to 1.0%, while the CPI index that excludes energy as well as perishable food, was at 0.5%, most since July 2016. All three indices posted seasonally adjusted February-on-January upticks of 0.1%. The energy component intensified, climbing 0.9% on month and 7.0% on year.

European Union leaders continue to summit in Brussels. Priorities include how to respond in a unified way to the U.S. import tariffs and the Brexit talks, whose timetable is fast approaching the 2-year limit’s midpoint.

Singapore CPI inflation accelerated in February to all of 0.5%. Core CPI of 1.7% was at a 3-year high.

Spanish producer prices rose 1.3% on year in February. In the same interval, Danish retail sales climbed 1.7%.

Unemployment figures were released by Norway (2.5% in March), Turkey (10.9% in January) and Poland (6.8% in February).

Still to come: U.S. new home sales and durable goods orders as well as Canadian retail sales and consumer prices. The Atlanta Fed President Bostic and the Minneapolis Fed President Kashkari will be speaking publicly today.

Copyright 2018, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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