More Risk Aversion Lends Support to Dollar

October 8, 2018

The dollar has risen today by 0.8% against the Chinese yuan, 0.6% relative to sterling, 0.4% versus the euro, 0.3% vis-a-vis the loonie, and 0.1% against the Swiss franc and Mexican peso.

Japan (Sports Day) and Canada (Thanksgiving) are observing holiday closures, but China reopened for business following a one-week observance of the Communist Revolution of 1949.

Share prices in the Pacific Rim plunged 3.7% in China, 1.8% in Hong Kong and 1.4% in Australia. There were also drops of 0.6% in South Korea and Taiwan and 0.9% in New Zealand and Singapore. Markets in Europe have so far fallen 1.9% in Greece, 2.2% in Italy, 0.9% in France, 0.8% in Germany and Switzerland, and 0.5% in the U.K. and Spain.

The 10-year Italian sovereign debt yield jumped 16 basis points and is near a 4-1/2 year peak. Its Greek counterpart rose nearly as much (14 basis points). 10-year sovereign debt yield declines of 4 basis points in Germany and 3 bps in France and Great Britain further contributed to widening long-term interest rate differentials.

Commodity prices reflect the latest tide of risk aversion. WTI oil is down 1.3% at $73.38, while Comex gold fell 0.7% to $1,197.30 per troy ounce.

Several factors are encouraging investors to be risk averse.

  • An intensifying dispute between the Italian government and the EU over Italy’s fiscal policy.
  • Worries that Chinese growth will slow because of a trade war. Chinese foreign exchange reserves fell $22.7 billion last month, most in 7 months, and officials at the Peoples Bank of China injected fresh liquidity via a lower reserve requirement in hopes of encouraging more bank lending.
  • Britain is running out of time to negotiate Brexit, and this issue is dividing the country’s political cohesion.
  • The Kavanaugh confirmation was a huge win for President Trump. The Republicans are playing a weak hand masterfully, proving that democracy governments do not necessarily deliver policies that majorities prefer. With each political win, Trump will be emboldened to pursue his agenda of divide and conquer both domestically and in foreign policy. Trade tensions will swell.

The Sentix measure of investor sentiment toward the euro area slid to a 4-month low in October of 11.4 from a reading of 12.0 in September and 32.9 at the start of 2018.

German industrial production recorded a second straight month-on-month decline in August, falling 0.3% after July’s slide of 1.3%. Production was 0.1% lower than in August 2017, compared to a 6.1% on-year increase recorded last January.

Ireland’s construction purchasing managers index dropped 2.1 points to an 11-month low in September of 56.2, which still highlights a decent pace of improving operating conditions.

Czech industrial production and retail sales posted monthly advances and also were 1.9% and 4.2% higher than a year earlier in August. Norwegian industrial production climbed 2.3% between August 2017 and August 2018.

French business sentiment improved last month according to the Bank of France in manufacturing, services and construction. Confidence among manufacturers hit a 7-month high.

Russian CPI inflation accelerated 0.3 percentage points to a 14-month high in September of 3.4%. That compares with 2.3% just 3 months earlier.

Swiss unemployment edged down 0.1 percentage point as expected to 2.5% in September on a seasonally adjusted basis.

China’s services PMI rebounded 1.6 points to a 3-month high of 53.1 in September but an 11-month low in that economy’s manufacturing PMI limited the composite PMI’s improvement to just 0.1 point. At 52.1, such was still down from 53.0 at mid-year.

Officials at the National Bank of Serbia’s Executive Board agreed to hold their benchmark interest rate at 3.0%. Such was last changed back in April when the second of two back-to-back 25-basis point easings was engineered. 2017 and 2016 each also experienced 50 basis points of rate reduction. A released statement highlighted several external risks that warrant policy caution: volatile oil prices, further likely Fed tightening, the end of ECB bond buying, and world protectionism.

The Bank of Israel is also conducting a policy review today and expected to keep its interest rate steady at 0.1%.

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

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