Waves of Pessimism Persist on Numerous Fronts

June 11, 2020

The spreading of Covid-19 infections has intensified in several areas including big U.S. states like California, Florida, and Texas. Total U.S. reported cases eclipsed 2 million and at 2.066 million now represent 27.6% of the global total. As forecast by medical experts, reopening businesses has occurred at a clear cost, and this trade-off can be seen in many other countries too.

Urban protests in the United States enter their third week without abating.

It’s mystifying, but financial markets were taken aback by the bleak long-term economic picture painted by the FOMC yesterday. The enormous reopening of an output gap in most countries has revived deflationary fears.

Political uncertainty regarding the United States. President Trump’s poll ratings sagging, increasing the possibility that he will not step down even if he loses the election.

Two central banks cut policy interest rates today, Ukraine by 200 basis points and Serbia by 25 bps, but the Central Bank of Uzbekistan’s key rate, which had been reduced a full percentage point in mid-April, was left unchanged at 15% because officials need to see a more compelling retreat of inflation before easing further.

Stock markets in Asia  and Europe were hammered earlier today, and U.S. stock futures show a big loss. Share prices closed down 3.4% in Singapore, 2.8% in Japan, 2.3% in Hong Kong, 2.1% in India, 1.3% in Indonesia, 0.9% in South Korea, and 0.8% in China. Equities fell 3.1% in Australia and 0.9% in New Zealand, and in Europe, losses so far amount to 3.4% in Italy, 3.2% in Spain, 2.7% in France and Germany, 1.8% in Switzerland and 2.3% in Great Britain.

The price of WTI crude oil tumbled 4.1% overnight.

The stampede out of riskier assets has depressed 10-year sovereign debt yields by 5-7 basis points in Germany, France, Italy, Spain, the Netherlands, Switzerland and Great Britain. The 10-year U.S. Treasury yield and British gilt yield are down 3 and 2 basis points, while the price of gold climbed 0.8% overnight.

Another beneficiary of the risk aversion has been the dollar especially against commodity-sensitive currencies. The greenback rose 2.2% versus the peso, 1.2% against the Australian dollar, 1.0% relative to the kiwi and 0.7% vis-a-vis the loonie and sterling. Smaller gains of 0.2% and 0.1% have occurred against the euro and yuan. Alternative safe-haven currencies like the yen and Swiss franc have respectively held steady and dipped 0.1% against the dollar.

More sobering data were reported today.

Industrial production in Italy fell 19.1% on month and by a slightly greater-than-expected 42.5% on year in April.

The quarterly business outlook survey done by Japan’s Ministry of Finance produced very weak second-quarter readings of -47.6 among all large firms, -52.3 for large manufacturers and -45.3 for large non-manufacturers.

Mining output in South Africa plunged 34.1% on month and 47.3% on year in April, marking the largest declines since at least the beginning of 1981. South African factory output fell 1.2% in March and 5.4% on year, which represented the tenth 12-month decline in a row.

Greece had 14.4% unemployment in March, down from 16.4% at end-2019, but that improvement no doubt reversed subsequently.

Mexican industrial production posted record on-month and year-on-year drops of 25.1% and 29.3% in April. That month also saw Malaysian industrial production slumping 30.5% below March’s level and by 32% from a year earlier.

Over the twelve months through May, consumer prices showed no net change in Sweden and a 0.5% decline in Ireland, which constitutes the biggest on-year drop in 61 months.

Just in: U.S. producer prices rebounded 0.4% in May from April’s 1.3% decline but were still 0.8% lower than a year earlier. April’s rise was spearheaded by a 4.5% monthly increase in the energy component after a 19% plunge in April. Excluding food and energy, the so-called core PPI rate was halved to 0.3%.

And the number of  new U.S. jobless insurance claims fell last week for the tenth time in a row but at 1.542 million was above a million for a twelfth straight week. The latest four-week average of new jobless claims is 2.002 million, and the latest total of continuing jobless insurance claims remained greater than 20 million at 20.929 million.

Copyright 2020, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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