Fresh Wave of Risk-Aversion: Share Prices Now Following the Slide in Long-Term Interest Rates

July 8, 2021

U.S. stock futures point to a drop of around 1.3% at the U.S. open. Share prices Thursday closed down by 2.9% in Hong Kong, 1.1% in Singapore, 1.0% in South Korea, 0.9% in Japan and 0.8% in China. European stock markets so far have lost over 1.5% in German and the U.K. and more than 2% in Italy, France and Spain.

The ten-year Treasury yield’s downward slide was extended by another six basis points overnight and, at 1.26% versus 1.72% on May 12, has reached 46 basis points. Ten-year sovereign debt yields fell 4 basis points today in the U.K., 3 bps in Germany and a basis point in Japan.

Doubts about post-pandemic growth have been fanned by several developments:

  • Reminders that the pandemic isn’t over. Global deaths just broke above four million, and the official count is suspected to understate the true number substantially. The pace of new U.S. cases is again rising after an extended pause, and most of these infections are the Delta Variant. Several places around the world have reimposed Covid restrictions, including Toyko where the Olympics are about to begin.
  • FOMC minutes released yesterday failed to signal a readiness to begin tapering bond purchases just yet. Yes, officials considered that eventual urgency but concluded that the litmus test of “substantial further progress” toward its employment and inflation goals had not yet been met.
  • Several other central banks are also promoting growth. In China, which was a huge growth engine after the Great Recession and in the second half of 2020, the central bank signaled concern about recent growth trends and a rising predisposition toward a more accommodative monetary stance.
  • Central banks in Malaysia and Sri Lanka finished monetary policy reviews that erred on the side of stimulus. Bank Negara Malaysia retained a record low policy interest rate of 1.75%, down from 3.0% prevailing at the start of 2020. The Central Bank of Sri Lanka had cut its interest rate by 250 basis points to 4.5% during the first seven months of 2020, and today’s statement observes weaker growth lately amid rising Covid infections.
  • The National Bank of Serbia‘s Executive Board also left its stance unchanged. The interest rate in 2020 had been cut 50 basis points in March followed by more cuts 25 bps in April, June and December to its presently record low of 1.0%. Today’s statement reads, “in conditions of pronounced global uncertainty caused by the pandemic, the NBS preserved price and financial stability for the eighth year in a row, and at the same time it is on an equal footing with the Serbian Government in providing support to corporates and households.” Officials also note that Serbia is in a minority of economies whose GDP in 1Q 2021 exceeded the pre-pandemic level.
  • The extreme polarization of U.S. politics is casting a huge shadow over the likelihood of President Biden achieving anywhere near the agenda that he has laid out. Eight months past the 2020 presidential and congressional elections, it’s become apparent to an anxiously watching world that America’s democratic foundations, like condos in Florida, are eroding.
  • In the shorter run, economic growth everywhere is hampered by supply chain shortages that are proving harder-than-thought to sort out.

The DXY weighted dollar index hit a 13-week high of 92.79 initial overnight but subsequently fell 0.4%. The U.S. currency’s net overnight movements are widely mixed, with losses of 0.9% against the Swiss franc, 0.8% relative to the yen, and 0.5% versus the euro but gains of 0.7% vis-a-vis the Mexican peso and Aussie dollar, 0.5% against the Canadian dollar, and 0.3% vis-a-vis the Chinese yuan.

Likewise, the price of WTI oil retreated 0.5%, while that of gold has strengthened 0.8%.

Japan’s current account surplus widened not quite as much as forecast to JPY 1.98 trillion in May, and the merchandise trade surplus was merely JPY 2 billion. Japanese bank lending growth slowed sharply further to a 12-month increase of 2.8% in June from 2.8% in May and 4.8% in April.

The German current account surplus of EUR 13.1 billion in May lay between surpluses of EUR 21 billion in April and EUR 7.1 billion in May 2020. Seasonally adjusted merchandise exports rose just 0.3% on month and were eclipsed by a 3.4% monthly jump in imports.

Irish and Dutch CPI inflation settled back 0.1 percentage point to a 2-month lows of 1.6% and 2.0% in June, while Hungarian CPI inflation rose to a 102-month high of 5.3% that months.

Consumer confidence last month improved to a 5-quarter high in Russia and a 15-month high in Indonesia but fell in Thailand to a record low going back to the Asian debt crisis in 1998.

British house price inflation according to the index of the Royal Institute of Chartered Surveyors hit the highest level since 1988 last month.

Just In: New U.S. jobless insurance claims last week totaled 373k, 2k above the prior week’s number. Analysts had expected the total to drop.

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