INTERNATIONAL MORNING COMMENT
Another nasty day in the markets, with global equities down particularly sharply in Asia, and weaker elsewhere. Asian markets were off by over 2.0% at the close, with the NIKKEI down 2.19%, the Hang Seng off 2.87%, and the Aussie ASX 200 down almost 3.0%. Japanese banks admitted to small US sub-prime exposure while there was a report by an Aussie hedge firm, Basis Capital, that losses may exceed 80%. The MSCI Asia-Pacific index fell 2.3% to a 3-month low. Among the major Eurozone markets the CAC 40 has been the hardest hit, down just over 1.5% at about 7:00am, with the DAX off 0.83%. In general financial shares are leading the way down. Bond markets have strengthened again, with yields down about 6-7bp in 10’s in Japan and Australia, bringing Japanese yields to 1.625%, a rate not seen since early last May, where there was a bit of market instability as well. Two year yields fell 4bp, flattening the curve. Yields were off 3-4bp in the Eurozone in 10’s, and 8-9bp in 2’s, for a steeper curve there. The Bank of Japan again drained liquidity from the system while the ECB refrained from adding one-day funds, suggesting in their mind things are returning to normal, despite market jitters — the day is young. The liquidity squeeze seems to have eased a bit but markets are still very risk averse and jittery. The yen continued to strengthen this morning even against a rising dollar, as carry trades were unwound. Euro yen was up ¥1.82 at 157.28 at about 7:00am with the yen up ¥0.89 against the dollar, at 116.69. Sterling slipped on slowing wage growth and a 9-0 vote for no rate change and no clear signal that another would be needed in the August BoE meeting minutes; it was trading at $1.9898.
Oil prices rose this morning as the hurricane season starts in earnest. The tropical depression in the Gulf is not a threat to oil facilities and the path of tropical storm Dean is still uncertain, but that has not prevented a price jump. The US light crude contract was trading up 55 cents to $72.93/bbl with Brent up 58 cents to $71.09/bbl.
On the data front the UK labor market continued to firm, with the unemployment rate slipping to 2.6% in July from 2.7% in June on a drop in the claimant count of 8,500. The ILO rate through June was steady at 5.4%. Wage growth slowed; wage increases including bonuses rose 3.3% Y/Y in July, down from 3.4% in June while excluding bonuses growth slowed to 3.4% from 3.5%. Unit labor costs, measured 3 months/Y/Y, were up 0.4% in June.
Australian consumer confidence fell 8.1% in August, to 111.1, still well above the “neutral” level of 100. The RBA rate hike played a role, as there has been a pattern of slumping confidence after each move, followed by a recovery. The wage cost index rose 1.1% in Q2, up from a 1.0% Q1 rise, to be up 4.0% Y/Y.