International Morning Comment
The market sell-off in equities gathered steam overnight, led of course by issues of financial companies. Fed Governor Poole argued against an emergency rate cut in comments last night, noting that the Fed would not act without hard evidence of damage to the real economy. That dashed a lot of hopes. At this stage the loss in asset values from the sell-off far exceeds any possible loss from sub-prime mortgage defaults, and it is about time for investors to start sifting through all this to pick up assets which have been caught in the downdraft. Financial firms in Canada and Australia are having the most difficulty obtaining funding just now, with central banks adding liquidity. Thus far the ECB has stayed out of the market. The immediate concern in the US centers on Countrywide Mortgage. On that front, Countrywide drew on its backup lines of some $11.5 billion, which should help stabilize things. They have additional liquidity lines should they need them. The MSCI Asia Pacific index was off 3.3%, for the largest loss in a year; markets in Korea and the Philippines were both off in excess of 6%. Turkish markets are also being hammered, with equities down 8% and the lire off 7% at about 7:00am, New York time. European markets are down sharply as well, with the DAX off 2.4% and the FTSE down just over 3.1%. In general Eurozone equities are down by between 2.4% and 3.15% (the CAC40) this morning. The flight to quality has led to another significant rally in government securities in Europe and most of Asia. Ten year yields were down by 9bp in Germany to 4.242%, with 2-year Schatz off 20bp, to 3.926%. Credit spreads have widened but are well off their highs in Europe, with the iTraxx Crossover index up about 20bp this morning, to 380bp. This certainly does not match the sell-off in equities. Ten-year yields rose 2bp in Japan while 2’s fell 4bp, as the flight to quality has shifted to shorter duration instruments. The yen once again soared, as the carry trade unwind gets into full swing; the corollary to that is weakness in the high yielders. The yen was up ¥2.4 per dollar at ¥114.22, rising ¥3.6 against the euro, to 153.15. With the exception of the yen the dollar is stronger, as the flight to liquidity continues. To caution once again, this is a flight to liquidity and the US has the largest and most liquid markets in the world. This is not a vote of confidence in the dollar per se, and dollar strength will reverse when this is over.
Oil prices are again suffering, battered by concern about the impact of this financial glitch on global growth and by the need to get out of what ever is liquid to meet other funding requirements. The US light crude contract is trading off $2.03/bbl to $71.30 with Brent down $2.36/bbl, at $69.28.
On the data front Eurozone consumer prices fell 0.2% in July, as expected with the Y/Y headline index up 1.8% Y/Y and core up 1.9% Y/Y.
UK retail sales jumped 0.7% in July, with June revised up to show a 0.4% increase. Australian average weekly wages costs jumped 1.7% in Q2, to be up 4.6% Y/Y. The RBA is stuck, with a liquidity crunch having to take priority over inflation concerns.