International Morning Comment
The jitters are back, although markets have come back fairly sharply off their morning lows in Europe. Rumors are circulating that the Fed might cut rates today, as Bernanke, Paulson and Dodd are meeting to discuss market turmoil. The Bank of England lent £314 million at the penalty rate overnight among reports of tight liquidity. The ECB injected E46 billion above estimated needs this morning. German banks in particular are complaining of funding problems. WestLB indicated it has some E1.2 billion in sub-prime paper and there are stories circulating that a German state-owned bank received E3 billion in emergency funding.
Government bond prices are higher, with yields in the Eurozone down 2-4bp in 10’s and 7-9bp in 2’s. Ten-year bunds are yielding 4.233% with 2-year Schatz yielded 3.848% (at 7:50 am New York time).
China raised interest rates by 27bp overnight, in its ongoing effort to curb rapid growth and mounting inflationary pressures — although for the most part those are from rising food prices about which monetary policy can do little. This is the fourth rate hike this year, bringing the one-year deposit rate to 3.6%; lending rates were raised 18bp to 7.02%. Low deposit rates have encouraged funds to be shifted into equities. This does not appear likely to impact that at all.
Equities rose in Asia, with the MSCI Asia pacific up 1.2% overnight. Equities slipped in early trading in Europe but reversed in mid-day European trading to be up in most markets. The DAX was up 0.38% at just after 7:30am NY time; it was off 0.56% at 6:40am.
The yen and euro strengthened slightly against the dollar this morning, while the high yielders and emerging market currencies were softer as risk aversion returned to markets.
Oil prices slipped this morning as the worst fears about storm damage from Hurricane Dean abated. The US light crude contract was trading off 9 cents, at $71.03/bbl with Brent up 14 cents at $69.99/bbl.
On the data front, the Japanese All-industry index rose 0.2% in June after falling 0.3% in May. That was a bit weaker than expected. Machine tool orders were revised up slightly for July, to 18.8% Y/Y.
The Eurozone trade surplus was higher than expected, at E7.8 billion in June, up from E1.7 billion in May; the seasonally adjusted surplus rose to E5.2 billion from E3.9 billion. ZEW investor confidence fell sharply in August, which is not surprising. Expectations in Germany slipped from +10.4 to -6.9. At the same time current conditions held up fairly well, falling to 80.2 from 88.2.
Canadian consumer prices rose in line with expectations, with headline and core prices up 0.1% in July for a headline Y/Y gain of 2.2% and a core increase of 2.3%. The core rate was down from 2.5% Y/Y in June.