International Morning Comment
The Bank of Japan voted 8-1 to leave rates on hold, but Fukui maintained his hawkish stance and the economic assessment was left unchanged.
The appetite for bottom fishing risky assets has taken hold this morning, reversing some of the asset price shifts of the past two weeks. This is still a risky market, vulnerable to a late announcement of financial problems as foreclosures rise (it is still almost impossible to roll mortgage backed commercial paper), hedge funds face calls to withdraw funds, and private equity deals struggle to get done. Central banks are still inclined to remain on hold rather than cut rates to give markets a boost. And for now that stance seems to be paying off. Bank of America bought $2 billion of Countrywide, while the concerted discount window borrowing by four big US banks, not for need but to reduce the stigma for others of going to the discount window, was joined by a German bank, who presumably was grateful for the cover.
Equities are up, with gains in Asia particularly impressive. The NIKKEI rose 2.6% (to remain down by over 5% for the year), the Hang Seng up almost 2.8% (to be up just over 15% for the year) and the Aussie ASX 200 up about 2.6%, to be up 8.6% for the year. Hong Kong is getting an extra boost from the policy shift to allow Chinese to buy HK shares. European markets are also showing solid gains, rising by just over 1% in the UK and across most of the Eurozone (Spain is up by about half that). The DAX has risen by almost as much as the Hang Seng this year, up 14.8% to date this morning.
The yen is down sharply, even against a fading dollar, as carry trades resume. As would be expected the AUD and NZD hare stronger. The yen was down by about ¥2.4 against the euro at just after 7:00 am New York time. As we noted, there was a pile into short-term US government assets which had a counterpart in a strong dollar. That had nothing to do with dollar fundamentals, so the dollar is very vulnerable to spreading good news on the liquidity front.
Bond prices are down, with the short end underperforming as might be expected. Yields in 10’s are up about 2bp across Europe and in Japan, while they are up 7bp in Australia and 16bp in New Zealand. Yields on two’s have registered more of the price action, rising about 5bp in Europe, 3 in Japan, 11 in Australia and 29 in New Zealand.
Oil prices rose this morning, with the US light crude contract up 44 cents at $69.70/bbl at about 7:30 est; Brent was up 63 cents, at $69.33/bbl. It is not yet clear when Mexico will reopen wells shut by the passage of Hurricane Dean. In addition, some of the sell off in oil contracts was the result of the need to sell liquid assets rather that a shift in sentiment about oil prices. Gasoline and diesel prices at the pump have edged off the lows they reached on August 19th.
On the data front, German real GDP details were firm. German GDP growth slowed to 0.3% in Q2, about a 1.0% annualized growth rate, from a rise of 0.5% in Q1. Declining inventories subtracted 0.6 percentage points from growth. Construction was also weak, falling 4.8% for the quarter, almost 20% at an annual rate, as truly dreadful weather put projects on hold. In combination those two points of weakness suggest that Q3 real GDP growth will show a solid gain. Private consumption contributed 0.4 percentage points to GDP growth, while investment in machinery and equipment added another 0.2 points, rising almost 10% at an annual rate. The largest contributor was net exports, adding 0.8 points to growth; that is not likely to repeated going forward.
UK Q2 investment spending was somewhat disappointing, as it was up just 0.8% after falling 0.6% in Q1. Manufacturing investment fell by almost 6% in the quarter. Investment intentions remained firm even as the data on spending has been quite weak in the first half of the year. The Bank of England has been down the big revision road before and is not likely to by moved much by these data.