Christopher Wood at Wall Street Journal:
World financial markets reacted bearishly to Germany’s surprise announcement last week banning “naked” short-selling of euro-zone government debt, derivatives and some financial stocks. Short selling is considered naked when it involves the sale of an asset that isn’t owned by the seller and isn’t borrowed to cover the position while it’s held. The news disturbed investors because of the unilateral nature of Germany’s action. It’s also seen as a potential prelude to other antimarket actions from Germany, or for that matter the U.S. and other Western nations, where the political backlash against free markets continues.
Also causing anxiety is the ominous rise in recent weeks in the three-month London interbank offered rate (Libor), the rate the most creditworthy banks charge each other for loans. This could result in yet another European credit crisis with banks becoming increasingly unwilling to lend to each other because of the interconnected holdings of “junk” European government debt. Bank for International Settlements (BIS) data shows that European bank exposure to sovereign debt in Portugal, Italy, Ireland, Greece and Spain totalled $2.8 trillion at the end of last year, accounting for 89% of international banks’ total exposure to those countries.
Moving beyond Europe, a further negative for investors to contend with has been China’s current tightening cycle; most particularly a machine-gun burst of antispeculation measures in the past two months aimed at its booming residential property market. China’s leadership, worried by growing social concerns about unaffordable apartment prices, will want to see official confirmation that both residential property transactions and residential property prices are falling, as indeed is now the case. Transaction volumes are down more than 50% from the levels reached in the first half of April. Prices will soon follow.
Meanwhile, in America bank lending continues to decline as does the velocity of money in circulation. If this persists, markets will face worryingly low GDP growth in the U.S. going into 2011. It’s this prospect that’s begun to be discounted in the recent stock-market correction, which has already seen the S&P 500 give up all its gains for the year. This will sooner or later pave the way for another round of fiscal easing in Washington when both the Obama administration and Congress give up on their current hopes of a normal U.S. recovery.
That political mood swing will again raise the protectionist risk in Washington, with the lightning rod being the Chinese exchange rate. Beijing has been signaling that it will resume incremental appreciation of the renminbi by the middle of this year. But with the renminbi having appreciated by 24% against the euro since late November, China’s leaders may be having second thoughts. A trade row between China and the U.S. on top of the growing concerns about a “double dip” in the West is the last thing markets will want to contend with. But they may have to.
Gwen Robinson at Financial Times:
A big swing up – and back down – for Chinese stocks at the start of the week spoke more eloquently than any analyst could about the market’s extreme sensitivity to any hint of price-curbing measures in China’s overheating property market.
And it’s also shed some light on the role of the country’s restricted A-shares.
After suffering big sell-offs ahead of the recent slide in western markets last week, Chinese stocks surged 3.5 per cent on Monday, their biggest gain since November, largely on reports that the government may defer a planned property tax for several years.
But on Tuesday, the Shanghai market closed down 1.9 per cent on a fresh media report that the government was preparing to step up measures to curb property prices.
As Bloomberg reports, the Economic Observer, a local newspaper, said Shanghai would start a property tax trial next month. In fact, the paper had run a report last month about the trial tax, also in its online English-language edition.
Tuesday’s reconfirmation nevertheless prompted some bearish predictions from analysts of a double-dip for the economy, barely a week after another round of property-induced fears hit stocks.
S&P/Case-Shiller released the monthly Home Price Indices for March (actually a 3 month average), and the Q1 2010 National Index.
The monthly data includes prices for 20 individual cities, and two composite indices (10 cities and 20 cities).
Data through March 2009, released today by Standard & Poor’s for its S&P/Case-Shiller Home Price Indices … show that the U.S. National Home Price Index fell 3.2% in the first quarter of 2010, but remains above its year-earlier level. In March, 13 of the 20 MSAs covered by S&P/Case-Shiller Home Price Indices and both monthly composites were down although the two composites and 10 MSAs showed year-over-year gains.
Housing prices rebounded from crisis lows, but recently have seen renewed weakness as tax incentives are ending and foreclosures are climbing.
Oh, if you don’t love the smell of naplam in the morning, you will not be happy with the market actions.
Per my delayed Bloomberg, Euro flirting with recent lows, at 1.2281. Gold off at $1187 an ounce. (which fits if you believe in deflation, even though gold does well in deflation, the inflationistas may have pushed it too far too fast and be exiting the trade). The Nikkei had a bad day and is off 3.1%. Stoxx 50 is off 3.03%, the FTSE is down 2.54%,
In case you also missed it, the US and China have temporarily buried the hatchet, escalating North Korean tension leading the US to act a tad more submissive and the Euro slide making this not exactly the best time to escalate a fight.
Meanwhile, Geithner is trying to talk up the market: “Geithner Says Europeans ‘Acting Forcefully’ to Mend Finances.” But absent internal rebalancing, fiscal austerity puts Europe on a deflationary path, and its only refuge is to really tank the euro to provide some lift via higher exports. And that will come at the expense of its trading partners, and is eventually likely to produce protectionist measures.
Alphaville has most of the datapoints you need this morning. There’s the European bourses, which started off low and basically haven’t moved all day; the FTSE 100 is now pretty definitively below 5,000 for the first time since September. There’s the flight-to-Germany trade: 10-year Bunds are now below 2.86%. There’s Libor, which is looking ugly and getting worse. There’s the euro, of course, which is now at 1.22. And, in case you want policymaker panic rather than market panic, there’s the proposed German short-selling ban.
All of which makes the downward lurch in US stock prices seem pretty reasonable, in context. Stocks are naturally volatile things, and when you decisively break a barrier like Dow 10,000, there’s no predicting what will happen next. But you might want to have another look at the spreadsheet that Frank Tantillo and I put together comparing the Dow at the bottom of the flash crash to the Dow now: not only is the average at pretty much exactly the same place, but nearly all of the component stocks are within a point or two of their flash-crash lows. (IBM, 3M, and P&G are the outperformers; Caterpillar and Microsoft are the underperformers.)
The S&P 500 is down 2.8% today: another day like this, and it’ll break back down into triple digits. Just remember, though, that it was not all that long ago the S&P was trading below 700. As ever, if you’re invested in stocks, make sure you have a strong stomach. And expect a lot more volatility going forwards.
Ryan Avent at Free Exchange at The Economist:
To what does all of this amount? Clearly, the outlook for the global economy has worsened in the last month, but by how much? Markets provide some evidence. In America, stocks are still up a good 50% from the lows hit early in 2009. Commodity prices, too, are well above the levels they plumbed during the darkest days of the recession. If the outlook isn’t as good as it was in April, it is still considerably better than it was last spring. But this grows less encouraging as markets continue to fall.
One interesting question is the extent to which the current downturn is rooted in structural factors rather than demand shortfalls. It’s easy to identify both. There are persistent trade imbalances which need to be resolved, labour market transitions which need to take place, and balance sheet holes—across sovereigns, firms, and households—that need to be filled. At the same time, developed economies continue to operate well below potential, and the deflationary signs in Europe and America point to too-timid central bank policy.
In the early stages of the recession, the addressing of structural factors was put on hold. Countries ran large cyclical deficits to offset the impact of falling demand, China paused its appreciation of the renminbi against the dollar, and so on. As European debt fears have grown, however, the ability of some countries to delay structural adjustments has vanished. Similarly, some economists have argued that it is now time for China to unleash its domestic demand, in order to provide a much-needed boost to the world economy.
So is the right approach now to embrace structural reforms and hope for the best? Obviously, when the capacity to delay adjustments has been met, there is little choice but to adjust. At the same time, these will be wrenching shifts, in some cases, and it would be preferable to make them over a period of decades rather than years. America would do well to solve its fiscal troubles through tweaks over the course of the next decade, as opposed to rapid, Greek-style crash austerity. But it’s just as important to ensure that these shifts take place in an environment of sufficient demand. Structural reform in a deflationary world will often mean battles over a shrinking pie, and those can quickly become bitter. This must be avoided.
It is going to become steadily more difficult for countries to put off needed structural adjustments to their economies. It is critical that central banks facilitate and accommodate these shifts. They’re going to trigger an increased demand for cash and security. If the Fed and the ECB continue on their disinflationary path, then the global economy may be in real trouble. A world in which demand collapses just as structural shifts can no longer be avoided is one we’d all prefer to avoid.
If you were hoping the economy was due for a turnaround soon, prepare to batten down the hatches instead. The money supply is shrinking at a rate not seen since the Great Depression — and the White House seems intent on repeating history:
The M3 figures – which include broad range of bank accounts and are tracked by British and European monetarists for warning signals about the direction of the US economy a year or so in advance – began shrinking last summer. The pace has since quickened….
It’s frightening,” said Professor Tim Congdon from International Monetary Research. “The plunge in M3 has no precedent since the Great Depression. The dominant reason for this is that regulators across the world are pressing banks to raise capital asset ratios and to shrink their risk assets. This is why the US is not recovering properly,” he said.
The US authorities have an entirely different explanation for the failure of stimulus measures to gain full traction. They are opting instead for yet further doses of Keynesian spending, despite warnings from the IMF that the gross public debt of the US will reach 97pc of GDP next year and 110pc by 2015.
Having spent almost $1 trillion to no effect, Larry Summers has apparently convinced President Obama that another $200 billion will “keep growth on track.”
UPDATE: Ben Herzon
Annie Lowrey at Washington Independent