Major Risk-Off Alert – Currency Thoughts
Major Risk-Off Alert
August 5, 2024
Reminiscent of October 19, 1987, a.k.a Black Monday when a difficult Friday session coalesced into a category 5 stampede out of risky assets culminating in a record 22.6% single day plunge in the DOW, today has seen a cascade of eye-popping equity market drops. And like then, an element of the storm has been a government effort top override currency market forces. At the Plaza Accord of September 1985, major governments joined forces to depreciate the dollar and thereby rectify a perceived excessive U.S. trade deficit. By 1987, however, officials declared that operation over and took steps to support the U.S. currency.
The destabilizing force this time has been a resurgence of the Japanese yen, now 14% stronger than its recent low against the dollar, triggered by a the Bank of Japan’s announced interest rate hike and other plans to retreat from a ultra-loose monetary policy. This reversal was superimposed on actions by other central banks to lower interest rates and in the Fed’s case a disappointing decision to delay the initial rate cut for six more weeks.
Monday’s equity market sell-off began in Asia led by a 12.4% dive in Japan’s Nikkei-225 index and including plunges 8.8% in South Korea, 8.4% in Taiwan, 5.4% in Indonesia, and 3.7% in Australia. Equities in Europe of lost over 3% already today in Germany, Spain, Switzerland, and Italy. The British FTSE is down 2.9%, and key U.S. stock futures are 5.3%, 3.9%, and 2.7% lower in the case of the Nasdaq, SPX and DJIA, respectively.
Bitcoin’s price has sunk 12.7% so far today, and prices for gold and oil are down a bit more than 2.0%.
The rush into fixed income securities has seen 10-year sovereign debt yields slump today by 16 basis points in Japan, 7 bps in Germany, 8 bps in the United States and 6 basis points in Great Britain.
The weighted DXY dollar index fell to its weakest level since January. The greenback is 3% weaker today versus the yen and 0.7% softer against the euro.
Black Monday in 1987 elicited an immediate policy counterattack, and the incident miraculously was not associated with a recession. Optimists will tell their clients not to panic, noting that equities always have proven to be a lucrative asset class over the long run. That mantra overstates the case. It took the DOW until November 23, 1954 to recover to its pre-depression high of 382 set in September 1929. More recently, Japan’s Nikkei only earlier this year moved above all-time record high close of 38,916 reached on the final business day of 1989, some 35 years earlier. If 35 years and 25 years don’t constitute a long run span of time, what does?
Recession fears last week were stirred by a series of weaker-than-expected economic data reported not only by the United States but also in a number of other major countries. Geopolitical concerns have been accentuated by a rising chance of a full-blown pan-Middle Eastern war. A failed assassination attempt on Donald Trump, and President Biden’s decision to drop out of the U.S. presidential race have given the appearance that nobody is going to play a leadership role in handling the shared challenges facing all countries around the world. With hindsight, it’s not surprising that investors are losing hope.
Today’s economic data menu mostly featured another round of purchasing manager surveys, mostly weaker than consensus expectations.
Euroland’s final July composite and service sector PMI readings of 50.2 and 51.9 each represent four-month lows. The German, Italian and Spanish PMIs were each below June levels, and while the French index did rise, such remained below the 50 line of neutrality between an expanding and deteriorating economy. Despite Euroland’s low pulse rate, inflation is receding only slowly.
Britain’s composite and service PMIs in July of 52.8 and 52.5 were above June levels but below those seen in May.
India‘s composite and service PMIs slid to 2-month lows, and China‘s composite reading of 51.2 was its lowest in nine months. Australia‘s composite and service-sector PMI readings of 49.9 and 50.4 fell to their lowest levels since January. Russia‘s composite and service PMIs of 51.9 and 51.1 rose, in contrast, to 3- and 4-month highs.
Non-oil PMI readings from the United Arab Emirates, Saudi Arabia and Egypt constituted 34-, 30- and 2-month lows.
Japan’s composite and service sector PMIs had settled at 7- and 22-month lows in June but rebounded to two-month highs last month.
But Singapore‘s private PMI reading of 57.2 was at a 21-month high, and South Africa‘s 49.3 reading was at a 2-month high. Lebanon‘s 48.3 score was the best since April but likely to get reversed as the country becomes engulfed in a wider war. Hong Kong‘s private PMI posted below 50 for a third straight time although above the May and June levels. Sweden‘s readings of 52.5 overall and 53.8 on the service sector were at 4-month highs.
Producer price figures for June were also released today in Euroland. A monthly 0.5% rise was the steepest in nine months and associated with the least negative year-on-year comparison (-3.2%) in a year. The driving force behind these results involved energy, which jumped 1.6% month-on-month.
Turkish consumer prices in July (+3.23% versus June) increased at least 3.0% for the sixth time in the past seven months, but their 12-month rate of increase receded for a second straight time to 61.8% from 71.6% in June and 75.5% in May. Producer prices rose 1.9% on month and 60.3% on year.
Year-on-year Indonesian GDP growth continues to look suspiciously stable, printing last quarter at 5.03% after 5.11% in 1Q, 5.04% in the final quarter of 2023, 5.14% in 3Q 2023 and 5.04% in 2Q 2023.
The Sentix measure of investor sentiment toward the euro area economy sank to a 7-month low of -13.9 this month.
Just In: The U.S. S&P Global-compiled service sector purchasing managers index for July has undergone a particularly large downward revision of 1.0 point to a 55.0, resulting in a 0.7-percentage point downward revision of the composite reading to a 3-month low of 54.3. The Institute of Supply Management’s non-manufacturing PMI reading in July moved back above the 50 threshold to a 51.4 following June’s 48.8.
Copyright 2024, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
Tags: Euroland producer prices, falling equity markets, service and composite PMIs July 2024
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