The contrast yesterday on global markets was dramatic: in Europe another spike in market interest rates renewed pressure on Italy, Spain, the euro and the eurozone itself.
In Tokyo, the Bank of Japan left interest rates untouched, moaned about the impact of the higher yen, downgraded the outlook for the country’s economy, but didn’t change interest rates or add to its current bout of quantitative easing.
In London overnight the Bank of England forecast a fall in the high inflation rate, but sliced its growth forecast in half to 1% for the next year, and warned that the eurozone crisis was an increasing danger to the health of the British economy.
And UK unemployment again rose to a new 15 year high of 8.3%, with more than a million young people out of work, an all time record, unfortunately.
On Tuesday, markets ignored the news from Japan, and a late rise in US markets after reasonable October retail sales data was released, and focused on the gloom in Europe.
So after an early rise, Asian markets mostly finished in the red yesterday. Markets in Europe fell in London and Germany, but rose in Italy and Paris.
In the US markets were slightly negative, but the losses deepened as trading ended on a warning from Fitch Ratings that problems in Europe would mean more pressure on US banks and their ratings.
Gold eased, but oil tipped over the $US100 a barrel level in New York after a series of deals revealed that oil supplies around the important Cushing terminal zone in Oklahoma would be freed up in the next year, allowing prices to trade closer to higher European and Asian levels..
Economic data in the US was stronger than expected on Wednesday, with industrial production up 0.7% in October and consumer prices down.
The Australian market fell 0.8% yesterday and will open lower this morning after the late fall on Wall Street.
Interestingly, traders reported that the volume of equities traded in New York on Tuesday and Asia and Europe last night were noticeably lighter than normal, a sign perhaps that investors are retreating to the sidelines while they watch the European crisis deepen.
The Bank of Japan has left its key rate unchanged at between zero and 0.1% and warned the economy will "face an adverse effect from the slowdown in overseas economies and the appreciation of the yen as well as from the flooding in Thailand."
In a statement released together with its rate decision on Wednesday, the BoJ warned: "The sovereign debt problem in Europe could result in weaker growth not only in the European economy but also in the global economy particularly through its effects on global financial markets."
And the Reserve Bank in Australia shares those worries, as we saw in Tuesday’s minutes from the November 1 board meeting that cut rates, and the November 4 release of the 4th Statement of Monetary Policy of the year.
In Europe the word ‘contagion’ is being used more frequently as rates on 10 year Italian debt rose above 7% again, for the second time in 10 days. Rates on Spanish 10 year bonds also rose past 6% to new highs.
Rates eased a touch on Wednesday, but then rose and finished at uncomfortably high levels.
Italy got a new government, Greece saw two of the three parties in the new government refuse to sign off on the new austerity package, meaning Greece might not get the long awaited 8 billion euro payment that will keep the country solvent.
The Financial Times and other media reported that euro bond markets saw a sell off on Tuesday in bonds and the paper said that "investor fears spread beyond Italy and Spain to triple A rated France, Austria, Finland and the Netherlands."
"The premium that France and Austria pay over Germany to borrow rose to euro-era records of 192 basis points and 184bp respectively, levels investors say are no longer consistent with top credit ratings"
"Mike Riddell of M&G, one of Europe’s biggest fund managers, called it “probably the most worrying day” of the crisis so far," the FT reported.
The paper said the Spanish premium to Germany hit 482 basis points, above the critical 450bp rate at which Irish and Portuguese yields spiralled out of control and forced both countries into international bail-outs. Belgium also saw its bonds’ spread over German debt reach record levels of 314bp.
The FT and other outlets said that there were few buyers in many bond markets, with only the European Central Bank active in Italy and Spain.
“It is really scary,” said one at a US bank. “Everyone is liquidating in the eurozone bond markets … Everyone is heading for the door,” the FT reported.
German 10-year yields fell slightly to 1.77% (they are the benchmark bonds for all other euro bonds). Finnish and Dutch yields rose 17bp and 10bp, leaving their premiums to Germany close to the peaks hit in the GFC back in 2009.
There remains no circuit breaker in sight and the growth data for the eurozone was weak and unsupportive.
The 0.5% growth rate in the third quarter for Germany was solid, as was the 0.4% rise in France.
But what caught the eye and worried investors was the 0.3% contraction in the Netherlands, which means the recession in the south (Portugal, Italy, Greece and Spain) may have started infecting one of the core economies of northern Europe.
The Netherlands are exposed to swings in trade volumes with the Port of Rotterdam one of the world’s largest and a good barometer of what is happening. It would feel the slide in eurozone industrial orders and production reported last week for September.
Rumours in Asian markets that France could see a credit rating cut also worried investors.
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