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Prospects daily: Contagion fears grip global financial markets

Global Macroeconomics Team's picture

Important developments today:

1.Contagion fears hit global financial markets

2. U.S. unemployment rate ticks up, but payrolls also increase

3. German industrial production rebounds once again


Contagion fears hit global markets. The unfolding Greek debt crisis and mounting fear of contagion continued to weigh on global financial markets today, extending yesterday’s sharp losses. At the height of market panic, stock markets plummeted globally, the euro plunged to 14-month low, the VIX index broke through 40, and CDS spreads for Greece, Spain, Portugal, and Ireland soared to record highs. Markets have since bounced back, recovering some of losses by the close of trading yesterday. Thursday’s panic selling indeed reminded some of mayhem after the Lehman collapse in 2008. Meanwhile, general flight-to-safety saw U.S. Treasuries heading for the biggest weekly gain in eight months.

Global equities slumped again on Friday, with Asian markets sliding as much as 3% amid concern that the Greek debt crisis is spiraling out of control. Investor sentiment was further hit by the overnight plunge on Wall Street, reportedly due to some trading errors which wiped $1 trillion from the value of U.S. stocks at one point. And emerging-market stocks tumbled for a fifth day, dragging the benchmark MSCI index down 11% from its 2010 peak in early-April.
Greek bonds tumbled again today, pushing up the yield on the two-year Greek government bonds by 131 basis points (bps) to 19.75%. The yield spread between 10-year Greek bonds and the benchmark German bunds rose to a record 967 bps. Yields on Spanish, Italian, and Portugal bonds also jumped, extending a surge in borrowing costs.

The turmoil in bond and stock markets is spilling over into interbank markets. The cost of inter-bank dollar loans for three months, or Libor, climbed 5.5 bps to 0.428% today, the highest level since August 2009, as the ongoing sovereign debt crisis made banks cautious about inter-bank lending. This was the biggest jump since Jan.16, 2009. The spreads between three-month Libor and the overnight swap rate, an indicator of banks’ reluctance to lend to each other, rose more than 6 bps to 18.5 bps, also the most since August. The gauge soared to 364 bps in the wake of the collapse of Lehman brothers in 2008.

U.S. unemployment rate ticks up; non-farm payroll employment surges. The April employment report from the Labor Department showed the unemployment rate rising by 0.2% in April to 9.9%, as seasonal layoffs surrounding the Easter holiday added thousands of job-seekers to the market. However, payrolls surged over the same month, as companies added 290,000 new employees, exceeding median estimates of a 200,000 increase in jobs. April’s increase in payrolls was the strongest in four years, and was led by the creation of 231,000 jobs in the private sector. Despite this jump in April, payroll employment is still nearly eight million below its level in December 2007, and the increase in the unemployment rate is a reminder of how far the U.S. economy still has to recover.


Source: Economy Ministry

German industrial production demonstrates strong growth…According to the latest report from the German Economic Ministry, industrial production jumped 4% (m/m) in March after a 0.2% drop in February, adding further evidence that the slowdown in production in the early months of the year was a winter-related slump that is now over. The gain in March was led by a 26.7% (m/m) increase in construction activity, which had stagnated in winter. The production of investment goods rose 4.4% (m/m), while consumer goods were up 3.5%. Energy output declined by 5.8% over the same period. Yesterday’s report on new orders showed factory orders surging by 5% (m/m) in March, which will give further impetus to the revival of the manufacturing sector in Europe’s largest economy. 

Among emerging markets:

In East Asia and Pacific, China’s producer price inflation rose 6.5% (y/y) in April, the most in 18 months, according to the median of 29 economists that responded to the Bloomberg News survey.

In Latin America and Caribbean, Peru’s central bank unexpectedly raised its reference rate by 25 basis points to 1.5%, as the economy is poised to expand at a faster rate compared to its neighbors and despite the fact that inflation remains below the 1% to 3% range targeted by the central bank. The central bank cut interest rates by 525 basis points in 2009 to prevent a sharper contraction in output.

In Central and Eastern Europe and the CIS, Ukraine’s central bank cuts its overnight interest rate to 11.5% from 12.5%, the second cut this year, as inflation eased to the slowest pace in more than three years. Inflation eased to 9.7% in April from 11% in March.

Russia’s economy expanded an annual 1.2% in April, after growing a revised 0.3% in March, prompting resumption in hiring.

consumer price inflation accelerated to 2.9% year-on-year in April, the fastest pace in 14 months, after prices rose 1.7% in March.

Czech Republic’s
industrial output advanced an annual 10.2% in March, after growing 7% on February, marking the fastest expansion rate since October 2007, on improved external demand.