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Prospects daily: Global markets slump as Euro Area crisis worsens

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Important developments today:

1.  Global markets slump as banking and geopolitical woes hit sentiment

2.  U.S. consumer confidence surges in latest month despite European crisis

3.  South Africa's economic growth accelerates in the first quarter of 2010


Global markets slump as banking and geopolitical woes hit sentiment. Global markets are once more in brutal sell-off mode, driven by concerns about the European banking sector, following the rescue of a Spanish savings bank, and growing geopolitical tensions on the Korean peninsula. Deepening worries over European banks, as indicated by a continued increase in the key London interbank offered rate (Libor), prompted renewed concerns about European debt problems. Some analysts argue that the short-term impact of back-to-back crises could be substantial, given that the market is just recovering from the previous banking fiasco. Global stocks, the euro, and oil prices all tumbled, while government bonds in the United States and several European countries gained.

World stocks as measured by the MSCI World Index fell 2% to their lowest since September 2009; emerging-market equities declined the most since August, with the MSCI-EM Index losing nearly 4% today. European and Asian stocks plunged with financial stocks bearing the brunt of the sell-off in Europe. Stocks across heavily-indebted European countries (including Greece, Ireland, Italy, Portugal, and Spain) are all in bear market territory Tuesday, as they have dropped more than 20% from their highs reached of mid-April—with the exception of Greece, which reached its “bear market” earlier.

Meanwhile, the euro continued to tumble, hitting an 8½ year low against the yen and neared a 4-year low against the dollar on Tuesday, as deepening concerns about the health of European banking system spooked investors. Stress in money markets were stirred up, lifting demand for dollars across the board. Libor for dollar funds climbed for an 11th day today, hitting highest levels since July 2009. Oil prices fell, sinking to below $68/bbl on growing risk aversion.

In contrast, U.S. Treasuries assumed the lead in carrying government paper higher, as rising risk aversion boosted the appeal of sovereign debt. Rising Libor provided another reason to sell equities and buy bonds. The yield on the 10-year Treasury note slid to its lowest in more-than a year, as negative sentiment continues to lead world stock markets. German and French government bonds advanced, pushing 10-year yields to record lows as more investors are shifting out of risky assets and into safer havens.


In European developments: new orders received by manufacturers in the Euro Area increased the most in almost three years in March, led by demand for capital goods and other machinery. Though reflecting orders data already announced by Germany, France and Italy, of which orders for Germany surged 5% in the month, there are smaller countries that also have seen demand from customers increase in the month. To a degree, weather is a factor here, as the first months of 2010 were disastrous for Europe. But the combination of stronger export orders and a bounce-back from weather-related stoppages in activity should set the stage for a stronger GDP outturn in the second quarter, following the meager 0.8% GDP advance of the first (saar).

And in one of the first readings of consumer confidence for May, Italian households’ sentiment declined sharply in the month to the lowest in a year, as tensions in financial markets made consumers more pessimistic about the economic outlook. The ISAE measure of sentiment fell to 105.4 in May from 107.9 in April.


Richmond Fed Survey paints early picture for U.S. conditions in May. A survey of manufacturers and service industry executives carried out this month in the region that constitutes the service area of the Richmond Federal Reserve found developments decidedly more mixed than in April. In the factory sector, the headline index dipped from 30 to 26 in May; but activity continued to expand for a fourth month. Shipments edged up 2 points, new orders slipped 5 points and importantly, the jobs index dropped 9 points in the month. Services activity was also mixed, with employment up, but retail sales flattening. Whether these early views of May developments reflect in part changes in sentiment grounded in European financial developments will need to be assayed in coming weeks.


U.S. home prices up modestly from last year. Average unadjusted home prices in 20 U.S. cities dipped 0.5% (m/m) in March, but increased a modest 2.3% from 12 months ago, slightly less than median forecasts. The Case-Shiller/S&P home price index has been falling in month-over-month terms for six months in succession now, as an indication that- though the housing market is in better shape this year than in 2009, it is not yet on the path to a sustained recovery. Indeed, prices declined in 13 of 20 cities included in the index, led by a 4.1% (m/m) drop in the average cost of homes in Detroit. While the extension of the federal tax credit has temporarily boosted sales of existing homes (yesterday’s report), it has had almost no effect on average home prices, due to the mounting number of foreclosures that have been dampening property values.


Source: The Conference Board


U.S. consumer confidence surges in latest month despite European crisis. Consumer sentiment in the United States, measured by the Conference Board’s index of consumer confidence, surged 9.7% (m/m) in May, as the index leapt from a reading of 57.7 in April to 63.3 in May. Indeed, the current index level is the highest seen since March 2008, exceeding median market estimates of an increase to 58.5 for May [see ]. The Conference Board’s measure of current economic conditions increased from 28.2 in April to 30.2 in May, the highest since December 2008; while the expectations index surged to 85.3 from 77.4 in April, pointing to increasing consumer optimism about the domestic economic recovery, despite increasing tensions surrounding the debt crisis unfolding in Europe. Though the index is still weak compared to historic levels (the average index reading for 2007 was 103.4), consumer confidence is gaining traction, and may lead to stronger household spending over the coming months.


Among emerging markets:

In Latin America and the Caribbean, Brazil’s consumer confidence rose to a reading of 116.1 in May from 115.4 in April, as perceptions about the current situation improved to 128.4 from 125.5, according to the index from Getulio Vargas Foundation. Argentina’s industrial production increased 10.2% in April from a year earlier. Meanwhile the unemployment rate stood at 8.3% in the first quarter of 2010.

In Central and Eastern Europe, Poland’s central bank kept its key interest rate unchanged at a record low 3.5% for an eleventh month, as it is weighing the impact of Europe’s debt crisis.

In Sub-Saharan Africa, South Africa’s economic growth accelerated to an annualized 4.6% quarter-on-quarter in the first quarter of 2010, up from 3.2% in the final quarter of 2009, marking the fastest pace in seven quarters. Mining output surged an annualized 15.4% in the first quarter, up from 4.6% previously, while manufacturing expanded 8.4%, marginally down from 10.1% the previous quarter. The retail, hotel and restaurant industry expanded 3.3% indicating that consumer spending is beginning to firm.

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