Wednesday, 17 November 2010

Shanghai leads global stock markets down on inflation concerns

South Korea raised interest rates on Tuesday but the threat of China acting to rein in inflation had the bigger impact on markets. Bloomberg reports:

Global stocks fell for a seventh day, the longest streak since January, and commodities slid amid concern that the debt crisis in Ireland and Greece is worsening and that China will act to slow its economy. U.S. Treasuries snapped a two-day plunge and the dollar rallied.

The MSCI World Index slid 1.9 percent at 4 p.m. in New York, the most since Aug. 11. The Standard & Poor’s 500 Index sank 1.6 percent and the Shanghai Composite Index lost 4 percent. Ten-year Treasury yields fell 12 basis point to 2.84 percent after a 31-point gain over the past two days, the biggest back-to-back rise since January 2009. Irish 10-year yields increased 28 basis points. The Dollar Index rose 0.9 percent, while Nickel and wheat led commodities lower...

The Shanghai Composite Index fell to the lowest level in a month as PetroChina Co. and Jiangxi Copper Co. plunged more than 6.5 percent on concern tighter monetary policy will curb demand for commodities. The China Securities Journal reported that the country will introduce measures to control rising food prices in the world’s fastest-growing major economy.

South Korea’s Kospi Index of shares lost 0.8 percent, while the won strengthened 0.4 percent against the dollar. The Bank of Korea raised the seven-day repurchase rate by 0.25 percentage point to 2.5 percent today, the second increase this year, and dropped a reference to keeping borrowing costs “accommodative.”

Asia is not the only place concerned about inflation. The UK has also been experiencing excessive inflation. From Reuters:

The Office for National Statistics said on Tuesday that annual consumer price inflation rose to 3.2 percent last month, more than a percentage point above the Bank's 2 percent target. It has now exceeded 3 percent every month since March.

Analysts had expected it to stay at 3.1 percent and sterling shot up around half a cent against the dollar as traders bet the stubbornly high inflation figures meant the Bank of England's Monetary Policy Committee would not pump more stimulus into the economy.

High inflation isn't stopping the BoE from contemplating quantitative easing though.

However Governor Mervyn King, forced by his remit to write a fourth letter of explanation this year as to why inflation is so high, stressed the Bank could still do more quantitative easing if it were judged necessary...

King said the rise in inflation was likely temporary and that spare capacity in the economy would bring the CPI rate down in the medium-term.

The euro region also saw inflation accelerate in October. Bloomberg reports:

European inflation accelerated to the fastest in almost two years in October, led by surging energy costs.

Euro-area consumer prices rose 1.9 percent from a year earlier after increasing 1.8 percent in September, the European Union statistics office in Luxembourg said today. That’s the fastest since November 2008 and in line with an estimate published on Oct. 29. Energy prices rose 8.5 percent in October from a year earlier, the biggest gain since May.

US producer prices, though, rose less than expected in October. From MarketWatch:

U.S. producer prices rose in October at a pace slower than economists had anticipated as prices for cars and trucks declined, according to government data released Tuesday.

Overall, producer prices increased, up a seasonally adjusted 0.4% as energy prices rose, the Labor Department reported.

Higher inflation in the near future cannot be ruled out though.

The government also reported that prices for intermediate goods rose 1.2% in October, while prices for crude goods gained 4.3%. Over 12 months, prices for intermediate goods were up 6.4%, while prices for crude goods were up 17%.

Still, the Federal Reserve's industrial production report did not suggest much inflationary pressure in the economy. From Reuters:

U.S. industrial production was flat in October, Federal Reserve data showed on Tuesday...

Manufacturing edged up 0.5 percent, its biggest gain since July, but utilities output dropped 3.4 percent because unseasonably warm temperatures reduced demand for heating.

The capacity utilization rate, a measure of slack in the economy, was flat at 74.8 percent. That was up 6.6 percentage points from a June 2009 low but remained 5.8 points below its 1972-2009 average.

In other US data, the National Association of Home Builders/Wells Fargo housing market index rose to 16 in November from a downwardly revised 15 reading in October.

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