Fear and uncertainty

illustration: dealingroom DNB markets

(05.08.2011) Fear and uncertainty were the main drivers in financial markets yesterday. As a result stock markets plunged. Interest rates fell in both USA and Germany, but increased in Italy and Spain. In FX markets safe havens, as the Swiss franc and the Japanese yen, strengthened. Today all eyes will be on the labour market report from the US.

By Maren Romstad, Analyst at DNB Markets

The debt crisis in continuing to weigh on financial markets and the main focus is on Italy and Spain. In addition, the uncertainties regarding the US economy is increasing. Due to increased fear equities fell significantly yesterday (down 3.5 to 5 per cent). US, German and Norwegian interest rates declined markedly, while the Swiss franc and the Japanese yen strengthened. The effects from the interventions from the Swiss and Japanese central banks were short lived. With increased demand for safe havens gold prices continue to increase, while oil prices are decreasing.

The European central bank announced that they bought both Irish and Portuguese government bonds
yesterday and bond yields continued to edge up in Italy and Spain. Yesterday afternoon ten year yields were trading around 6.2 per cent. In Spain there were auctions in the three and five year bonds yesterday. Spanish government collected 3.3 billion euros, but the cost was the highest since 2000. Compared to their last auction in June, three year rates increased 80 basis points to 4.8 per cent. The five year loan is at 5 per cent interest rate. This was probably their last auction in August, but they do, however, need 38 billion euro before year end.
 
The main focus at ECB’s press conference yesterday was also the debt crisis. As expected, interest rates were kept unchanged and there were no new signals compared to the meeting in July. Inflation will be monitored very closely, which imply that the next rate hike is due later this fall (October or November). Trichet emphasized that uncertainty is extremely high, and they will continue to purchase government bonds and provide short term liquidity measures as long as necessary.

Furthermore, ECB announced that given the renewed tensions in some financial markets in the euro area, they have decided to conduct a liquidity-providing longer-term refinancing operation with the maturity of six months. This operation will be conducted at a fixed rate and with full allotment. Bank of England also kept rates on hold yesterday, which was in line with expectations in advance. The asset purchase program also remained unchanged.
 
Turing to macro figures, German manufacturing orders were far better than consensus’ expectations in June. Orders were up 1.8 per cent, while there was expected a fall of 0.5 per cent. Export orders grew quite strongly, while in the home market, orders dropped by almost 11 per cent and reversed the entire rise from May. The underlying tendency is still strong and the increase is indicating growing manufacturing production going forward. These figures are released later today.
 
In Norway, LFS unemployment fell from 3.4 per cent in April (three month average) to 3.3 per cent in May. However, employment growth fell markedly (7000 persons), but the labour force fell by more (11.000). So far this year both employment and the labour force have increased, and we do expect this tendency to continue going forward. Norges Bank assumes a gradual decline in the unemployment rate and yesterday’s figures were thus in line with the central bank’s view.
 
Today the important US labour market report is released. Consensus expects employment to increase by 85.000 – not particularly much, but at least somewhat better than the last two months. The unemployment rate is expected unchanged at 9.2 per cent. Yesterday’s figures on initial claims were in line with consensus, at 400.000. If the labour market report disappoints, we can expect another day marked by fear and uncertainty.