The week's top news in world financial markets from Maximus Capital

  • 2009-09-17
USA

The trade deficit widened to $32bn in July from $27.5bn in June, a much wider deficit than the consensus forecast had expected. This means trade is likely to turn to a drag on GDP growth in Q3 09. However, the July data reflected rebounding demand in imports and exports of highly cyclical goods. For example, over the three months ending in July, real imports of automotive products surged 169.5 percent at an annualized pace, by far the largest increase in the history of the series.

This may have partly reflected anticipated demand for the Cash for Clunkers program, but it also likely indicated that inventories of many models may have fallen below desired levels as global production ratcheted back during the recession. Exports of autos also surged, indicating that demand was rebounding abroad as well. The rebound in trade flows was also seen in other cyclical categories. For example, capital goods imports rose an annualized 23.3 percent over the three months ending in July, while capital goods exports increased 17.4 percent.

Euro zone

During the past week, ECB officials have embarked upon a clear strategy of informing markets of how the ECB would exit from its non-standard operations. This kicked off with the speech by ECB President Trichet to the 'ECB Watcher Conference,' in which he emphasized that the technical design of the ECB's non-standard operations meant that unless the Governing Council actively decided to renew them, they would run off naturally. In other respects there are signs of ongoing improvement in the money markets 's for example, the reduction in the borrowing by euro area banks from the ECB's dollar liquidity-providing operations.

This reflects the improvement in forward market liquidity, in relation to the effective penalty charged by the ECB and Fed for such term dollar loans. Hence the ECB's FX claims on euro area residents have fallen back to €60bn in recent weeks (versus $230bn at end-2008) and are set to diminish significantly more. Meanwhile, as banks have increasingly relied upon the ECB's one year refinancing to meet their liquidity needs, they have sharply curtailed their use of the weekly 'Main' refinancing operation: whereas this amounted to an average of €291bn during H1 07, in recent weeks it has been averaging around €75bn only.

Central and Eastern Europe

This week's economic data largely confirmed a constructive pattern regarding: 1) growth recovery; 2) inflation moderation; and 3) external adjustments in the regional economies:

1)    Growth-related data tended to surprise on the upside. Turkey's Q2 GDP data showed a y/y decline of 7 percent. This was slightly better than the 8.0 percent decline expected by the market and, importantly, it meant that, seasonally adjusted GDP in Q2 grew by around 3 percent q/q versus Q1.

2)    Inflation surprised on the downside. In Czech Republic and Romania prices in August fell by 0.2 percent compared with July. This corresponded to +0.2 percent and +5.0 percent y/y inflation, respectively, and was below market expectations in both cases. Even in Hungary prices fell in August by 0.3 percent 's despite the July VAT hikes.

3)    Most external accounts also adjusted faster than expected. The July trade balances in Czech Rep, Romania and particularly in Hungary were better than expected. Poland's July current account was the only exception, where mainly higher-than-expected imports moved the current account back into deficit after it had been in surplus since February 2009.

Written using materials from Bloomberg and  Reuters Research