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DIVISION OP INTERNATIONAL. FINAjjfig. ^ Ho.3 72 BOARD OF OOVKRNORS OFTHe 1 F E D E R A L RESERVE SYSTEM 1 \UG °'C ^ V ; 1 August 17, 1962 BANK I r ; r^gAPl1|AL MARKET DEVELOPMENTS ABROAD I . Germany IIo Nine Charts on F i n a n c i a l Markets Abroad I. Germany: Money and Capital Markets i n July F u r t h e r sharp d e c l i n e s i n German stock p r i c e s and a continued tendency toward r e l a t i v e t i g h t n e s s i n money and s e c u r i t y markets were the important f i n a n c i a l developments i n Germany during July and e a r l y Augusto By August 7* the German stock p r i c e index reached a low f o r 1962 s u b s t a n t i a l l y below the May l e v e l and was per cent below t h e postwar peak of mid-1961 „ During J u l y , s h o r t money r a t e s eased from the highs reached following the June tax date but were above A p r i l aid. May l e v e l s as the following monthly r a t e s ( i n p e r cent p e r annum) i n d i c a t e s Day-to-day money Treasury b i l l s April May June July 2-3/1* 2 2-1/2 2-1/8 3-l/k 2-1/U 2-7/8 2-1/2 On J u l y 31, the Bundesbank r a i s e d t h e s e l l i n g r a t e f o r the three-month Treasury b i l l by l / 8 per cent t o 2-1/2 per c e n t . By August 1 9 however 5 t h e c a l l money r a t e had dropped t o 2-5/8 per cento Long-term bond y i e l d s had an upward tendency„ The bond market was dominated by two l a r g e government bond i s s u e s with 6 per cent coupons which were h e a v i l y o v e r s u b s c r i b e d * Both r e s i d e n t and non-resident i n v e s t o r s were r e p o r t e d l y i n t e r e s t e d i n these o f f e r i n g s e The sharp d e c l i n e i n stock p r i c e s i n l a t e July and e a r l y August was i n p a r t a f f e c t e d by s e v e r a l corporate i n s o l v e n c i e s which c o n t r i b u t e d t o markst nervousness r a t h e r than t o any s p e c i f i c adverse t u r n i n major German economic i n d i c a t o r s during the period under reviewo German o f f i c i a l s continued t o be concerned about wage and p r i c e t r e n d s and about Germany5 s ' competitive p o s i t i o n . The Bundesbank's Monthly Report f o r J u l y p r e s e n t s a p i c t u r e of c o n t r a d i c t o r y tendencies w i t h i n t h e domestic economy with such expansionary f a c t o r s as the continuing acute labor shortage$ t h e unusually sharp seasonal pick-up i n t h e spring months and growing consumer demand considered t o be "merely t h e a f t e r - e f f e c t s of the i n t e n s i v e boom* period from 1959 t o the end of 1961," (Times, London, August 10, 1962 s p„ 1 2 . ) NOT FOR PUBLICATION DECONTROLLED AFTER SIX MONTHS NOT FCR PUBLICATION ' - 2 - The commercial banks a r e thought t o have moved, some l i q u i d f u n d s t o f o r e i g n markets during J u l y , The a c t i o n by t h e Bundesbank , a t the end of J u l y r a i s i n g t o 1 per c e n t t h e c o s t of swapping U.S. d o l l a r s forward t o D-marks f o r t h e 31-60 day term and 3/U per cent f o r 6 l - l 8 0 day term probably reduced the a t t r a c t i v e n e s s of f o r e i g n i n v e s t m e n t s , (See T a b l e . ) O f f i c i a l . r e s e r v e s f e l l $19 m i l l i o n i n July* The spot d o l l a r i n F r a n k f u r t strengthened a t the end of the month f o l l o w i n g P r e s i d e n t Kennedy's T e l s t a r appearance. However, the forward premium during J u l y i n c r e a s e d f u r t h e r t o 0 . 9 - 1 . 0 p e r cent p e r annum. Money market. Money r a t e s during J u l y d e c l i n e d from t h e l a t e June highs as the s e c o n d - q u a r t e r t a x d a t e p a s s e d . (See Table and Charts 3 and lw) The weekly range of d a y - t o - d a y and three-month l o a n r a t e s i n F r a n k f u r t . ( i n p e r cent per annum) were: Day-to-day money June 214.-30 J u l y 2-6 9-13 16-20 23-27 3-l/U 3 2-3A 2-3/U 2-5/8 ~ - 3-1/8 3-l/U 3 3 3-l/U Three-month loans n.a. n.a. 3-l/U - 3-3/8 3-l/U n.a. The Bundesbank r e p o r t e d some f u r t h e r r e d u c t i o n i n the l i q u i d a s s e t s of t h e commercial banks d u r i n g t h e month. Bank h o l d i n g s of German Treasury b i l l s , s h o r t - t e r m Treasury bonds and s h o r t - t e r m a s s e t s abroad amounted t o DM 8.6 b i l l i o n compared with DM 9«5> b i l l i o n on March 31 and the u n u s u a l l y high f i g u r e of .DM 1 1 . 3 b i l l i o n on January 31. The banks remain s u f f i c i e n t l y l i q u i d so t h a t t h e y continue to be i n t e r e s t e d - i n p r o f i t a b l e s h o r t - t e r m i n v e s t m e n t s . They a r e thought t o have moved some f u n d s abroad during J u l y . Bond marks to Despite a d e c l i n i n g tendency i n bond p r i c e s during J u l y , the market absorbed a DM U00 m i l l i o n , 20-year F e d e r a l Government l o a n with a 6 per c e n t coupon on J u l y 6 and a DM 210 m i l l i o n , 20-year F e d e r a l Post O f f i c e bond with a 6 per cent coupon on J u l y 31. Both i s s u e s were h e a v i l y over-subscribedo P r i v a t e i n v e s t o r s , both, domestic and n o n - r e s i d e n t , showed i n t e r e s t i n t h e s e two i s s u e s . But t h e J u l y f l o t a t i o n s helped t o develop r e s i s t a n c e t o any downward movement i n Germany bond y i e l d s a t t h i s time. (See Chart 6 . ) During June, g r o s s s e c u r i t y f l o t a t i o n s amounted t o DM 711 m i l l i o n or s u b s t a n t i a l l y below t h e l e v e l s i n e a r l i e r months t h i s y e a r a s may be seen i n t h e t a b l e on page 3- A p a r t i c u l a r l y sharp drop i n new i s s u e s - o f - s h a r e s c o n t r i b u t e d t o t h i s d e c l i n e . A s i z e a b l e number of new i s s u e s a r e expected b e f o r e w i n t e r i n c l u d i n g a F e d e r a l Railway bond and r e f u n d i n g f l o t a t i o n s of maturing bonds with 8 p e r cent coupons i s s u e d e a r l i e r i n t h e postwar p e r i o d . NOT FOR PUBLICATION NOT FOR PUBLICATION - 3 - Gross Placements in German Security Markets (in millions of DM, monthly or monthly average) 1 I 1961 II III IV JL 16 78 50 79 112 7? 31h 136 259 • — 32 89 132 "Occasional" borrowers bonds: Industrial Public authority Foreign issuers Other bonds a / 39 uia Total occasional borrowers1 bonds i . 581 211 Uil Mortgage and communal bonds Total gross bond placements b / Gross share placements Total security placements at issue value — 101 117 8U U 53 — 8U 213 526 525 U6U 503 1,107 735 w 715 35U 263 1,1*61 999 78 20 139 130 . 217 109 328 I486 207 665 U53 U3U 1,212 793 75? U85 WiO 971 5E7 5U7 3to 352 130 185 8U6 1,397 957 1962 M i «2Z June 205 230 322 6U 998 992 1»?93 711 a7 Mostly bonds of specialized credit institutions, especially i n 1961. 5 / Includes medium-term notes (Kassenobligationen). Stock market. After a sharp recovery from U39 to k$9 during the f i r s t two weeks of July, the stock market „ f e l l even more sharply t o 1*21 during the l a s t two weeks in July, a drop of 9 per cent in this o f f i c i a l index# (See Chart 7.) The index of stock prices was thus the same as in the summer of 1959# . The 'Frankfurter Allgemeine Zeitung a l l shares index indicates a further 5 per cent decline in the f i r s t seven days of August. (July percentage changes in the FAZ index approximate those of the o f f i c i a l index,) The Economist reports that the July f a l l came on low volume with foreigners and banks the dominant s e l l e r s . It further stated that increasing tension over Berlin was a general bear influence and that the banks were selling to increase liquidity since they expect the balance of payments developments to bring on further money market tightening. The financial collapse of Mr. Willy Schlieker's s t e e l qnd shipbuilding complex was a factor i n the July stock price decline • With consolidated s a l e s of over $200 million a year and a reported capitalization of onljr $5 Million, Schlieker found that to meet current financial obligations he e i t h e r had t o round up f o r his companies an estimated $20 to $30 million In c r e d i t s from domestic and foreign banks and customers or to persuade current suppliers t o extend outstanding credits, He has been unsuccessful a t both, and c r e d i t o r s have begun acquiring control of some of the individual operating companies* iron press reports, the problem of the Schlieker companies appears to be NOT FOR. PUBLICATION NOT FOR PUBLICATION - h - s t r i c t l y short-run l i q u i d i t y d i f f i c u l t i e s - i n s u f f i c i e n t cash arrL current receipts to meet operating needs. The press r e p o r t s imply that, given more time, Schlieker could probably get h i s financing in order, since demand for the products of his companies i s reported s t i l l strong. The shipyard, for instance, i s reported to have orders enough to keep work going through 15*63, including orders from U.S. firms. The Wall S t r e e t Journal has reported that he has sought advance payments for - ships ordered by'Vi*o'American f i r n s , among others, the American Telephone and Telegraph Company and Bethlehem Steel Corporation (August 13, 1962, p. 20). \ - Reserves and the dollar exchange rate. Gross commercial bank holdings of foreign exchange declined $25$ million in June. Since o f f i c i a l foreign exchange holdings increased #15b million, combined German foreign exchange reserves -declined by $101 million in June. Commercial bank f o r e i g n exchange holdings increased in July, The large increase in holdings in the beginning ef the month was only s l i g h t l y reduced by repatriations at the end of the racnch. "Since o f f i c i a l reserves declined by only #1? million in July, combined reserves certainly increased for the month. (Trade s t a t i s t i c s are expected to show a larger surplus than usual for July.) German Foreign Exch-.-uK> Reserves " H ^ T ^ l i ^ cr .' doTlarsT 1961 Bundesbank Comm. banks a / Total JL +300 +L79 +799 JLL HI b/+122 -6I4I4 -570 + 68 +I4.0I4. - 74 ^27 -282 1962 _ I I Na^r -L63 +L8 +L8 >601 +72 -.138 , -ho I June +15L -255 -101 a / Balances with f o r e i g n ban to: and money market" investments 'abroad. 5 / A f t e r s p e c i a l debt prepaym.cnh; . j m i l l i o n to the United S t a t e s and tEe United Kingdom. The t o t a l would iv: . .-serve gain of $898 m i l l i o n , i f adjusted for these t r a n s a c t i o n s . The Bundesbank again changed t,ne swap r a t e s and Treasury b i l l r a t e s e f f e c t i v e August 1, The previous changes, were on July 16. Each time swap r a t e s were increased I/J4 per cent 5 and 31-60 day c o n t r a c t s now c a r r y a 1 per cent discount; 61-180 day c o n t r a c t s a 3/U per cent d i s c o u n t . Treasury b i l l r a t e s increased another 1/8 per c e n t j and now 60-90 day b i l l s , f o r i n s t a n c e , are o f f e r e d with a 2-1/2 per cent r e t u r n . As u s u a l , by making these changes the Bundesbank attempts to induce the commercial banks to reduce t h e i r exports of short-term funds* At the end of July the spot d o l l a r picked up some strength following the P r e s i d e n t ' s T e l s t a r s t a t e n e n t t h a t the United S t a t e s w i l l not devalue the d o l l a r e From a peak of 25,119 cents per D-Mark on July 13 the spot r a t e dropped gradually during the r e s t of July to 25.020 on August 1„ (See Chart 8 . ) In e a r l y August, however, the D-Mark strengthened s l i g h t l y t o 25>«0U0 on August 9. The forward premium increased throughout July from O.U per cent per annum and has been maintained a t 0 , 9 - 1 per cent per annum so f a r during August. NOT FOR PUBLICATION Europe and B r i t i s h Commonwealth Section, 5 Germany; S e l e c t e d Money Market Y i e l d s and Exchange R a t e s ( p e r c e n t p e r annum) • 3-mo o U 5 S, $ i n t o Marks Commo / b a n k f / Market U.K. Ger. U.S. . -0.25 -0.25 -0.60 -0.73 -1.30 6.00 5.31 5.28 2.13 2.00 2.00 2.31 2.L7 2.60 -0.25 -0o5o -0o25 =0.95 -0.62 -0.35 ho3h 5.LL ho3h 1.88 1.88 2.00 2.7U 2.83 2.75 +0.68 25 3.13 3.81 May 25 • ,25 n0 a a 3.66 ' June 22 .25 n.a„ 3.69 29 25 n.a. 3.66 July 6 +O063 .25 3,31 3.9U 13 +Ook7 - 0 . 5 0 3.22 20 3.72 - 0 50 27 3.9k ^0.75: 3.81 Aug.. 3 -0.75 10 a / Bundesbank s p e c i a l r a t e f o r 2 t o 6 month d e p o s i t s <> -0.35 -0.21 -0.26 -O.kO 3.69 3.78 3.8b 3c 81 3.81 3.88 3.81 3.75 2.13 2.25 2,25 2.25 2.25 2.38 2.38 2.50 2.69 2.7U 2.90 2.93 2.96 2.91 2.88 2.82 3-mOo E u r o d o l l a r -deposits London 3-mo. i n t e r bank l o a n s Frankfurt , Spread in favor London 1961-oct. 6 Nov. 10 Dec. 22 3.25 3.31 3.88 UoOO 3.63 3.72 -0.75 -0.32 +0.13 1962-Jan. 5 Feb.. 16 Mar. 30 3.63 3.UU 3.69 3.00 +0.50 +0.56 +lo06 Germany; Comm. bank . loans—' 2.7$ 2.63 -0oh7 -0.61 -0 62 -0.95 -O08U 3-mo. T r e a s . b i l l s . — -™ — S e l e c t e d Loan. D e p o s i t and S e c u r i t y R a t e s ( p e r c e n t p e r annum) 6-12 mo. d e p o s i t s Savings Time Railway 1958-83 Public authorities Share yields Yield gap 1959-March Dec. 7.25 8.50 3.25 3.25 2.50 3.25 a 11 3.22 2.19 2.U U.O 1960-March . Dec 0 8.50 8.50 3.75 U.50 3.25 3.50 6.3 5.9 60U 6.2 2.27 1.96 ho2 1961-March Dec. 8.00 7.50 ti.25 , " 3.50 3.25 2.75 5.8 6.0 5.9 6.0 2 011 2.19 3.7 3.5 1962-Jan. Feb. Mar. April May June July 7.50 7.50 7.50 7.50 7.50 7.50, 3.# 3-50 3.50 3.50 3.50 3.50 2,75 . 2.75 2.75 2.75 2.75 2.75 5.8 5.9 5o7 5.6 5.6 . 5.8 5.9 2.57 2.61 2.65 2.77 3»23 3.19 & 2.8 2.6^ 2.3 a / Approved c r e d i t s on current account. n - 6.6 5.7 5.8 5,8 U.i 3.3 r INTEREST ARBITRAGE, UNITED STATES / C A N A D A iThundoy fiq THREE-MONTH TREASURY BILL RATES /Vv-^V Vv\ RATE DIFFERENTIAL AND FORWARD V^V CANADIAN DOLLAR S P R E A D IN F A V O R OF C A N A D A + +_ a A RATE DIFFERENTIAL WITH FORWARD EXCHANGE COVER NET I N C E N T I V E IN F A V O R OF C A N A D A + INTEREST ARBITRAGE, NEW Y O R K / L O N D O N Friday f i g u r e^ 3-MONTH RATE ~ 3 Per ten* per annum TREASURY DIFFERENTIAL M O NTH | STERLING 1 1 RATES AND FORWARD 1 1 SILL I R A T E DIF F E R E N T I A L . W I T H ~ F O F (WAR D EXC: H A N G E - COVER \ A ' IN 1 - v*\v AVOR 11 11 11 11 II 11 I| M J $ D 1959 M J 1960 S 1 ( \ - 1 1 1 1 1 1 1 I I 1 1 1 1 11 D M J 1961 S D M 11 11 J 1962 $ D INTEREST ARBITRAGE 3-MONTH . FOR TREASURY EURO-DOLLAR GERMAN BILLS, DEPOSIT COMMERCIAL INTERBANK BANKS LENDING RATE AND RATES - \ GERMAN INTERBANK LOAN RATI EURODOLLAR GERMAN TREASURY BILLS- RATE DIFFERENTIAL I AND FORWARD DEUTSCHE MARK S P R E A D IN F A V O R O F F R A N K F U R T : INTERBANK LOAN RATE O R W A R D RATE V \ A I PS 'COUHT (-) " " W > I I r ~ TREASURY BILLS i I i i I i—i. i i - i RATE l DIFFERENTIAL T WITH NET I N C E N T I V E FORWARD IN F A V O R /\vt '} \ n x L ^i EXCHANGE COVER OF FRANKFURT ( + ) INTERBANK v\i 17 TREASURY BILLS LOAN RATE INTEREST Friday ARBITRAGE/ FRANKFURT / L O N D O N figures 3-MONTH • TREASURY INTERBANK BILLS LENDING Per AND RATES V A GERMAN INTERBANK RATE D I F F E R E N T I A L A N D | - 3 - M O N T H FORWARD STERLING RATE DIFFERENTIAL WITH FORWARD EXCHANGE COVER GERMAN TREASURY B I l l S v— I960 1961 * 1962 cent par onnun SHQTfeT-TERM INTEREST RATES — , tU»0-D0UAR . lONPONA yuu/V Vlh ## 3-month treasury bill for U. S. dollar deposi Japan (3 month rale) and Switzerland (3-month deposit rate) \ LONG-TERM BOND YIELDS 1959 Y* INDUSTRIAL STOCK 1 INDICES' 19 5 8 = 100 Ratio CANADA V 1959 1962 stole SPOT EXCHANGE RATES - MAJOR CURRENCIES AGAINST U.S. DOLLAR Above Abov e -\/n 1962 par 6 par \H 3-MONTH FORWARD EXCHANGE RATES _fJLT. - 1 « 1 » _ P AGAINST jAGAINST U. S. DOLLARS POUND STERLING . PREMIUM • LONDON G»«AN MARK U.S. DOLLAR AGAINST POUND STERL NG FRENCH - LONDON FRANC A 1 2 ' a H 1961 ."H 1
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