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DIVISION OF I N T E R N A T I O N A L F I N A N C E BOARD OF GOVERNORS F E D E R A L RESERVE SYSTEM H. 13 gL No, 16^ -August 26, 1964 CAPITAL MARKET DEVELOPMENTS ABROAD 17 II. I. Germany: uermany Nine Charts on Financial Markets Abroad Money and Capital Markets, July-August 1964 Conditions in German financial markets improved appreciably during July and August. In part, this better tone reflected the success of the attempts of the German authorities both to curb the inflow of foreign funds and to mop up some of thd excess liquidity in the domestic market. The balance of payments, which had been in substantial surplus in June, was probably in approximate balance during July and the first half of August. Short-term funds available to the domestic market became less plentiful because of two factors: the disappearance of large inflows of foreign exchange and the continuing incentive for private banks to place funds abroad both into U.S. Treasury bills and in the Euro-dollar market. As a result, the money market tightened further after August 1 when an increase in minimum reserve requirements became effective. Short-term money rates moved higher and call money was quoted at 3-7/8 per cent in the third week of August, or running 7/8 per cent above the discount rate. Despite this spread, however, banking circles did not expect any discount rate action on the part of the Bundesbank: this would only serve to defeat the Bank's policy of encouraging money exports. The bond market, although seasonally quiet, has had a much improved tone since early July and it was no. longer necessary for the Bundesbank to engage in support purchases of Federal issues. Yields on the 6 per cent coupon Federal bonds have stabilized at around 6. 37 per cent since early July and a DM 250 million.Federal Railway bond was placed without difficulty at an effective yield of 6.32 per cent. Two factors which contributed to the stabilization of the bond market were: (a) the view that the long-awaited policy measures to contain inflationary pressures have now come to an end, at least for the present; and (b) the effects of the withholding tax on bonds-so far indefinitely postponed—have now worked themselves out. The view that the authorities are not likely to be required to act more drastically at this time also contributed to a considerable strengthening in the stock market: the stock price index (F.A. Z,) rose 4. 7 per cent between the end of June and August 21, but was still about 4.8 per cent below the 1964 high recorded at the beginning of April. Hesitancy on the part of domestic investors has diminished and the German press reports that sales by foreigners-reported to take advantage of the rise in the New York market—have come to an end, . • .• OFFICIAL USE ONLY (Decontrolled after six months) - OFFICIAL USE ONLY - 2 - Security markets in summer lull Security markets have been seasonally quiet in recent weeks, Turnover . has been small and the number of new major placements has declined, But, in contrast with last year, prices have strengthened and a number of major issues \ w e r a readily placed. The bond market quickly absorbed two major issues offered between mid-July and mid-August, A DM 50 million placement of a Swiss-based corporation (exempt from the proposed withholding tax) was issued at an effective yield of 5,88 per cent and a DM 250 million issue of the Federal Railways was placed at an effective yield of 6.32 per cent. This issue has been previously postponed because of weak market conditions. Yields of existing Federal issues, such as tnat of the 5-1/2 per cent Railways bond of 1958-1963, have remained steady during July and August despite the cessation o.f Bundesbank support purchases of Federal, issues, (See Table 1„ ) Table 1, Germany: March 20 Bond YieldsRailroad bond (1958-83) 5.84 Stock Price Index; Industrials (December 31,1958=100) 209. 22 Exchange Rates : Spot DM (u\ S, cents) . Forward per annum) 25.161 +0. 9 Selected Financial Indicators May 29 June 6 . 27 195 ,40 Ju ly 10 17 24 31 6. 39 6 . 3f 6 .33 6.34 6 . 34 193. 57 197 . 92 197 .50 25 . 164 25. 160 +0,,4 40. 9 25,. 168 25 .158 40,.8 40,.8 August 14 7 6, , 33 '196, 31 19 9. 19 198. 50 203 .03 25.158 25 150 25, 15 7 25 . 151 40 . 6 40,7 40 40, 6 8 1 I'he stock market also improved. Between June 30 and August 21 the stock index of the F,A.Z„ rose by 4.7 per cent and recovered a major portion of the loss sustained between March and June in reaction to the withdrawal of foreign funds, (See Table 2,) Confidence in business prospects and the basic strength of the market is also demonstrated by the fairly large gap between bond and stock yields: ic amounted to 3.3 per cent in the second quarter and must have increased since, (See Table 10,) Despite the postponement of some new placements, particularly of Federal issues ; total placement of securities of all types increased by 31 per cent in the secpnd quarter of 1964 as compared with the preceding year, (See Table 3.) A greater part of these funds came from domestic sources than in the preceding year, since5 on balance, German residents bought domestic securities from foreigners in contrast to net j^ales a year earlier. Domestic funds channelled into the German capital market, either through the purchase of new securities or through transactions with foreigners amounted to about DM 6 billion in the second quarter of 1964 This was more than four times the amount forthcoming in the second quarter of 1963, OFFICIAL USE ONLY 6. 33 - 3 - OFFICIAL USE ONLY Table 2„ Germany: Stock Index (December 31, 1958=100) All time high: .1963 high: 1963 low: Aug. 31 > I960 Sept. 9 Feb, 26 January February March April May June 196U Source: 31 28 26 30 22 1 12 26 26U.60 19U.81 151.5H 196U high: low: July 198.1*7 202.06 207 .Wr 202.81 198.3S 19U.52 193.72 193.57 August April 6 Jan. 2 211„02 l89o08 196.20 197.92 3 10 17 2H 31 7 1U 197.50 196.31 199.19 198.50 203.03 Frankfurter Allgemeine Zeitung Table 3» Germany: Gross Placements in Security Markets 1/ (millions of DM, month or monthly average) II "Occasional" borrowers bonds: Industrial Public authorities Foreign issuers Other bonds 2/ Total Mortgage and communal bonds Total gross bond placements 3/ Gross share placements Total security placement at issue value V 2/ 3/ 88 U5l 1 9 6 3 til J 5 166 328 I June 70 195 325 lt95 U6 177 316 JL3§ 158 llii U0 189 182 U20 138 111 2U6 UhO 352 11k JL53 180 692 67U 733 927 835 501 851 1152 578 575 672 959 668 890 bl9 636 1270 12U9 1U05 ,1886 1503 . 1391 1330 1788 51 117 116 _1U5 225 229 _138 308 1321 1366 1521 2031 1728 1620 HI 38 2096 —— • Deutsche Bundesbank Monthly Report, Table V, 6. 1 9 6 h April May 117 h2h 20 172 —— Market value. Mostly bonds of specialized credit institutions <> Includes medium-term notes (Kassenobligationen). Sources II OFFICIAL USE ONLY - 4 - OFFICIAL USE ONLY Money market tightening Despite the g'uly 9 announcement of the increase in reserve requirements effective August 1, the money market did not begin to tighten until the last week of July. Conditions were reported to be difficult in the first weeks of August. "An extraordinarily large increase in currency in circulation during the mid-summer vacation period made the reserve position of the banks more difficult at the beginning of the month and heavy use was made of the discount privilege. Redeposits of some currency and large public disbursements eased the situation somewhat in mid-month. Day-to-day money was quoted between 3 and 3-3/4 per cent and threemonth money between 3-5/8 and 3-7/8 in July. (See Table 4.) Day-to-day money moved up to 3-5/8.- 3-7/8 during the difficult first two weeks in August, in contrast to the usual seasonal easing in the second week of the month and has remained at these rates through August 21. Three month money has not significantly changed from July averages. Table 4. Germany; Money Market Rates in Frankfurt (in per cent per annum) , Day-to-day money May June July 1-7 8-15 16-23 24-30 1- 7 8-15 16-23 24-30 1- 7 8-15 16-23 24-31 3-1/2 2-7/8 3-1/4 3 3-1/8 .2-3/4 3-1/8 2-3/4 3-1/4 3 3 3 - 3-7/8 3-3/8 3-5/8 3-3/8 3-1/2 3-1/4 3-7/8 3-5/8 3-3/8 3-1/4 3-1/2 3-3/4 1/ Three-month loans ' 3-5/8 - 3-3/4 3-5/8 - 3-3/4 3-5/8 - 3-3/4 3-5/8 - 3-3/4 3-3/4 - 3-7/8 3-3/4 3-5/8 - 3-3/4 3-3/4 3-5/8 3-5/8 - 3-3/4 3-5/8 - 3-7/8 3-3/4 1/ Highest and lowest rates quoted each week by Frankfurt banks. Source; Deutsche Bundesbank. External position trending toward balance in July-August After a net deficit in April and approximate balance in May, the German balance of payments again showed a surplus of DM 343 million ($86 million) in Jane, With a sharp seasonal decline in the trade balance, the June surplus was the result of large inflows of short-term funds, partly because of renewed revaluation rumors; both the short-term private capital and the "errors and emissions" categories showed strong surpluses. (See Table 5.) Even with the June.inflow, however, the increase in domestic liquidity due to foreign funds was practically halted during the second quarter as a whole because of private capital outflows in April and May. The outflow of long-term capital has probably OFFICIAL USE ONLY OFFICIAL USE ONLY declined in recent weeks as fever foreign bonds have been offered in Germany and as foreign withdrawals from the German securities markets appear to havediminished. Preliminary indications suggest that large official payments abroad ar.d a decline of speculative inflows may again have caused the balance of payments to be in deficit in July, and in close balance through mid-August. Table 5, Germany: Balance of Payments (in millions of DM) 1 9 6 3 III IV Goods and Services Tirade balance Services Tctal Official Payments Donations Long-term capital Short-term capital Total Private Capital Long-term Short-term 2/ Errors and omissions Total Surplus or Deficit (-) I_ II 19 6 4 1/ April May June 1944 77 1867 .737 - 15 722 738 88 826 469 -150 319 -1093 - 176 - 382 -1651 -1376 - 230 15 -1591 -637 -130 6 -761 -356 - 45 - 14 -415 -383 - 55 23 -415 435 - 618 904 721 1334 - 955 162 582 - 211 65 -247 41 - 35 -241 -280 -395 - 87 77 -409 2 1263 - 539 724 2860 274 3134 2227 37 2264 -1290 - 123 592 - 821 -1054 - 471 -1296 -2821 838 206 209 1253 1156 583 - 453 -1399 - 363 - 50 - -309 " 208 - : 439 343 1/ Preliminary. 2/ Includes commercial bank capital other than foreign exchange assets. Source; Basic data from Bundesbank and International Financial Statistics rearranged by author; Decline in foreign reserves in July Foreign reserves held by the Bundesbank declined by $1-10 million in July, reversing speculative inflows which had occurred in June. (See Table 6.) The major factors appear to have been large official payments abroad and some money re-exports by the commercial banks after their mid-year liquidity needs had been met. Some use was made of the special 0.25 per cent forward premium on the. D-mark offered by the Bundesbank to the commercial banks for purposes of investment in U.S. Treasury Bills. These specie! arrangements are made for three, month periods and would not permit the banks to repatriate their funds without penalty in time for the August rise in reserve requirements. Mid-year totals show that the inflow of foreign reserves to the Bundesbank was small in the first half of 1964. Governmental measures designed to reverse the earlier inflows of capital have clearly been a success. The reserve gains in this period may be attributed principally to speculative, inflows of funds in early June. " OFFICIAL USE ONLY OFFICIAL USE ONLY Table 6. I Bundesbank gold and foreign exchange Gold . Foreign exchange Total 164 491 655 110 -94 16 Bo Drawing rights on IMF 35 I, Commercial banks foreign exchange Total through C 6 - Germany: Changes in Reserve Position (in millions of U.S. dollars) 1963 Jan.Dec. A. - — 1964 March April May August June July—' 1-71/ 128 -84 44 104 -196 -92 107 -253 -146 10 -57 -47 11 226 237 92 54 73 - - 9 69 n.a. 73 236 -71 67 88 48 -207 n.a. 763 344 27 48 - 64 II 6 - 8 99 35 -145 -110 8 15 23 n„ a„ 1/ Estimated. Source.: IMF. International Financial'Statistics; Bundesbank, Monthly Report. D-nark eases. The market for the D-mark has been quiet since early July. The rate has declined from 25.168 U.S. cents on July 10 to 25.151 cents on August 14. (See Table 7.) The passing of speculative interest and money exports by the bsr.its alter seasonal reeds had been net explain the easing of the rate. With revaV a:ion rumors quieting funds were no longer flowing in and the forward : -rimij:.! also declined from 1.0 per cent in early Ju%i to 0.6 per cent in mid^ — g • Nevertheless, the annual report of the Association for the Protection or German Savings, which has as its membership nearly the ^entire banking community., came out flatly in favor of both a revaluation and a temporary invocation of par* 23 of the Foreign Trade Law which would prohibit capital importSo However* the Association was not supported in its view by its entire membership. In particular the Association of Private Banks has protested against this recommendation and is reported to be contemplating dropping its membership. OFFICIAL USE ONLY - 7 - OFFICIAL USE ONLY Table 7. Germany: Exchange Rate in U.S. cents per DM and Three Months Forward Rates in per cent per annum Par value Upper limit Lower limit 1963 1964 Dec. Jar,. Feb. March April May " June 27 31 21 27 24 8 22 5 19 S] 25,.156 25.,166 25. 176 25. 160 25. 168 25. 158 25. 160 25. 169 25. 168 2/ Forward — +0.0 40.8 , +0.9 +0.9 +0.5 +0.5 +0.4 +0.7 +0.8 25.000 25.188 24.875 1964 3 10 17 24 31 August 7 14 July S£ot^ / Forward +1.0 25.,165 •25.,168 3/+0.8 +0.8 25. 158 +0. 7 25. 158 +0.8 25. 150 +0. 6 25. 157 +0.6 25. 151 1/ Certified noon buying rate in New York. 2/ Closing market rate in Frankfurt. _3/ July 20 Source : Federal Reserve Board. Trade balance declines - The seasonally adjusted trade balance, which had already shown a small decline in.June, was more than halved,to DM 300 million ($75 million), in July. This was the result of a small decline in exports from the high... June level and a continued increase in imports, which in July more than regained the April, 1964 high. While July exports were still 9.4 per cent above July, 1963, the very spectacular export growth rates of over 15 per cent registered during the first half may be a thing of the past. In part these large increases were due to the low level of exports in the first quarter of 1963 because of the harsh winter, but in part a tapering off of the growth rates may be expected as continental stabilization programs take hold and domestic order books continue to lengthen. This would also be indicated by the fact that foreign order inflow in the second quarter was only slightly above the very high first quarter rate. OFFICIAL USE ONLY OFFICIAL USE ONLY Table 8. Germany: Merchandise Trade, 1963-July 1964 (seas-onally adjusted monthly or monthly average, in DM billions) Exports f« o.b. .363 T II III IV 1964 I II April May June July Source; Imports c. i. f „ Industrial goods Imports Trade balance 4.45 4.85 5.00 5.07 4.12 4.40 4.57 4.30 3.11 3.33 3.41 3.21 .33 .45 .43 . 77 -5.34 5.41 3.46 4. 71 3.38 3.50 .88 . 70 5.63 4.91 5.68 5,44 5.00 4.15 4.97 5.14 3.80 3.04 3.67 .63 . 76 . 71 .30 Deutsche Bundesbank. Europe" and British Commonwealth Section. II. Nine Charts on Financial Markets Abroad Chart 1 - International Money Market Yields for U.S. Dollar Investors Chart 2 - Interest Arbitrage, United States/Canada Chart 3 - Interest Arbitrage, New York/London Chart 4 - Interest Arbitrage for German Commercial Banks Chart 5 - Short-term Interest Rates Chart 6 - Long-term Bond Yields Chart 7 - Industrial Stock Indices ~ Chart 8 - Spot Exchange Rates - Major Currencies Against U.S. Dollar Chart 9 - 3-month Forward Exchange Rates OFFICIAL USE ONLY Table Germany - 3-mOe Eurodollar deposits London 1964-Jan, 31 Feb. 28 March 20 27 April 10 24 May 8 15 22 29 June 5 12 19 July 3 10 17 24 31 August 7 14 \4.12 4.12 4, 25 4.25 4.25 4,19 4.25 4.25 4» 19 4o 19 4.31 4,38 4.38 4.31 4. 38 4,38 4,31 4,31 4.19 4.25 (per cent per annum) 3-mo. inter- Spread bank loans in favor London Frankfurt 3,31 3.38 3.44 3.50 3.56 3.63 3.69 3.69 3.69 3. 69 3.81 3.75 3. 69 3.63 3.69 3. 75 3.75 3.75 tie a* n.a. 40.81 40. 74 40.81 40. 75 40.69 40.56 40.56 40.56 40.50 40.50 40.50 40.63 40.69 40.68 40.69 40.63 40.56 40.56 3~mc 0 U.S. # into Marks Comm. Market bank U.K. Ger. U.S. 40. 75 40.75 40.50 40.50 40.50 40.50 40.50 40. 50 40. 50 40 0 50 40.50 40.50 40.50 40. 50 40.25 40.25 40.25 40. 25 40.25 40.25 3.61 4.16 4, 16 4.16 4.16 4.16 4.16 4, 25 4,25 4.25 4.32 4,36 4,32 4.34 4.34 4.44 4,50. 4.50 4,50 4. 50 2.63 2.63 2.63 2.63 2.63 2.63 2.63 2.63 2.63 2.63 2.63 2.63 2.63 2.63 2.63 2.63 2.63 2.63 2.63 2.63 3.48 3.56 3.52 3.52 3.44 3.43 3.47 3.45 3.45 3.46 3.45 3.46 3.46 3.46 3.45 3.39 3.43 3.44 3.47 3. 48 ' 3-mo. Treas. bills 40.8 +1.0 40.9 40.9 40 v 8 40.5 40.5 40.5 40.4 40.4 40.7 40.8 +0.8 4-1,0 40.8 40.8 40.7 40.8 40, 6 40 , 6 Germanys Selected Loana Deposit and Security Rates (per cent per annum) Comiru bank loans 6-12 mo, deposits Savings Timei z Bond yields 5-1/2% Public Railway author1958-83- ities Share Yields Yield gap 1963-August September October November December 7.50 7.50 7.50 7.50 7.50 3.50 3.50 3.50 3.50 3.50 2.75 2.75 2.75 2.75 2.75 6.09 6.09 6.07 6.04 6.03 6c 1 6.1 6.1 6.0 6.0 3.09 3.08 3.17 3.26 3.16 3.0 3.0 2.9 2.7 2.8 1964-January February March April May June July 7.50 7c 50 7.50 7.50 7o 50 7.50 7.50 3.50 3.50 3.50 3.50 3.50 3.50 3.50 2. 75 2.75 2. 75 2. 75 2. 75 2C 75 2. 75 5,93 5.80 5.88 6.09 6.23 6. 36 6. 35 5.9 5.9 6.0 6.2 6.3 6.3 n°a. 3.01 2.93 2.83 2.88 2.98 3.03 n, a. 2.9 3.0 3.2 3.3 3.3 3.3 n. a. 1/ Approved credits on current account. T/ Beginning on March 20, 1964, commercial banks are prohibited from making interest payments on new foreign owned time deposits, 3/ Monthly averages of end-of-week figures. I N T E R N A T I O N A L M O N E Y M A R K E T Y I E L D S FOR U . S . D O L L A R I N V E S T O R S ! 3 - M O N T H E U R O - D O L L A R DEPOSIT VS. CERTIFICATE OF DEPOSIT Wednetdoy I i o u r e s YIELDS U.S. CERTIFICATE Of DEPOSIT, DIFFERENTIAL; E U R O D O L L A R OVE R U . S . C E R T j F I C A T E OF D E P O S I T I N E W Y O R K OFFER RATES O N SELECTED 3 M O N T H I N V E S T M E N T S Friday <lg»re» : ] ; ' ' TREASURY B I L L S - f u l l y H e d g e d ' C O M M E R CI AL P A P E R - F u I ly H e d g e d U.K. HIRE PURCHASE [CANADIAN FINANCE COMPANY • U.S. FINANCE CO*PANY|" 1964 'Par t>nl p « f onntimj INTEREST A R B I T R A G E , U N I T E D STATES / CANADA Friday figures* P* r e « n l p e r a n n u m ONIT H I R E ASUR Y BIL - RAT ES - - - o W 1 1 1 1 v 1 1 STATES 1 1 I 1 1 1 11 1 1 1 1 1 1 1 1 \ 1 1 1 1 1 1 1 RATE D I F F E R E N T I A L A N D F O R W A R D C A N A D I A N D O L L A R Discount RATE D I F F E R E N T I A L W I T H F O R W A R D E X C H A N G E C O V E R NET INCENTIVE IN FAVOR OF C 11 I I II I I I III I * Thursday figyret 1961-1962, Friday thereafter. II I II I I II I II II II II I I I I INTEREST A R B I T R A G E , N E W Y O R K / L O N D O N Fridoy fig u roi 3 - M O N T H TREASURY BILL RATES 1 1 1 1 1 1 1 1 1 RAH E DIP FEREIMTIAL A N D 3-MC) N T H FORV VARD STER L I N G " " V SPSEA1» IN FA\rot of LONDON - 1 r r'\ - ( fs.-r — - 1 1 1 1 1 1 1 1 1 1 1 | 1 1 | | I | | | | | RA E D I F F E R E N T I A L W I T H F O R W A R D E X C H A N G E C O V E R IN FAVOR OF LONDON I | | | II | | | | INTEREST A R B I T R A G E FOR G E R M A N C O M M E R C I A L B A N K S I 3 - M O N T H TREASURY B I L L S , I N T E R B A N K L E N D I N G RATE A N D ] EURO D O L L A R D E P O S I T RATES ~ I I LOAN 1AT11 E U R O - P O U A I LONDON GERMAN TREASURY RILLS 1.. 1 . I I J . I . 1 RATE D I F F E R E N T I A L A N D F O R W A R D DEUTSCHE M A R K FORWARD RATI D I S C O U N T ; ! - ! RATE D I F F E R E N T I A L W I T H F O R W A R D E X C H A N G E C O V E R 1 HIT INCENTIVE:" IN FAVOI OF f I A N I I U I T ( + 1 TREASURY 1111$ " I HiS 1 S H O R T - T E R M I N T E R E S T RATES # EURO-DOLLAR - LONDON 9 ! 1962 "X" ,3- monlh tTeosury bill role« for all counlriei except Japaiv I and Switzerland (3 month deposit role). • j - p - m o n l h rate lor U. S dollar deposits in london J (Average role on bank loom and discount. 3 -1^ L O N G - T E R M B O N D YIELDS /v 1964 I N D U S T R I A L STOCK INDICES 1958 = 100 ] Rotio H o l » I JSO. GERMANY \\ a ~ I'U.S. 300 1 r~l 962 I S P O T 8 E X C H A N G E RATES - M A J O R C U R R E N C I E S A G A I N S T U . S . D O L L A R GERMAN MARK / doll; u m . STERLING FRENCH F R A N C . B E L G I A N FRANC CANADIAN DOLLAR JAPANESE YEN 1 3 - M O N T H F O R W A R D E X C H A N G E RATE ^F ridgy H g ures A G A I N S T U.S. DOLLARS POUND) STERLING I A G A I N S T POUND STERLING • L O N D O N SWISS f R A N C GERMAN MARK A G A I N S T P O U N D STERLING - L O N D O N PREMIUM + v: FRENCH FRANC -UJ
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