Weekly Market Commentary

Overview Stock markets are at last waking up to the effects and potential long term consequences of the chaos in credit markets. Shares in aviation, banks, construction, insurers, and retailers sold off hard. A few are trading at less than one tenth of peak value, some below March's lows, and drops of 25% daily are not that unusual. Most indices are at or quite close to this year's lowest levels, losing between 7% and 20% since January, the biggest fallers of course the previous darlings: Mumbai and Turkey. Higher interest rates, or the threat of them, have been blamed but a whole host of other problems are also at work. Many are fretting about inflation targets that have been shot to pieces, the finger correctly pointed at higher food and energy prices. India raised its repo rate to 8.00%, Chile and South Africa upped theirs by 50 basis points to 6.75% and 12.00% respectively. Interbank rates continue to sneak higher, Eurozone three-month Libor to 4.96% and Eurodollar futures 3.70% over year-end, dragging Treasury paper with them so that many are yielding more than they have done in months. The US dollar continues with its bout of corrective strength, taking JPY to 108.43 and the Euro to 1.5303; Eastern European currencies have strengthened again, EUR/CZK a record 24.095 korunas. Commodities were sidelined and mixed although the CRB Index set a new record high at 445.73 because CBT Corn surged to another record at 725.50 cents per bushel. Baltic Freight Rates retreated suddenly except Clean Tanker ones to Japan. Political and Economic Developments Months into the credit crunch and now the ECB calls for more access to sensitive information from commercial banks. Co-ordination, communication, transparency, etc…the point is the 'gamekeeper' does not know and understand his 'poachers'. The complex set up between the different regulatory bodies makes things messy and opaque, with bank supervisors not required to pass on information so as to help the ECB in setting rates. Some Fed governors have also called for something similar, the supervision of investment banks under particular scrutiny as they avail themselves of the discount window. The FSA's outgoing chairman Callum McCarthy joined the argument over bankers' pay saying 'the present system places excessive emphasis on the short-term performance of individual parts of an organisation' and that he thought 'it entirely appropriate for supervisors, as part of our general assessment of systems and controls, to be interested in compensation and incentive structures'. Nevertheless women's pay is still a fraction of their male contemporaries. Underlying Themes Some European truckers are striking, picketing and creating blockades in protest at the price of fuel. UK salaries they say, at £32K per annum are the same as they were in 1992 (so much for blue collar workers' pricing power). There is of course one fail-safe way to reduce consumption and emissions; use less. Figures this week have the volume of British petrol and diesel sales dropping 20% from a year ago, and this before supply disruptions. Driving very slowly (between 20 and 40 mph) will also shrink petrol bills by about £500 per annum, a new study by a former AA fuel efficiency expert found, and is the most economical speed not the 55 mph usually quoted. So Tesco non-food sales dropping come as no surprise and now Exxon Mobil plans to exit retail operations by selling all US gas stations citing a very challenging environment. University of Michigan June Consumer Sentiment at its lowest since records began in 1980. What to watch for next week Monday Tokyo May Condominium Sales, Eurozone final CPI, US June Empire Manufacturing, NAHB Housing Market Index and April long-term TIC flows. Tuesday Japan April Tertiary Industry Index, EZ15 Trade Balance, UK May CPI, German and EU June ZEW Surveys, US May PPI, Housing Starts, Building Permits, Industrial Production and Capacity Utilisation. Wednesday Minutes of the Bank of Japan and Bank of England's MPC meetings, Tokyo and Nationwide May Department Store Sales, UK CBI June Industrial Trends and the Chancellor's Mansion House dinner. Thursday Japan April All Industry Activity Index, UK May Retail Sales, Public Finances, Money Supply, US Leading Indicators and June Philadelphia Fed Survey while the Swiss National Bank holds a quarterly monetary policy assessment. Friday 20th is the Summer Solstice, the longest daylight in the Northern hemisphere, and holidays in Finland and Sweden with just German May Producer Prices due. Positioning and Technical Analysis The sooner and the closer equity indices manage weekly and/or monthly closes below pivotal support levels around March's lows, the faster things will unravel. Indices will then tumble like dominos, the weakest shares most vulnerable to a brutal hit, bringing into question the viability of the business. Long-dated Treasury yields should drop from today's extremes, possibly very sharply, and then traders and investors will focus on credit quality. Interbank yields will remain high (and possibly go higher still) but top names' secured debt will command an increasing premium. The US yield curve should flatten and the Eurozone and UK ones invert further. Commodities and currencies should continue mixed and sidelined in a lengthy complex period of correction and consolidation. Mizuho Corporate Bank Disclaimer The information contained in this paper is based on or derived from information generally available to the public from sources believed to be reliable. No representation or warranty is made or implied that it is accurate or complete. Any opinions expressed in this paper are subject to change without notice. This paper has been prepared solely for information purposes and if so decided, for private circulation and does not constitute any solicitation to buy or sell any instrument, or to engage in any trading strategy.