Overview
Stock markets took centre stage again with many shares dropping 25% or more in a day and others to levels so low they haven’t been seen in decades. Many indices are at or below the January/March lows, in turn lower than they have traded since 2005 or 2006 (depending on which one). Some have dropped by 20% from last year’s peak, an amount traditionally considered a bear market. Much has been made of the Nikkei closing lower for twelve consecutive days but it is still well above March’s low. As always the ‘darlings’ of yesteryear are the hardest hit, Mumbai and Turkey slashed by almost 50% since January, closely followed by South Korea’s 35% hit. Interest rates were mixed with many emerging markets seeing higher Treasury yields yet G7 ones unchanged and index-linked ones are lower. FX was sidelined but Eastern European currencies gained against both the Euro and the US dollar. The Czech koruna another new low rate of 23.685, the Hungarian forint a record 232.42 per Euro, and the Polish zloty 3.3190. Commodities remain very well bid, the CRB Index a new record 473.97, Nymex Crude $145.85 a barrel, CBT Soybeans 1663 cents per bushel and even CME Live Cattle a record $104.70 cents per pound.
Political and Economic Developments
Once again the ECB managed to surprise the market, not with the 25 basis point rate hike to 4.25% (with which they knocked traders sideways a month ago), but with the dovish comments at their press conference afterwards. Admittedly starting from some of the highest yields of the last twenty years, but this saw benchmark Schatz drop from 4.75% to 4.37%, almost reversing June’s back up. Sweden’s Riksbank also raised rates 25 basis points to 4.50%, the highest since 1996, because inflation touched 4.00%, double the 2.00% target. ‘Over the year, the repo rate will need to be raised further on a couple of occasions’ they added though with little market effect as the move had been expected. The Central Bank of Indonesia also upped their repo 25 basis points to 8.75% because inflation is running at 11.03%, in part due to recent cuts in oil subsidies.
US June Non-Farm Payrolls dropped by 62K, the sixth successive monthly decline, and weekly jobless claims are over 400K hinting it is about to tip into recession. The private sector is slashing jobs, among them investment bankers because of shrinking activity, while the government adds employees. No wonder June Vehicle Sales dropped to 13.6 million annualised, down from 15.7 million last year and the smallest number shifted since August 1993. The trend away from light trucks (-19.4%) towards smaller cars benefited Honda, Hyundai, Kia, Subaru and Volkswagen.
Underlying Themes
Belt tightening all round, little luxuries out and thrift in. Either because of drooping property values, sagging pension fund pots, below-inflation wage increases this year (and several before that), and now because of soaring energy and food prices. UK charity ActionAid estimates the cost of food has increased by 82% since 2006 and this has put 750 million people at risk from hunger as well as the 850 million already living with chronic hunger. The least well off in the UK are already skipping meals because they cannot afford them any more. And the authorities response? Basically, ‘you have been warned’ which, in actress Joan Collins’ delightful words: ‘being beautiful and growing older is like being rich and getting poorer’.
What to watch for next week Leaders of G8 countries (plus another 8 discussing climate change) meet in Japan from Monday to Wednesday, German July Wholesale Prices are due from this day, UK and German May Industrial Production, plus Eurozone July Sentix Investor Confidence. Tuesday UK June NIESR GDP, Japan Money Supply, Bankruptcies and Economy Watchers’ Survey, UK May DCLG House Prices, US Pending Home Sales, Wholesale Inventories and Consumer Credit. Wednesday Japan May Machinery Orders, German and UK Trade Balances, EZ15 final Q1 GDP, UK June Nationwide Consumer Confidence and BRC Shop Price Index. Thursday Japan May Trade Balance, June Domestic CGPI, the Bank of England decides on rates (unanimously expected unchanged at 5.00%) and the ECB publishes its Monthly Bulletin. Friday Japan June Consumer Confidence, US May Trade Balance, June Monthly Budget Statement and July University of Michigan Confidence Survey.
Positioning and Technical Analysis
Because today is a US holiday the week fizzled out rather than ending with a bang, hinting that we will probably take up the baton again next week. Therefore stock markets should again be in the spotlight, for all the wrong reasons say some, and might gather even more downside momentum collapsing through a series of pivotal chart levels. Treasury yields, rather than cower in the face of central bank rhetoric, will be increasingly valued for their safe-haven status (and to heck with what theyyield). Interbank rates will remain very difficult and probably high, with more banks scrambling to patch up their books in any way they can. Whether big investors are still keen to buy into/lend to them after so many have already come begging is the questin. Looks increasingly like a case of first come first served, and no leftovers. FX and most commodities will probably be sidelined, consolidating in the big bands established earlier this year.
Have a nice weekend!
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.
