Overview
Stock indices suffered sharp falls early on but recovered after Wednesday lunchtime on a combination of short-covering and marginally better news from banks, to end roughly unchanged on the week. We would describe this as a 'relief rally' but note that we have formed 'hammer' candles on many charts suggesting a few weeks of consolidation above these lows. The same effect in Treasury yields which rallied from new recent lows to end unchanged on the week. Credit spreads widened slightly, iTraxx to 555 and the US TED spread to 165. Generalised US dollar weakness saw the Euro reach a new record $1.6040, as did the Australian dollar $0.9850 and its Singapore equivalent S$1.3425. The Czech koruna (22.979), Hungarian forint (228.00), and Polish zloty (3.2025) once again set new strongest ever levels against the Euro. Nymex Crude Oil sold off hard from an all-time high of $147.27 to $129.00 per barrel. This dragged many commodities with it, including Grains, Oilseeds, Softs and Metals.
Political and Economic
Developments Inflation is currently a big problem. French June CPI +3.6% Y/Y, higher than it has been since 1991, EZ15 CPI a record +4.0%, US CPI +5.0%, UK CPI +3.8% Y/Y (highest since 1992) and Input PPI a record +30.3% Y/Y. Thursday's IMF Quarterly Report acknowledges the world is caught between slowing demand in advanced economies and rising inflation, especially in emerging markets. They urged these to use fiscal restraint, higher interest rates, and to consider currency appreciation to control inflation expectations. The Philippines lifted their key rate by 50 basis points to 5.75% and Thailand +25 bp to 3.50% for precisely this reason, a bit 'behind the curve' as the IMF pointed out because CPI is running at 11.4% and 8.9% Y/Y respectively. The next question is for how long prices rise, can and will the authorities tame inflation in the light of faltering economic growth, and when will it subside? The answer: it depends.
The fragile Japanese consumer has once again reined in spending: Nationwide Department Store Sales -7.6% Y/Y, the biggest decline since 1997's VAT hike. A lesson in how an asset bubble can deflate very slowly rather than pop.
Novice Pakistani equity investors, where the KSE-100 index is -35% from April's record, smashed doors and windows of the Karachi Stock Exchange. 'For me, this is just a murder for my economic future,' said Usman Khan a lift operator whose US$5000 life savings are invested there. European indices are down 20%-30% since January.
Underlying Themes
Although some are blatantly in denial, we are facing the four Horsemen of the Apocalypse: inflation, recession, unemployment and plummeting asset prices. The speed with which Eurozone citizens have embraced these headwinds has alarmed some - May Industrial Production down a record -1.9% M/M and -0.6% Y/Y, the lowest since September 2003, and July's ZEW Survey a record low -63.7. We applaud realists and repeat our mantra: prepare for the worst and hope for the best. US citizens, ever the optimists, may have been jolted by scenes of hundreds of California depositors queuing to get what's left after the FDIC took over failed IndyMac Bancorp Inc over the weekend. With $19B in deposits and $32B of assets this ranks just behind Continental Illinois' 1984 $40B 'too big to fail' rescue. This could have also been the fate of the UK's Alliance & Leicester building society had Banco Santander not stumped up £1.26B in stock for it on Monday. Its shares rallied from £2.13 to £3.40, but still well down from last year's £12.00.
What to watch for next week
Monday 21st July is Japan Ocean Day holiday with US June Leading Indicators and UK July Rightmove House Prices. Tuesday Japan May All-Industry Activity Index, June Supermarket Sales and US May OFHEO House Price Index. Wednesday UK BBA June Mortgage Lending, Minutes of the Bank of England's July MPC meeting, CBI Quarterly Industrial Trends, EZ15 May Industrial New Orders and the Fed's Beige Book. Overnight the Reserve Bank of New Zealand decides on rates (Official Cash Rate expected unchanged at 8.25%), then on Thursday Japan June Trade Balance, UK Retail Sales, July PMI's for the different European countries, German IFO and US June Existing Home Sales. Friday Tokyo July and Nationwide June CPI, Corporate Services Prices, Eurozone Money Supply, UK Q2 GDP, US June Durable Goods Orders, New Home Sales and final July University of Michigan Confidence Survey. A general election in Cambodia on Sunday 27th.
Positioning and Technical Analysis
We shall continue to allow for a few more weeks of prices thrashing around pivotal chart levels in equity indices, after which we expect more big falls. If not this month then by late August Treasury paper should be increasingly in demand, regardless of yield or inflation, because of its 'safe haven' status. For the FX market, where sooner rather than later we expect generalised and potentially extreme US dollar weakness, moves should accelerate as many are faced with a U-turn. Commodities are in consolidation mode where each one will move under its own steam and to its particular dynamics.
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.
