Tremendous moves in the Foreign Exchange market, buffeted from all sides, so no wonder implied volatility is on its way up. The Yen has gained against all currencies bar none, and Yen crosses slumped towards their lowest prices of the last year or two (the collapse only just dawning on many). The US dollar has gained against all other currencies, notably Cable where daily two cent declines are almost the norm (low $1.7537), also setting a record low against the Euro at £0.8187. The Euro gained against Nordic and Eastern European currencies, despite dropping to $1.4196 to the dollar. Emerging market currencies have not been spared either, the South Korean won hit especially badly again (-16% in the last six weeks) and the Russian authorities intervening to prop up the rouble. Safe-haven status of Treasury paper explains its continued bid tone, regardless of economic news, benchmark thirty-year US TBonds yielding 4.20% very close to their all-time low (4.10% January 2008). The ECB will increase to a minimum of 12% the haircut it takes on Asset Backed Securities, and to 5% for unsecured bank bonds (matching terms already in place at the Bank of England).
Commodities dropped a little in price, in line with a strengthening US dollar, and Baltic Freight Rates plunged close to their cheapest in two years. Most worrying of all are equity indices, which have seen sharp losses this week especially over the last two days. Many have closed below the ‘neckline' of long term ‘head-and-shoulder' tops, which usually herald many months' worth of price declines. The first to do so have been Asian ones, closely followed by Utilities, with Europe and North America hot on their heels.
Political and Economic Developments
Much turmoil and confusion in global financial markets, the main themes being a deteriorating economic outlook, potential asset price deflation, and retail price inflation. The Reserve Bank of Australia trimmed interest rates by 25 basis points to 7.00% because of the former, taking ten-year Treasury yields to 5.60% and their lowest in eighteen months. Sweden's Riksbank raised theirs by a quarter of a percent to 4.75% because of the latter, and the Bank of Canada, ECB and Bank of England left rates unchanged (even as the British authorities do their best to undermine UK plc). UK August car sales dropped 18.6% to 63,225, the lowest in 42 years.
US August Non-farm Payrolls shrank by 84K, within expectations and below the psychological 100K or recessionary 250K. Unemployment however leapt to 6.1%, highest in five years, job losses widespread across all age groups.
Underlying Themes
Too many economists, analysts, company directors, CEO's and pundits in general are talking their own book. Well one would, wouldn't one, especially when the proverbial hits the fan. Unfortunately the time for regrouping, tactical moves and a united front was a year ago and now no one will believe the pep talk. We urge investors to concentrate on capital preservation, always keeping an eye on what is likely to be an ever greater temptation for politicians to inflate their way out of the crisis. We realise that for many asset price increases have become a much-needed portion of net wealth because of shrinking real take-home pay, but hoping for sizeable investment returns now is a) too risky and b) too soon in the economic cycle.
What to watch for next week
Saturday Presidential elections in Pakistan, Sunday legislative ones in Hong Kong. Monday Japan August Bankruptcies, Economy Watchers Survey, UK PPI and Eurozone September Sentix Investor Confidence. Tuesday Japan August Machine Tool Orders, UK RICS House Price Balance, July Industrial Production, German Trade Balance, US Pending Home Sales and Wholesale Inventories. Wednesday Japan July Current Account, Leading and Coincident Indices, August Domestic CGPI and UK July Trade Balance while Mr. Trichet testifies at the EU parliament. Thursday Japan July Machine Orders, ECB's Monthly Report, US July Trade Balance and August Monthly Budget Statement. Friday Japan final Q2 GDP, EZ15 July Industrial Production, US Business Inventories, August PPI, Retail Sales and September University of Michigan Confidence. Saturday the 13th EU Finance Ministers meet in Brussels; let's see if they can come up with any gems.
Positioning and Technical Analysis
Many are still in denial so moves should accelerate over the coming month. The basic problem remains: there is no cheap credit and those with money to lend have little faith in borrowers. Any endeavour built on plentiful and steady borrowing is a ‘broken business model', not just this month but for the foreseeable future. The only questions are to what extent will the authorities be willing to throw money at it, how much they have available to waste, and for how long will they continue shovelling. The Eurozone should be constrained by the debt-to-GDP ratio of 3.00%, or will it? Ireland's is forecast to hit 4.00% as it faces a €5B shortfall in tax revenues, and their Budget has been brought forward to October 14th. The US has less of a chance of handouts with no one at the helm until January next year, and less room for rate cuts too.
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.
