Sunday, November 23, 2008

Weekly Market Commentary


More investors and different markets are reacting to the 'credit crunch' and are beginning to really understand the ramifications of unwinding the 'carry trade'. Central bankers are coming round to the fact that a 'zero interest rate policy' is probably warranted, maybe 'quantitative easing' as well, and in a surprise move Switzerland halved their target rate to 1.00% from 2.00%. The rush into Treasuries continues, the yield on three-month TBills dropping to just 1 basis point, forcing investors into longer maturities, causing a dramatic flattening of the US yield curve. Benchmark thirty-year TBonds dropped to a record low 3.43%, a massive 82 basis points in just four days, and probably the biggest ever percentage move. Similar if less extreme moves in other countries, although some emerging market bonds remain under pressure and Ecuador defaulted on what they call an 'illegal' issue. Treasury Inflation Protected Securities (US TIPS) are behaving in a most extraordinary manner, five-year yields up to a new record of 4.00%. Credit spreads widened as the interbank money markets continue very seized up, iTraxx Crossover a record 905 basis points and Moody's BAA over ten-year Treasuries 612. Hungary's sovereign rating was downgraded to BBB by Standard and Poors.

Most equity indices are close to or below October's low point, the S&P 500 losing a staggering 17% over the last 5 days to 750, lower than anything since April 1997 and worth half of what it did a year ago.

Commodities were sidelined or a bit lower, Nymex Crude Oil at $48.25 below anything since May 2005 when the 'boom' in raw materials started. Currencies also sidelined although some Yen crosses dipped below October's low.

Political and Economic Developments

Inflation is coming down quite sharply, UK October CPI running at 4.5% instead of September's 5.2%; US CPI 3.7% versus 4.9%; US Producer Prices rising 5.2% instead of 8.7% a month ago; German PPI a mere 7.8% against 8.3%. All well and good but still way higher than their maximum targets. Several sentiment measures are also lower, the Philadelphia Fed Survey close to its lowest in twenty years. The US National Association of Home Builders Index almost a record low at 9.00 (from an average of roughly 66 from 1998 to 2005). Japan and Singapore are now also officially in recession.

On the 'positive' side, UK M4 Money Supply has ballooned by 15.1% over the last year, a rate of expansion last seen in August 1990. Government Budget deficits are also expected to expand significantly this year and next.

Underlying Themes

Echoes of previous market peaks with yesterday's lavish inaugural bash for The Atlantis Hotel, Palm Jumeirah, Dubai. Kylie Minogue was allegedly paid £1.3 million for a one hour show for 2,000 of the world's elite; a firework display six times bigger than Beijing's this year could be seen from space; total cost of the do: about $20 million. Hard to credit it but the heads of the big three US carmakers travelled to Washington in their private jets begging, as they threatened widespread unemployment if they weren't bailed out (again!). President elect Obama is looking increasingly like the 'great white hope' with the US National Intelligence Council saying political decisions of the next 4-8 years are critical as the US moves towards being just one of several superpowers.

A recent poll showed 33% of Icelanders want to emigrate.

What to watch for next week

A holiday-shortened week with Thanksgiving in Japan Monday and in the UAE and US Thursday. From Monday German October Import Prices and UK November Nationwide House Prices, IFO Survey, EZ15 September Industrial New Orders and Current Account, plus US October Existing Home Sales. Tuesday Japan October Corporate Service Prices, Supermarket Sales, German and US final Q3 GDP; then German December GfK Confidence, UK October BBA Mortgages, September CaseShiller House Prices and November Consumer Confidence. From Wednesday CPI for the different German states, UK final Q3 GDP, US October Durable Goods Orders, Personal Income, Core PCE, New Home Sales, November Chicago Purchasing Managers and final Michigan Confidence. Thursday Minutes of the Bank of Japan's meeting, Eurozone Money Supply, November Business Climate and German Unemployment. Friday Japanese October Jobless, Household Spending, Housing Starts, Industrial Production, Retail Trade, National CPI, Tokyo November CPI and Small Business Confidence. Then UK GfK Consumer Confidence, CBI Distributive Trades Report, EZ15 CPI and October Unemployment.

Positioning and Technical Analysis

We have shifted up a gear in the rush to try and sort out things by year-end. The reality is that many will find it impossible to do as they would like, forced into salvaging what they can, and hoping things will improve next year. Job cuts are also likely to accelerate as part of this process, avoiding Christmas and other bonuses in a desperate bid to scrimp. Shops will find this Christmas' spirit mean, conspicuous consumption the ghost of Christmas past, and enforced belt-tightening the ghost of Christmas future. Family, friends and foes will all understand the need to preserve capital and cut debt. Next year many will come to learn how, and how much, needs to be done to repair their savings.

Mizuho Corporate Bank


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.