Sunday, February 1, 2009

Weekly Market Commentary


Equity indices continue to hover nervously on key support levels and we still feel it is just a matter of time, probably within the next two weeks, before they fall through these. Interest rates have backed up a bit more, part of the price discovery mechanism in yield curves and credit spreads, as well as massive uncertainty on inflation's outlook. Currencies mixed, the Russian rouble at its weakest ever (it trades as a basket 55% USD and 45% EUR) at 35.59 from 29.13 after Christmas and the man in the street fretting about another 1998-style collapse. The Hungarian forint under renewed attack at a record 299.25, the New Zealand dollar at $0.5065 at its weakest since December 2002, Cable up at $1.4400 and £0.8945 to the Euro. Precious metals have benefited from the continued uncertainty, spot Gold up to $926.00 and Silver doing even better at $12.57 per ounce, but the same cannot be said for other metals. Lumber at a new record low $137.90 per 1,000 random board feet.

Political and Economic Developments

Even more rate cuts: 50 basis points in the Philippines to 5.00%, 75 in Poland to 4.25%, also 75 from Israel to a record low 1.00%, and an alarming 150 from New Zealand to a record low 3.00%. Meanwhile Japanese Construction Orders plunge 27.3% Y/Y, almost as much as the record low of 1993, UK Nationwide House Prices drop a record 16.6% Y/Y, and the volume of US New Home Sales hit a record low 331K annualised - presumably because they're all too busy queuing to claim unemployment benefit which sees a record 4.776M (note: these series go back to the sixties). Japan's Unemployment soared suddenly to 4.4% (highest since December 2005), January's Industrial Production drops 20.6%, Vehicle Production -25.2%, so Household Spending shrinks 4.6% Y/Y. Eurozone Unemployment up at 8.00% with layoffs announced daily in all industries.

After last week's UK Q4 GDP, -1.5% Q/Q and -1.8% Y/Y, today's US GDP at -3.8% annualised following Q3's -0.5% was not as awful as some had feared. IMF managing director Strauss-Kahn says countries are queuing up for help from the fund, and if they all qualified its money would run out in six to eight months.

Underlying Themes

Overblown egos at Davos giving us, for what they're worth, views on the global economy and how to fix it. President Obama has pushed through legislation, without a single Republican vote in its favour, for another $800B or so stimulus package and Germany, who's largesse arrived begrudgingly, will have to cope with its biggest ever post-WWII budget deficit. Others are discussing the concept of a 'bad bank' where all the 'nasties' are put into storage so the tax payer can pay for them eventually. Very loud noises about increased regulation (and little said about lax oversight which got us here in the first place), and not an ounce of international cooperation in sight. The Italian finance minister storms off in a huff mid-way through a scheduled TV interview and Turkish Prime Minister Erdogan has a stand up fight with Israel's Peres on stage. Oh dear.

What to watch for next week

Monday the 2nd February holidays in Malaysia and Mexico, German December Retail Sales from this day and Manufacturing PMI's for various European countries, Japanese January Vehicle Sales, US Manufacturing ISM plus December Construction Spending, Personal Income and Spending. Tuesday Japan December Labour Cash Earnings, January Monetary Base, UK Construction PMI, Eurozone December PPI, US Pending Home Sales, then January Car and Truck Sales. Wednesday UK January Services PMI, Official Reserves, EZ15 December Retail Sales, US January Challenger Job Cuts, ADP Employment Change, and Non-Manufacturing ISM. Thursday German December Factory Orders, the Bank of England decides on rates (almost unanimously expected to cut 50 basis points to 1.00%) as does the ECB (unanimously expected unchanged at 2.00%). Then US December Factory Orders, Q4 Non-Farm Productivity and Unit Labour Costs. Friday Japan December Leading and Coincident Indices, UK and German Industrial Production, UK January PPI, US Non-Farm Payrolls and Unemployment.

Positioning and Technical Analysis

If equities do not collapse next week, propped up on a wing and a prayer and bucket-loads of bail-out money, then interest rates should take centre-stage. With central bank target rates at or close to next-to-nothing, the question now is what rates of interest must be paid by different debtors for different maturities? While we expect yield-curves to remain positive, a certain amount of flattening is likely for longer-dated Treasuries as investors accept a lower return rather than no return on short-dates. Pressure in the interbank money markets is unlikely to ease at all, and the spread of Libor over Treasuries and over overnight money should widen, possibly very considerably. Emerging market bonds and currencies are likely to remain under pressure as they realise there is precious little money available for spending on 'peripherals', just like discretionary spending in cash-strapped households. Commodities should remain sidelined.

Have a nice weekend!

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.