Sunday, February 8, 2009

Weekly Market Commentary


Equity indices continue to hover nervously on key chart support levels and interest rate markets remain mixed, still part of price discovery in yield curves and credit spreads. The Bank of England today announced new measures for its Asset Purchase Facility aimed at narrowing the spread on commercial paper and corporate bonds starting the 13th February. Currencies also mixed, Eastern European ones under considerable pressure so that the Polish zloty at 4.7000 is almost at its weakest ever to the Euro, and only central bank intervention stopped the Mexican peso weakening beyond a record high at 14.7045 pesos. The yen is a little softer, Aussie, South African rand and Brazilian real the biggest gainers. Commodities range-bound, Softs and Metals a tad higher.

Political and Economic Developments

As usual, rate cuts: 50 basis points from Britain and Norway to 1.00% and 2.50% respectively, a whopping 100 basis points from Australia and South Africa to 3.25% and 10.50%. Understandable, but so out of step was Russia's hike of its key rate to 11.00% as the rouble hit 36.4545, its weakest ever, and its sovereign debt rating is cut to BBB because billions in reserves have either been spent propping up the currency or are simply leaving the country.

US Weekly Jobless Claims 626K, Unemployment 7.6%, both highest since 1982 and Continuing Jobless Claims at a new record 4,788K; January Non-Farm Payrolls –598K, just shy of 1974's record 602K drop and more worryingly the third consecutive month where more than 500K jobs were lost, the White House scaremongering on unemployment to try to rush through the new bail-out package. Canada lost 129K jobs last month, almost double the 1982 record. Alarming and sad as it is, compared to the problems facing the Chinese Communist Party this is small fry. Twenty million migrant workers (16.5% of the total) lost their jobs in the months around the Lunar New Year. Many of these hail from Henan and Anhui provinces where a state of emergency was declared because of 'a severe drought rarely seen in history' affecting 37,000 square miles of farmland. Meanwhile Q4 GDP at 6.8% is almost the lowest since 1991 and about half the 2007 peak.

Underlying Themes

We believe there is an American saying that goes, Q: 'why are Democrats happy to raise taxes?' A: 'because they don't pay any'. When you cannot fill cabinet posts because too many candidates are tax-dodgers - you know the problem is endemic. Meanwhile bank bonus season is in full swing and everyone, and anybody, has a strong opinion. President Obama has decreed that employee compensation packages are to be capped at $500K in all of the 359 institutions that have received Treasury funds; audible gasps from fat cats who now say they don't need/want government money so as to wriggle out of this one. How is one expected to live off so little? Other politicians are probably lining up to score cheap points by imposing equally arbitrary limits.

What to watch for next week

Sunday 8th Switzerland holds a referendum on whether to renew the EU agreement on free movement of people. Monday Eurozone Finance Ministers meet in Brussels and a raft of Japanese numbers: December Trade Balance, Machine Orders, January Money Supply, Bankruptcies, Machine Tool Orders and Economy Watchers' Survey, then Germany's December Trade Balance and Eurozone February Sentix Investor Confidence. Tuesday Israeli parliamentary elections and the Swedish Riksbank starts a two-day rate-setting meeting (currently 2.00%), with UK January RICS House Price Balance and Japanese Consumer Confidence early, then UK December Trade Balance and US Wholesale Inventories. Wednesday, a Japanese holiday, the Bank of England's Quarterly Inflation Report, UK December Average Earnings and January Unemployment, plus US December Trade Balance and January Monthly Budget Statement. Thursday Japan January Domestic CGPI, the ECB publishes its Monthly Report, Eurozone December Industrial Production, US Business Inventories and January Retail Sales. (Unlucky) Friday the 13th G7 finance ministers start a two-day meeting in Rome, German and EZ15 Q4 GDP, February University of Michigan Confidence as US markets close early ahead of Monday 16th President's Day holiday and Canada's Family Day.

Positioning and Technical Analysis

Equity indices are uncannily, almost too neatly and deliberately, hovering at key chart levels as we debate whether the 'Alan Greenspan put' still exists. Rumours that the FSA will introduce a complete ban on short selling of shares do the rounds. While hope remains that rescue packages will work, allow for cautious two-way moves in many instruments, the key being the layering of interest rates by name and maturity; money is still in short supply despite government largesse. The consensus view that the Yen should strengthen, probably because of continued de-leveraging as in 2008, will probably come under review as one by one Yen crosses edge higher. Other major currencies will probably have to be re-thought too, as has been the case for Sterling and the Norwegian krone this fortnight. Above all, there are a series of small subtle changes in many instruments, and others that are at extremes, building for a big move which ought to start by the end of this month. 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.