A difficult, tiring week as equity indices hover around key support levels and the ever-optimistic retail investor continues to hope for a bounce. The spotlight has shifted away from Eastern Europe and the Baltic to South Korea where the won is at its weakest since the Asian crisis of 1997/1998 (1542.9) and the Taiwan dollar also close to its record (35.000). At 15.0000 Mexican pesos to the greenback a all-time high as the US accuses the country of being a 'failed state' like Pakistan, and the Indian rupee weakens to a record 51.17. The Yen was this week's big loser among the majors, dropping to 98.72, taking many by surprise as they are still in 'de-leveraging' and 'repatriation' mode. Some interest rates are a little higher than they were last week as the world becomes more concerned at the ballooning deficits being run by so many nations, while the cost of insuring debt is mounting rapidly. Energy futures are inching up off recent lows and may have found an interim base, while ICE Sugar futures are higher than they have been since early October at 13.72 cents per pound.
Political and Economic Developments
Japanese news is not good ahead of 2009's Budget to be passed next month, compounding the problems for possibly the most unpopular prime minister in history, who has to call a general election by September at the latest and whose finance minister was forced to resign for apparently being drunk at a G7 press conference. January Exports fell at their fastest pace in over 50 years, -45.7% from this time last year, taking the Trade Balance to a record deficit of 952B Yen despite a 31.7% drop in imports. Industrial Production collapsed by a record 10.0% M/M in January, a whopping 30.8% Y/Y and Vehicle Production –41.0% Y/Y, as joblessness increases and vacancies shrink. Other export-led Asian economies are suffering something similar.
A few little rate cuts worth mentioning: 50 basis points off in Poland, Malaysia and Thailand to 4.00%, 2.00% and 1.50% respectively. S&P cuts the sovereign ratings of Latvia and Romania to 'junk' at BB+.
Underlying Themes
US real estate is still in a dreadful mess, both commercial and residential. US January Existing Home Sales are running at 4.49 million annualised and New Home sales 309K, the lowest for these ten year-old series, and the price of the average home is at a six-year low of $170,300. Almost half of all sales are 'distressed' so no wonder Fed chairman Bernanke said he was worried about foreclosures. (Interestingly he also said he was not worried about inflation in the next two years at least). Not surprising therefore that Housing Starts and Building Permits are at their lowest on record and more worrying still is CaseShiller's report that Q4 house price declines increased 18.23% Y/Y from 16.55% in Q3 – the rate at which homes are losing their value is speeding up rather than slowing down, something one would not expect after two years of declines. It is affecting everyone and Annie Leibowitz has had to mortgage all her photographs to raise $15 million to cover mortgages on properties she inherited from the late Susan Sontag; the art pawn shop she used currently charges between 6.00% and 16.00% interest per annum. Empty homes decaying visibly; so sad, such a waste. Where are the affordable housing mob?
What to watch for next week
Sunday EU leaders meet in Brussels to discuss the economic crisis. Monday the 2nd March German January Wholesale Prices and Retail Sales due from this day, Japanese Labour Cash Earnings, February Eurozone CPI, UK Hometrack Housing Survey, January Consumer Credit, and Mortgage Approvals. Then US January Personal Income and Spending, PCE Deflator, Construction Spending and February Manufacturing ISM. Tuesday Japan February Money Supply, UK Construction PMI, US Vehicle Sales, Eurozone January PPI, US Pending Home Sales and the Bank of Canada decides on rates (expect a cut of 25 to 50 basis points from a current 1.00% target). Wednesday EZ16 January Retail Sales, UK February Nationwide Consumer Confidence, Services PMI, Official Reserves, BRC Shop Price Index, US Challenger Job Cuts, ADP Employment Change, Non-Manufacturing ISM and the Fed's Beige Book. Thursday Japan's Q4 Capital Spending, Eurozone GDP, US Unit Labour Costs, US January Factory Orders and the Bank of England and ECB decide on rates (most expect 50 basis point cuts from both to 0.50% and 1.50% respectively). Friday German January PPI, US January Consumer Credit, UK February PPI, US Non-Farm Payrolls and Unemployment. Sunday the 8th March is Prophet Mohammad's Birthday holiday in several countries (subject to lunar sighting).
Positioning and Technical Analysis
Weekly and monthly closes below pivotal chart levels should tip equity indices over the edge. We continue to urge extreme caution in the FX market as moves should continue erratic and take many by surprise, several currencies trading at what might turn out to be unsustainable extremes. Top quality Treasury bonds should continue to be the safe-haven of choice (lack of viable alternatives the real reason), and yield curves should flatten as investors hunt for incremental yield. Watch the energy group for signs of breaking above recent ranges and precious metals should be allotted a small portion of an investment portfolio (again because of a lack of other safe opportunities).
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.
