Sunday, March 22, 2009

Weekly Market Commentary

Overview Most equity indices are up a tiny bit for a second consecutive week, helped along with a massive PR campaign from the US authorities. Following an unusual Sunday evening public TV broadcast by the Fed's Bernanke (who said the recession will end this year), upbeat comments on the first two months trading at Citigroup, risk appetite returning at JPMorgan, Bank of America to be profitable in 2009 and GE Capital should break even this year. To cap the lot we have President Obama on a late night TV comedy/chat show telling us he has every confidence in Treasury Secretary Geithner and flying on Air Force 1 is 'cool'. Right, so now we know. Some commodities are higher, helped by a suddenly much weaker US dollar (see below). The rush into precious metals has been widely reported, taking spot Gold to $966.70 per ounce and LME Copper at its highest in months at $4070 per tonne; same idea for Nymex Crude Oil at $52.25 per barrel and ICE Sugar at 13.76 cents per pound. Baltic Tanker rates, both to Japan and to the US Gulf, are at their lowest in at least a decade. Political and Economic Developments Iceland cut its key interest rate by 100 basis points to 17.00% while the Fed announced it too has a Quantative Easing programme. It will buy US Treasuries to the tune of $300B, doubling to $1,450B purchases of mortgage-backed securities from agencies which are paying staff bonuses! Benchmark ten-year TNote yields collapsed from 3.02% to 2.47%, 50 basis points within the hour and allegedly the largest daily fall since October 1987; the yield curve flattened. As a result the spread of Moody's BAA-rated corporate bonds widened to 587 basis points, close to last year's record 618, and probably not what the authorities had in mind. What they did know was that the US dollar would weaken, 3.66% in a day against a basket of currencies, the Norwegian krone the biggest winner with an 8.2% daily gain and the Swedish krona 12.5% so far this month (keeping EUR/SEK one-month at-the-money implied volatility close to its record high). Rather confusingly Bank of Japan governor Shirakawa insisted that the planned increase in JGB purchases by 30% to 1,800B Yen monthly was not aimed at financing government debt nor keeping rates low. According to UK website, interest rates on unsecured personal loans are on average 13.2% per annum, compared to 10.4% a year ago. Lets see how the Bank of England's QE works its way through, noting that this concept has been met with massive public hostility - an inflationary beast to bail out greedy bankers. Index-linked Treasuries continue in demand, yields on UK 2016 dropping below 1.00% and US 2018 to 1.40%. Underlying Themes UK January Unemployment is over 2 million for the first time since 1997, 6.5% on the ILO basis, though it should be noted that with February's Claimant Count surging 138K (highest since records began in 1971) it will increase further. This explains January's Average Earnings dropping 0.2% (first ever negative number caused by shrinking bonuses), up just 1.8% Y/Y the weakest since 1967's +1.30% record low. French Q4 Unemployed at 8.2% (close to the US's 8.1%) so what do they do - go on strike protesting against President Sarkozy's reforms and economic policies. Latest US Capacity Utilisation hit a record low 70.9%, EZ16 Industrial Production collapses by a record 17.3% Y/Y, the volume of Irish Retail Sales a record -20.4% Y/Y in January. What to watch for next week Monday Minutes from the Bank of Japan's February 18th/19th meeting, Supermarket and Convenience Store Sales, Y/Y Land Prices to December 2008, then EZ16 January Trade Balance, Construction Output and US February Existing Home Sales. Tuesday March Manufacturing and Services PMI's for various European countries, UK February CPI and BBA Mortgages, Eurozone January Industrial New Orders and US House Price Index. Wednesday Japan February Trade Balance, US Durable Goods and New Home Sales, March UK CBI and German IFO while the Norges Bank decides on rates (expected to cut 50 basis points to 2.00%). Thursday Eurozone February Money Supply, UK Retail Sales, German April GfK Consumer Confidence and final US Q4 GDP. Friday Japan February Retail Trade, National CPI, March Tokyo CPI as well as those for the various German states, UK final Q4 GDP, US February Personal Income, Core PCE, Deflator and University of Michigan final March Confidence Survey. Sunday Montenegro parliamentary elections. Positioning and Technical Analysis Yen crosses may become more jittery as we approach Japanese financial year-end on the 31st. The banking/insurance sector may suffer a similar fate as we fret as to how and who has survived Q1 2009. US dollar weakness should continue, possibly dramatically, taking no prisoners. Do not even think of going against the trend - just yet. This should see sleepy commodity markets perk up a bit. Bourses will probably hold above recent lows until the end of the month and possibly for the whole of April, keeping within relatively small price ranges, taking a breather after this year's dizzying plunges. The very long term trend to lower interest rates for top quality borrowers is alive and well, even at these extreme lows. Mizuho Corporate Bank 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.