Sunday, April 26, 2009

Weekly Market Commentary


Equity indices suffered a sharp sell-off on Monday but recovered subsequently to close roughly unchanged on the week, again one dominated by waiting and watching to see what New York would do; Malaysia and Mumbai fared best, Australia and Dubai worst. Therefore Treasury yields remain unchanged from where they have traded for several months, Russian and Gilt ones a bit higher (though three-month TBills dropped to a multi-decade low of 0.47%). The money market for US dollars remains totally seized up, the spread either side of Libor widening between the different categories of banks. Currencies were mixed, the pound, US dollar and Polish zloty losing ground against the strongest Swedish krona, Japanese Yen and Swiss franc (despite Swiss National Bank president Roth saying they face the steepest economic contraction since 1975). Energy markets are very subdued, Nymex Natural Gas futures cheaper than they have been since October 2002. Precious metals traded higher, as did Cotton and Tin catching up with Copper, Lead, Plastics and Soy Bean futures which are more expensive than they have been since October.

Political and Economic Developments

More rate cuts, others threatening these: Canada -25 basis points to a record low 0.25%, India also -25 to 4.75%, Russia -50 to 12.50% and Sweden -50 to another record 0.50% and in a bid to bring Treasury bond yields down promised not to raise the target until the end of H1 2010.

Anglo Saxon economies are a mess and we know it, easy targets for those who save more and spend less than we do. Ironically Germany and Japan are expected to face bigger falls in economic output despite much higher savings ratios as their exports implode and domestic demand never really takes hold. Retail Prices are declining by 0.4% Y/Y in Britain (lowest since June 1959) and the US (lowest since May 1955), -0.7% in Ireland. UK Q2 GDP shrank by 4.1% Y/Y, as low as it was in Q3 1979, and the US numbers due next week are expected to be similar. Public finances are shot to pieces and a puppet-like Chancellor Darling still has the nerve to hoist his battered red briefcase before presenting his Budget to parliament. The less said about his plans and forecasts the better. Combined assets in the Fed system hit $2.25 trillion at the end of Q4 2008, almost double the previous year's $1.33 trillion.

Underlying Themes

Unemployment is rising around the world and with it true suffering for many. It will affect spending, saving, attitudes and crime. While the individual can (in some countries very easily) declare himself bankrupt, large financial institutions cannot. They have to nurse the bad loans, restructure, regroup, rethink - none are simple options and none can provide a 'quick fix'. The problems will drag on.

What to watch for next week Saturday parliamentary elections in Iceland and the IMF/World Bank meet in Washington. Monday just UK April Hometrack Survey and March BBA Mortgages. From Tuesday April CPI for the different German states is due, Japan March Retail Trade, April Small Business Confidence, US Consumer Confidence and February CaseShiller House Prices. Wednesday (a holiday in Japan and Israel) Eurozone March M3 Money Supply, April Business Climate, US Q1 GDP and the FOMC decides on rates (many are suggesting a 12 basis point cut from the current 0.25%). Thursday UK April GfK Consumer Confidence, Japan March Industrial Production, Housing Starts, Vehicle Production and Construction Orders. Then German March Retail Sales, April Unemployment, EZ16 CPI, March Unemployment, US Personal Income and Spending, Core PCE, Q1 Employment Cost Index and April Chicago Purchasing Managers. Friday May 1st most are on holiday though Japan releases March Jobless, Household Spending, Labour Cash Earnings, National CPI, Tokyo April CPI and Vehicle Sales. UK March Net Consumer Credit, Mortgage Approvals, US Factory Orders, April Manufacturing PMIs for the US and UK, final University of Michigan Confidence Survey and US Vehicle Sales. Monday 4th holidays in Ireland, and the UK; Japan through to Wednesday.

Positioning and Technical Analysis

Markets look set to emerge from the 'sleepy hollow' they have been lurking in for the last month or two, probably taking many by surprise and causing implied volatility to shoot higher. The US dollar should come under considerable pressure against a raft of major currencies, the Swiss franc, Euro and even Sterling in line to make the biggest gains. Emerging markets may also suffer, especially Eastern European ones, as their myriad financial problems comes back into the spotlight. Despite central bank actions and comments yields on their Treasury paper may back up suddenly. Commodity prices should get a boost from the FX moves, Base Metals standing to benefit most. Short-dated Treasury yields of major currencies should trade at unheard of or unbelievably low levels, with the potential for yield curves to flatten as we get round to the idea that these extreme and emergency rates are to stay with us for considerably longer. Equity indices might manage to inch up for an eighth week in a row but slippage increases the closer we get to a either to a 9th or a 12th consecutive weekly rally.

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.