Overview
Slow, thin markets in a holiday-shortened week (and another one due). Equity indices rallied for the eighth consecutive week, trading close to their highest levels of this year. Lagging were the Hang Seng and Sweden's OMX, leading Jakarta and Thailand. Yields were mixed with money market offered rates edging fractionally lower, as did two-year Treasuries (Gilts to 0.967%) while other US maturities backed up to the highest so far this year (10-year TNote 3.17% and 30-year 4.09%), making the yield curve the steepest this year (10's-2's 223 bp). The US dollar weakened fractionally against most major currencies except the Yen and the Mexican peso, so that Yen crosses are trading close to this year's highest levels, the Swedish krona and South Korean won benefiting the most. Commodities a mixed bag, ICE Sugar standing out by rallying to 14.40 cents per pound - close to the highest prices achieved in 2008, and CBT Soybeans at $10.72 per bushel - most expensive since early October.
Political and Economic Developments
Yet more rate cuts to counter shrinking economies: Brazil's Selic -50 basis points to a record low 10.25%; the same from the Reserve Bank of New Zealand to 2.50% who, like Canada, promised to hold it well into 2010. US Q1 GDP dropped -6.1% Q/Q annualised, business investment collapsing, similar to Q4's -6.3% and Germany's is estimated at -6.00%. Bad, but pity poor Lithuania where Q1 GDP was -9.5% Q/Q, -12.6% Y/Y.
US Consumer Confidence increased a little in April, and a number of sentiment surveys around the world reflected something similar. The idea can be summed up as 'things aren't getting any worse'. From here to 'things are getting better' is one very big step and probably a leap too far - for now.
Eurozone Unemployment shot up in March to 8.9%, almost as high at 2005's peak 9.1% and 1999's record 9.5%. Likewise Japan's to 4.8%, the highest since July 2004 with the Job-to-Applicant ratio the lowest since January 2002 and Labour Cash Earnings -3.7% Y/Y (record low was -5.7% July 2002).
Underlying Themes
Banks are not lending, and people are not borrowing. Chicken, egg, or a bit of both? UK February and March Net Consumer Credit were a mere £0.1B each, a record low and a fraction of the £2.0B or so average of 2000-2004. The Bank for International Settlements said that from Q2 to Q4 2008 banks cut international portfolios by 14%, $4,800B, the steepest decline in lending in at least 30 years. Most of the drop came from repatriation by Western European banks whose international aspirationsgrew exponentially during the credit boom. Meanwhile the US Treasury and the Fed put themselves in the ridiculous position of judging which of the top 19 US banks are fit for the purpose, a lose/lose situation where publication of results has been postponed. Hopefully this will be a lesson to the German authorities who are also considering a 'good bank/bad bank' solution. A leaked report estimated their toxic debt at €800B, concentrated in state lenders. Andrew Haldane, the Bank of England's director for financial stability, compared the world of finance to a complex network where lessons from biology, ecology, epidemiology, and neurology were perhaps as relevant as those from business. He also advocated broader use of central counterparties, increased netting of claims, and killing off undesirable financial innovations.
What to watch for next week
Sunday presidential elections in Panama and a week filled with holidays: Monday Japan and the UK among others, Tuesday and Wednesday Golden Week in Japan, Russia on the 11th. Monday German March Retail Sales, US Pending Home Sales and Construction Spending, plus Eurozone May Sentix Consumer Confidence. Tuesday UK April Construction PMI, US Non-Manufacturing ISM, and EZ16 March PPI, while the Reserve Bank of Australia decides on rates (probably unchanged at 3.00%); Eurozone finance ministers meet. Wednesday UK April Nationwide Consumer Confidence, Services PMI, Official Reserves, US Challenger Job Cuts, ADP Employment Change plus Eurozone March Retail Sales; the Norges Bank decides on rates (expect -50 basis points to 1.50%). Thursday Japan April Monetary Base, UK New Car Registrations, German March Factory Orders, US Consumer Credit, Q1 Non-Farm Productivity and Unit Labour Costs while the Bank of England and the ECB decide on rates (unanimously expected unchanged at 0.50% and -25 bp to 1.00% respectively). Friday German March Trade Balance, Industrial Production, US Wholesale Inventories, UK April PPI, US Non-Farm Payrolls and Unemployment.
Positioning and Technical Analysis
Markets look set to break from April's relatively small ranges, FX emerging from obscurity this year. We continue to favour generalised US dollar weakness and struggling emerging markets caused by re-capitalisation of core businesses. After eight weeks equity indices should run out of steam this month, though we do not expect sharp falls. Treasury yields should drop back within this year's bands as short-dated ones move towards new/all-time lows. Foodstuffs and some metals should trend slowly higher.
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.
