Sunday, May 10, 2009

Weekly Market Commentary


Having postponed the results of the 19 biggest US banks' 'stress tests', the authorities then spent the week leaking this 'information'. To cap it all Treasury secretary Geithner said the exercise was credible, carefully designed, that its importance lay in its transparency and that he 'hopes banks are going to get back to the business of banking'. Meanwhile Fed chairman Bernanke said their 'programs play a critical role in ensuring that the US banking sector will be in a position of strength'. Those 'not at risk of insolvency' but in need of recapitalisation have until the 9th of November to raise $74.6B. Stock indices, which had been rallying strongly for a ninth consecutive week, stopped in their tracks - probably a question of buy the rumour sell the fact. Nevertheless they have rallied roughly 30% from March's lows and some Asian ones have weekly closes above 200-day moving averages.

Treasury bonds sold off taking many to their highest yields in weeks (US 30-year 4.365%), though two-year paper remains at the very low levels of the last two months. Money market rates eased fractionally again taking some futures contracts to new record highs (Sep Euribor to 98.885 and Eurodollars to 99.150). The US dollar lost ground against all currencies, not huge amounts but subtle changes in the charts which hint at the start of a new trend. Leading the pack was the Australian dollar at $0.7616 strongest since October, the Canadian one hot on its heels at C$1.1555 and its best since November, Hungary and Sweden the best performing Europeans. Not surprisingly many commodity futures prices rallied too, spot Silver to $14.13, Palladium to $243.50, New York Cotton to 59.97 cents per pound and Gasoline to $1.70 per gallon.

Political and Economic Developments

Central bankers pulled more of the same rabbits out of their hats in the vain hope that this time they would do the trick. Fifty basis point cuts from Norway and Romania to 1.50% and 9.50% respectively, twenty-five basis points from the Czech Republic and the ECB to 1.50% and 1.00%, the latter also announcing €60B of 'Credit Easing' via covered bonds. The Bank of England threw in another £50B worth of Quantitative Easing. Mr. Trichet sees CPI inflation turning negative this summer because of the base effects of much lower energy prices and a broad based reduction in inflationary pressures. These 'short term dynamics are not relevant from a monetary policy perspective' and therefore interest rates are appropriate.

US Unemployment surged to 8.9% in April as the economy lost 539K jobs, a total of 5.7 million gone since December 2007. This is the highest jobless rate since September 1983 and according to the Bureau of Labor Statistics there are a terrifying 15.4% 'under utilized' workers, an alternative gauge started in 1948 which also includes 'discouraged' job seekers and the 'marginally attached'.

Underlying Themes

While the economy may be getting worse at a slower rate, it is still in recession and unemployment is rising. Average man, the perennial optimist, eagerly grasps the 'green shoots' and 'seedlings' offered to him by politicians and spin doctors. Why? Because he knows in his heart of hearts that if current measures do not work the future looks bleak indeed. In our opinion what we ought to face up to is the more likely possibility of things not getting significantly worse, but not improving much either - for a very long time.

What to watch for next week

Sunday central bankers meet in Basel and Monday only Japan April Machine Tool Orders; German Wholesale Prices due from this day. Tuesday Japan March Leading and Coincident Indices, UK and US Trade Balances, British Industrial Production, April BRC Retail Sales Monitor, RICS House Price Balance and US April Budget Statement. Wednesday the final phase of India's general election, Japan March Trade Balance, April Money Supply, Bankruptcies, Economy Watchers' Survey, UK NIESR GDP, Unemployment, March Average Earnings and Eurozone Industrial Production. Then the Bank of England's Quarterly Inflation Report, US April Import Prices, Retail Sales and March Business Inventories. Thursday just US April PPI. Friday Japan March Machine Orders and April CGPI, EZ16 CPI, German and Eurozone Q1 GDP, US March Long Term TIC flows, April CPI, Industrial Production, Capacity Utilisation, May Empire Survey and University of Michigan Confidence Survey. Saturday Kuwaiti parliamentary election.

Positioning and Technical Analysis

Seeing as many FX markets have been going broadly nowhere so far this year, there is a chance they will spring boldly into action adding momentum to the tendency to US dollar weakness. This should add to current bullish momentum in many commodities taking the CRB Index to its best level so far this year (and potentially a lot more further out). Money market rates and short-dated Treasuries should hold at current extremely low levels, or nudge fractionally down again. Longer-dated paper should remain very mixed, US ones likely to underperform their European counterparts, probably moving back towards the broad trading bands that have held for much of this year. 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.