Overview
Subtle changes in charts this week, the most obvious perhaps the drop in long-dated fixed income yields led by benchmark ten-year Gilts which reversed the previous week's short squeeze, dropping from 3.76% to 3.43%. Several money market futures contracts traded at new all-time highs, suggesting 3-month Libor at USD 0.75%, GBP 1.09% and EUR 1.13% by mid-June. Similar price action in Yen crosses which also reversed last week's gains, so USD/JPY at 94.78 is lower than usual over the last ten weeks. Equity indices stalled, many at their 200-day moving averages, having rallied for nine consecutive weeks since March. Grains, Oilseeds and Softs prices are higher, many at their best levels since October, ICE Sugar the star turn trading at 16.00 cents per pound (best since July 2006) on Brazil's floods. Nymex Crude Oil touched $60.08 per barrel, highest since November.
Political and Economic Developments
Rate cuts, for a change: 50 basis points from Russia to 12.00% because unemployment is 8.7M or 10%, and 100bp from Latvia to 4.00% because Q1 GDP dropped -18.0% Y/Y (Estonia's shrank -15.6% Y/Y and the Czech Republic's -3.4% Y/Y). French Q1 GDP dropped -1.2% Q/Q, -3.2% Y/Y; Italy's -2.4% Q/Q, -5.9% Y/Y; Germany -3.8% Q/Q (a fourth consecutive decline) -6.9% Y/Y; EZ16 -2.5%, -4.6% Y/Y. Hong Kong a record -4.3% Q/Q, -7.8% Y/Y, underlining just how interlinked our joined-up 'global' world has become, though Indonesia a rare bright spot growing +1.6% Q/Q and +4.4% Y/Y.
Underlying Themes
Are they using the same speechwriter (who may be cribbing from this column)? The Bank of England's Mervyn King, unveiling the Quarterly Inflation Report said, the UK has had 'emergency treatment (and an) unprecedented policy stimulus... (the) economy requires a period of healing... that will take time'. US Treasury's Geithner on the same day, 'the financial system is starting to heal... but the process of financial recovery and repair is going to take time'. We applaud the honesty but hope this is not a new version of the 'green shoots of recovery' spin they have been ramming down our throats all month.
In our opinion one of the reasons recovery will be so slow is precisely because of their zero interest rate policy. Low rates mean struggling mortgagees can postpone repossession, reducing forced sales, minimizing downward pressure on house prices, so that the housing market takes ages to bottom. Anecdotal evidence has it that some monthly repayments are just £25 - which even those on the dole can afford. UK March Average Earnings including bonuses dropped -0.4% Y/Y, the first annual decline since records began in 1964, but according to the FSA's Lord Turner disposable income rose 6.0% because of lower mortgage costs. Meanwhile those with jobs borrowed £11.3B last year, up 53% since 2007, for home improvements (except MP's who get their money straight from the taxpayer). The Japanese need no reminding that land prices, for all uses and nationwide, have done nothing but lose their value since 1991, shrinking by an average 4.00% per annum.
A survey by US internet realtor Zillow had sixty percent of homeowners acknowledging their property had dropped in value over the last year when in fact 80% have. Seventy-four percent believe house prices will not drop further over the next six months and 27% think values will increase. Thirty-one percent would put their property up for sale over the coming year if real the real estate market picked up. This 'shadow inventory' will keep supply at record highs and a lid on potential price rises. Fannie Mae lost $23.2B in Q1 and went begging for another $19.0B of aid.
What to watch for next week
Monday, Victory Day holiday in Canada, we get Tokyo April Condominium and Department Store Sales and Consumer Confidence, UK Rightmove May House Prices, Eurozone March Trade Balance and US May NAHB Housing Market Index. Tuesday Eurozone March Construction Output, UK April CPI, May ZEW Surveys for Germany and EZ16, US April Housing Starts and Building Permits. Wednesday Japan Q1 GDP, April Convenience Store Sales, German PPI, UK CBI Industrial Trends and Minutes of the Bank of England's and Fed's MPC/FOMC meetings. Thursday 21st Ascension Day holidays in many countries, Japan March Tertiary Industry Index and Bank of Japan meeting, May PMI's for various European countries, UK April Retail Sales, Money Supply, Public Sector Finances, US Leading Indicators and May Philadelphia Fed Survey. Friday just Japan April Supermarket Sales and UK revised Q1 GDP. Saturday German presidential election. Monday the 25th is Africa Day with several celebrating, a UK Bank Holiday and US Memorial Day.
Positioning and Technical Analysis
Scrutinise weekly candles for confirmation of reversals in fixed income, Yen crosses and possibly breakouts of major currencies against the US dollar. Some may fret and label these a return to 'risk aversion' and their gut reaction will probably be to offload peripherals and emerging market instruments again; we caution against over-simplistic assumptions. Equity indices will probably drift slowly lower to their 50-day moving averages over the next three weeks or so.
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.
