Monday, July 13, 2009

Weekly Market Commentary


Equity indices for once looked reality in the face and shuddered, hardest hit Russia -9.5% this week, followed by Argentina and Egypt -7.0%, oil stocks looking surprisingly vulnerable. More worryingly many are testing important support having lost almost one third of the gains from March to May's high. Weekly closes below chart levels complete small 'head-and-shoulder' tops in many and explain the move into Treasuries and the Yen - last year's 'safe-havens'. It also explains this week's tendency to edge out of emerging market currencies where the Russian rouble and South African rand lost most. Front month money market futures contracts are trading at record highs because Libor yields are moving towards the central bank target rates, taking short-dated Treasuries with them, and July09 Fed Funds futures are priced to yield 0.18%. Japanese benchmark two-year JGB's at 0.23% the lowest yield in four years, Swedish ones a record low 0.90%, but ten-year Gilts yielding slightly more this week as the Bank of England decided not to increase the £125B it will spend in total on Quantative Easing. Credit spreads widened slightly, the iTraxx Crossover junk bonds index out to 700 from 650 basis points late May, German Bubill yields the lowest ever at 0.375% and 0.434% for one and three-month maturities. Commodities mostly lower, Cotton the only exception, as investors assess the possibility of Chinese consumer demand being lower hoped, explaining the dip in Baltic Freight Rates.

Political and Economic Developments

More bad news, this time from Japan. Machine Orders dropped -38.3% Y/Y in May, almost as bad as January's record -39.5% and Machine Tool Orders a whopping -73.1% Y/Y (though off March's record -85.2%), giving the lie to Q2's so-called 'green shoots'. The Domestic Corporate Goods Price Index dropped a record -6.6% in the year to June, much worse than anything since the series began in 1961, hinting at another bout of deflation this year. Unusually for the UK June PPI Output Prices dropped -1.2% Y/Y, almost as bad as the 2001 record -1.5%, and one of just a dozen or so negative numbers ever seen.

Underlying Themes

Despite savings ratios increasing and consumers paying down debt, unemployment and falling asset prices have led to the highest ever rates of US bad debts. The American Bankers Association reported Q1 bank-issued credit card delinquencies (borrowers at least 30 days behind) at 4.75%, balances on these up 1.08%, putting the total at a record 6.60%. Non-payment of all consumer debt, including car loans, is running at 3.32% and the highest since records began in 1974, while 3.52% of home loans have gone sour (forcing Moody's to downgrade another $7.4B of prime jumbo loan-backed securities). A RICS survey of commercial property in 50 countries showed price declines in every single area in Q4 2008, the first time this has ever happened. No wonder banks are increasing loan loss provisions as eventually they will have to write off a good part of these assets.

What to watch for next week

Sunday 12th Tokyo Metropolitan assembly election, seen as a dry run for general elections later this year, a presidential one in the Republic of Congo while US Treasury Secretary Geithner flies out to Europe and the Middle East to discuss the financial crisis. Monday just Japan June Consumer Confidence and US Monthly Budget Statement. Tuesday in contrast a marathon numbers-wise: UK BRC June Retail Sales Monitor, RICS House Price Balance, CPI, May DCLG House Prices and Eurozone Industrial Production, June Tokyo Condominium Sales, July ZEW Surveys for Germany and EZ16, and the Bank of Japan starts a two-day meeting (expected unchanged at 0.10%); also US May Business Inventories, June Retail Sales and PPI. Wednesday EU27 June New Car Registrations, UK May Average Earnings and June Unemployment, EZ16 and US CPI, US Industrial Production and Capacity Utilisation, July Empire State Manufacturing Survey and Minutes of the Fed's June meeting. Thursday Japan May Tertiary Industry Index, Bank of Japan Monthly Report, US May TICS Flows, July Philadelphia Fed Survey and NAHB Housing Market Index. Friday EZ16 May Trade Balance and Construction Output, US Housing Starts and Building Permits.

Positioning and Technical Analysis

Several equity indices have broken important chart levels and interest rate futures likewise. Dollar/Yen and Yen crosses have joined in too, hinting at explosive moves next week possibly gapping lower over this weekend. Watch weekly closes carefully for confirmation and prepare for increased implied volatility. As chart levels give way, more stops will be triggered, leading to potentially very big moves in holiday-thin markets. We continue to expect a rush into safe-haven instruments which include the Japanese Yen, Treasuries and top quality corporate bonds, but this time not the US dollar. Last year's rush was caused by repatriation to recapitalise core assets; this time there's little money left to do so. At some point this month, and certainly in Q3 2009, the trend to generalised US dollar weakness should resume lending a little support to commodity prices where metals and softs are likely to hold up better than most.

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.