Sunday, July 26, 2009

Weekly Market Commentary


Extensive and perhaps over-excited media coverage of equity indices which rallied strongly for a second consecutive week (many for nine consecutive days) and some broke to new highs for the year. The best performers were Eastern European ones (Polish WIG +11.20% and Helsinki +7.0%) and Asian ones (Hang Seng +4.0%). Great excitement at the BBC World Service where the Dow Jones Industrial Average closing above 9,000 on Thursday made headline news. The US dollar lost ground against all currencies except the Yen, many trading close to their strongest levels this year, while the South African rand hit 7.6145 and its best level since August 2008. Yields backed up a little but remain well within the range of the last month. Most commodities are a bit higher, ICE Sugar at 18.48 cents per pound equalling the March 2006 high (and well above one standard deviation from the mean of the last thirty years), Nymex Crude Oil inched up to $67.68 per barrel, LME 3-month Aluminium $1,811 and Copper $5,575 per tonne, an increase of about 30% and 50% respectively from this year's lowest levels.

Political and Economic Developments

UK Q2 GDP dropped -0.8% Q/Q and -5.6% Y/Y, a record for a series going back to 1956 and a lot worse than the government and economists' forecasts. Meanwhile government debt ballooned again to a record £19B in June and net debt a whopping 55.6% of GDP. Typical of the British public, against this dire background they managed to push Retail Sales +1.2% M/M and +2.9% Y/Y due to unseasonably warm weather and early summer sales. Japanese Supermarket Sales -4.4% Y/Y, at the lower end of the range since 2000 as an increasingly desperate ruling LDP attacks the opposition Democratic Party, the election campaign heating up with headlines declaring: ‘The Future of Japan is in Danger'.

Brazil's central bank cut the key Selic rate by 50 basis points to a record low 8.75%.

Underlying Themes

While some banks reported good Q2 earnings on wider margins and successful trading, those lending to commercial real estate are suffering. Valued at $6,700B, 10% of US GDP, Moody's notes prices fell 7.6% in May and the sector as a whole had lost about 35% from its peak. Spanish residential rents are falling as properties that fail to sell (1.5 million so far and rising) flood the lettings sector - +55% to 3.3 million units over the last two years; Madrid and Barcelona down 8%, the first ever decline, to €12.6 per square metre. Hoteliers are getting reductions of up to 30% from landlords as they in turn see a sharp drop in guests especially at the business and luxury end. UK Commercial Property is struggling too, the British Retail Consortium estimates that one in eight town centre shops is empty. The beleaguered British Beer and Pub Association reports 52 pubs closing weekly this year against 39 last, the total still in business dropping to 53,446 from 58,600 in 2006, local ones rather than the high street especially hard hit. The Commercial Mortgage-Backed Securities Market is still pricing the very few deals done at eye-watering spreads - 145 basis points over ten-year Gilts for Land Securities' £360M on a site with a long-term government tenant in place.

What to watch for next week

Sunday 26th Ben Bernanke gives PBS TV an interview from the Federal Reserve Bank of Kansas City discussing the economy. Monday Japan June Corporate Services Prices, EZ16 Money Supply, US New Home Sales, UK July Hometrack Housing Survey, Nationwide House Prices from this day and German August GfK Consumer Confidence. Tuesday US May CaseShiller Home Prices, UK July CBI Distributive Trades and US Consumer Confidence. Wednesday Japan June Retail Trade, UK Net Consumer Credit, Money Supply and Mortgage Approvals, US Durable Goods Orders, the Fed's beige Book and July CPI for the different German states due from this day. Very late the Reserve Bank of New Zealand decides on rates (expected unchanged at 2.50%). Thursday Japan June Vehicle and Industrial Production, German Retail Sales and July Unemployment, EZ16 Business Climate Indicator and Confidence Surveys. Friday Japan June Jobless, Household Spending, Housing Starts, Construction Orders, National CPI, Tokyo July CPI, UK GfK Consumer Confidence, EZ16 CPI, Chicago Purchasing Managers, US Q2 GDP and Eurozone June Unemployment. Saturday is the 1st August.

Positioning and Technical Analysis

Rallies in equity indices are unlikely to see any follow-through next week so we shall allow for another two to four weeks of broadly sideways work. Those that posted new highs for this year we feel are in a process of establishing new wider trading bands. This should enable the Euro, pound and other major currencies to strengthen against the US dollar, causing another round of short-covering. Watch for strong weekly closes in these to confirm the start of the next leg in a long term trend. Commodities may benefit from this and perennial gold bugs will be tempted to buy more. Money market futures, especially Eurodollar interest rate ones, suddenly look vulnerable. If not next week then during August we expect a sharp sell-off, similar to the one in early June, as another round of jitters hit the banking sector. Fixed income yields should move sideways.

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.