Sunday, August 16, 2009

Weekly Market Commentary


Thin and nasty markets with lots of sudden intra-day swings as many reverse most of last Friday's moves. Money market futures soared, front months setting new record highs, giving the lie to much-hyped economic recovery (see below). Sep09 Eurodollars a record 99.57 (and three-month Libor offered at 0.43% today), Short Sterling 99.38, Euribor 99.21. These dragged two-year Treasury yields lower, benchmark US from 1.33% to 1.04% and Gilts to probably their lowest yield in at least a century at 0.90%, longer dated ones moving along in tandem. The US dollar retreated somewhat, Kiwi doing best hitting a multi-month high at $0.6888, the Yen not far behind at 94.42 from 97.79 last Friday (crosses lower too), and the Norwegian krone at 6.0000 per greenback. Many stock indices managed to limp to new highs for the year, Australia's S&P/ASX the best performer at 4,500, Shanghai's Composite the biggest loser down 6.5% to 3,045. Many commodities did well, ICE Sugar exploding to 23.33 cents per pound, several LME Base Metals pushing up to new highs for the year, though Nymex Natural Gas at $3.313 per MMBtu is close to its cheapest since September 2002.

Political and Economic Developments

Surprisingly German and French Q2 GDP rose 0.3% Q/Q (as did Greece and Portugal), so excited did finance minister Madame Lagarde become that she leaked the number over an hour early (one just cannot get the staff, as we keep saying). Also leaked Hong Kong GDP +3.3% Q/Q following Singapore's +20.7%. Minutes from the Fed's FOMC saw 'economic activity is levelling out. Conditions in financial markets have improved further in recent weeks. Household spending has continued to show signs of stabilizing'. So as far as they're concerned all's well then? A view not shared by the Bank of England whose opening sentence in the Quarterly Inflation Report reads: 'the world economy remains in a deep recession and its financial system in a fragile condition'. Independent thinking coupled with aversion to 'spin', and a view more in tune with our own.

South Africa cut rates by 50 basis point to 7.00%, Denmark shaved off 10 to 1.35%.

Underlying Themes

Owner occupiers struggling to pay their mortgages usually give up when they lose their job or when the value of the home is a lot less than the mortgage on it. Though UK Unemployment is up to 7.8% in June from 7.1% in March, home repossessions dropped to 11.4K in Q2 from 12.7K in Q1 (though +14.0% Y/Y). Interestingly the number of mortgages in arrears increased to 205.6K, suggesting lenders may be taking a softer stance. Not so rosy though is news that the discount between property prices at auction compared to conventional selling methods increased to 18.0% in July from an 11.0% discount in May. US July foreclosures set a new record at +32.0% Y/Y or 360K says RealtyTrac, while Federal Housing Finance Agency's director James Lockhart says these should increase for a while despite prices starting to stabilise. Of the 52 million US homes that are mortgaged, anything up to 15 million are already worth less than the value of the loan. No wonder today's August University of Michigan sentiment survey saw 'consumers much less favourable assessments of their personal finances'.

What to watch for next week

Monday Japan Q2 GDP, EZ16 June Trade Balance, US Long Term TIC Flows, UK August Rightmove House Prices, US NAHB Housing Market Index and Empire State Manufacturing Survey. Tuesday Tokyo and Nationwide July Department Store Sales, UK July CPI, US PPI, Housing Starts, Building Permits plus German and EZ16 August ZEW Surveys. Wednesday Japan June All Industry Activity Index, Eurozone Current Account and Construction Output, German July PPI, Minutes of the Bank of England's August MPC meeting and CBI August Industrial Trends; the Fed's 33rd Jackson Hole symposium on financial stability and macroeconomic policy starts in Wyoming. Thursday Japan July Convenience Store Sales, UK July Money Supply, Public Finances, Retail Sales, US July Leading Indicators and August Philadelphia Fed Survey; Afghan presidential election and parliamentary ones in Niger. Friday August Manufacturing PMI's for various European countries and US July Existing Home Sales.

Positioning and Technical Analysis

Holiday-thin markets as some instruments probe extremes (or at least their highest levels this year) mean instability will persist and some will be forced into drastic action. Money markets remain dysfunctional and some interest rate futures overbought and/or calendar spreads too wide. We continue to look for interim highs to form in equity indices, part of a process of establishing wider trading bands, and for yields to drop (flattening curves slowly). Generalised US dollar weakness should persist through the summer and probably until year-end, some commodities benefiting.

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.