Sunday, September 20, 2009

Weekly Market Commentary


Many markets hit extreme levels, equity indices in the limelight as they reached this year's peak and highest since Lehman's collapse twelve months ago. Best performers over this period have been Jakarta, Sweden and India, the FTSE and Nikkei lagging, the latter dragged down this week by banking stocks. At a Treasury Select Committee hearing Tuesday the Bank of England's King suggested excess reserves deposited at the central bank could earn less than Base Rate (currently 0.50%) but warned this was unlikely to encourage more lending to businesses and individuals. Short Sterling futures soared to record highs on this (front Dec09 to 99.500), benchmark two-year Gilts a record low yield of 0.699%, and the pound weakened across the board - EUR/GBP £0.9011. The US dollar also lost ground, the Brazilian real in the lead at 1.791 per greenback and the Euro not far behind at $1.4768. Appetite for precious metals was maintained, spot Gold reaching $1,023.85 per ounce, Silver leading at $17.63, Palladium ($303) and Platinum ($1,349.50). Nymex Natural Gas bounced very strongly from a multi-year low at $2.409 to $3.900 per 10K MMBtu.

Political and Economic Developments

During August the US consumer went out and did what s/he enjoys most - shopping. Not just exchanging 'clunkers' for new more economical cars, but lots of other thingstoo. Retail Sales rose 2.7%, one of the strongest monthly increases since the 1992 start to this series. This would explain why sentiment in Philadelphia and the Empire State area improved to their best levels since 2007. Though the August UK RICS House Price Balance was positive (10.7) for the first time since summer 2007, UK Retail Sales were absolutely flat last month. Perhaps July Average Earnings increasing by just +1.7% Y/Y (close to the lowest going back to 1964) has something to do with it; or rising Unemployment (+24.4K to 7.9%). The wettest ever July in Britain yet holidays to Europe were down by 12% and to the US -19% over the year.

Interestingly, the Eurozone's Trade Balance increased to a surplus €6.776B in July, the best in five years and not that far off the all-time high €9.162B.

Underlying Themes

Three cheers for Lord Levene, chairman of Lloyds who said, 'there is a very real danger that we shall end up doing irreparable damage to one of the strongest sectors of our economy. I am proud to be part of the City of London…because financial services are something at which we British excel'. While EU27 leaders urge 'the G20 summit (to) commit to agreeing to binding rules for financial institutions on variable remunerations, backed by the threat of sanctions at the national level' and the Archbishop of Canterbury urges bankers to 'repent', others enjoy tut-tut ting over excesses. All their arguments are riddled with holes. What about CEO's who 'earn' extra if company performance is above pre-agreed levels? All those who work in direct selling where commission income is a key motivator; research grants doled out in stages as work progresses (or not as the case may be), sportsmen who get paid incremental incentives over and above their wages let alone the trillions paid to footballers. Will heads of state micro-manage their compensation packages too?

What to watch for next week

From tomorrow Eid al-Fitr holidays start in many countries and continue through to Wednesday and a new three-day holiday in Japan until then. Monday just US August Leading Indicators and UK September Rightmove House Prices. Tuesday quieter still, only US July House Price Index. Wednesday September PMI's for various European countries, Minutes from the Bank of England's MPC meeting, August BBA Mortgages, EZ16 July Industrial New Orders, the Norges Bank decides on rates (expected unchanged at 1.25%) and then the FOMC's interest rate decision (expected unchanged at 0.25% but note that Fed Funds futures have been trading through here for weeks). Thursday Japan July All Industry Activity Index, August Trade Balance, Supermarket and Convenience Store Sales, US Existing Home Sales, Germany September IFO and G20 leaders start their meeting in Pittsburgh. Friday Japan August Corporate Services Prices, EZ16 M3 Money Supply, US Durable Goods Orders, New Home Sales and September University of Michigan Confidence Survey. Sunday federal elections in Germany, parliamentary ones in Portugal and Monday 28th Israel's Yom Kippur holiday.

Positioning and Technical Analysis

After weakening against all currencies for the last three weeks, and for ten against the Kiwi, the US dollar might need to take a breather. However, depending on weekly closes tonight there is a chance that the trend will gather pace through to mid-October, pushing precious metals and a few other commodities higher. Short-dated treasuries should continue in demand as money market rates tend towards zero; yields on longer maturities will eventually be dragged lower as well. Despite already being overbought, this could send equity indices higher still for a fourth week in a row prior to a correction starting in October.

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.