Sunday, October 11, 2009

Weekly Market Commentary


Foreign exchange in the limelight as many currencies traded at their strongest this year. Leading the pack was the Australian dollar (see below), +4.3% this week alone to a high of $0.9092, closely followed by the South African rand (+3.3%), and Kiwi ($0.7457). Bottom, along with the greenback, sterling so that GBP/AUD dropped to 1.7650, lower than anything since March 1985. UK Output PPI rose +0.5% on the month, Core +1.4% Y/Y, higher than expected and adding to worries about inflation and ballooning government debt. Eastern European currencies lost ground against the Euro on worries about potential changes in mortgage laws in Latvia, Swedish banks particularly exposed to the problem so that NOK/SEK rallied to 1.2400, the krona’s weakest since mid-June. Currency moves helped several commodities higher, most notably Gold to $1061.20 per ounce, a new record high. This was mainly a function of the exchange rate because Gold futures in Tokyo are trading around 3,000 yen per gram for a ninth consecutive week; Palladium also did very well rallying to $323.00 per ounce. Yield curves flattened a little further as rates on short dates backed by up more from last week’s lows than the long end, though ultra-long and index-linked remain well bid. Most equity indices reversed last week’s losses and are back close to September’s highs, Australia, Brazil, Russia and Turkey setting new peaks for this year. Stock pickers are perplexed, and possibly a little worried, by the trend to lower Treasury yields since mid-August as orthodox theory suggests that either equities or bonds can rally but not both. We believe both can enjoy the benefits of big enough ‘stimulus packages’, as can commodities, real estate, farmland, fine art, fine wines – an endless list propelled by cheap cash.

Political and Economic Developments

The Reserve Bank of Australia raised their cash rate by 25 basis points to 3.25%, surprising most pundits (though they will not admit it). Great excitement and loud trumpeting that this signals the first of many countries to turn the corner, put the credit crunch behind them, who can look forward to solid economic recovery, and that this is the first in a series of rate hikes to bring them back up to more ‘normal’ levels. Needless to say we feel they are getting ahead of themselves. Lets not forget that central banks can get rate rises wrong, as Canada did in 2003 and again in 2007, and more famously the ECB in 2008. The usual mutterings about suitable exit strategies as and when appropriate from Messers Bernanke, King and Trichet, though Chinese vice-president Xi Jinping today said, ‘we will continue to implement…moderately easing monetary policy’ because economic recovery would be a long process. Marginally more upbeat is that Y/Y Bankruptcies in Japan dropped by 18.0%, close to their lowest in over a decade.

Underlying Themes

US Consumer Credit was -$12.0B in August, less negative than July’s low point of -$19.0B, the seventh consecutive monthly decline and the eleventh negative number of the last thirteen months. Matching the seven-month decline of 1991, they are the longest consecutive drops since the series began in 1943. Obviously people are choosing to pay down debt seeing as money market rates are practically nil, revolving credit amounting to $10B of the total and non-revolving $2.07B, buoyed by the ‘cash for clunkers’ programme. Attempts to clamp down on credit card charges may have made bankers more choosy as to who they extend lines to.

What to watch for next week

Monday 12th holidays in several countries including Brazil, Canada and Japan and no economic numbers are due. Tuesday UK September CPI, RICS House Price Balance and DCLG House Prices, BRC Retail Sales Monitor and German October ZEW Survey. Wednesday Japan September Domestic CGPI, Tokyo Condominium Sales and Consumer Confidence, while the Bank of Japan concludes a two-day rate-setting meeting (expected unchanged at 0.10%). Also UK August Average Earnings and Unemployment, Eurozone Industrial Production, US Business Inventories, September Retail Sales, Import Prices and Minutes of September’s FOMC. Thursday EZ16 and US September CPI, October Philadelphia Fed Survey and Empire State Manufacturing one. Friday Eurozone August Trade Balance, US TICS Flows, September Industrial Production and Capacity Utilisation, October’s University of Michigan Confidence Survey while Botswana holds a general election. Monday the 19th Diwali holiday in India.

Positioning and Technical Analysis

Allow for a week or two of consolidation close to current levels in the FX market, moves in the crosses dominating and the US dollar taking a breather from its recent battering. Treasuries should strengthen, yield curves flattening, perhaps because banks prepare to be forced to hold better quality assets as reserves. Equities will probably hover uncertainly at current levels and we remind investors they should consider what currency appreciation/depreciation ought to do for share values. Few market professionals will be surprised if some were to suddenly drop by 10% for no apparent reason.

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.