Monday, October 26, 2009

Weekly Market Commentary


FX rates pushing boundaries amid generalised US dollar weakness, so much so that Brazil imposed a tax on foreign investment in domestic bonds and equities to stem hot money flows (the tax does not apply to foreign direct investment). This saw the real back up a tiny bit from its strongest this year at 1.697 per greenback, though other major currencies are trading at extremes: Swiss franc 1.0033, Euro $1.5061, Australian dollar $0.9330, Kiwi $0.7635; sterling and yen lagging. This pushed many commodities higher, LME Lead and Zinc the best performers among the metals, +11% this week alone, CBoT Wheat +12%, Nymex Crude Oil to $82.00 per barrel, and ICE Cocoa at $3412 per tonne its most expensive since the 1970's. Most stock indices are up on the week, some to new highs for this year, but others have been rattled - obviously the Bovespa on the tax move and to a greater extent India -6.00% from last week's peak, and Jakarta -5.00% (these three are of course among this year's biggest gainers), also Italy's MIB -3.75% on rumours of budget-minded economy minister Tremonti's possible resignation on PM Berlusconi's decision to cut taxes. Money market rates are unchanged though some are starting to wonder how things will turn out over year-end. Treasury yields backed up a little again but remain well within recent ranges.

Political and Economic Developments

Stock markets defy gravity, propelled by stimulus packages, while the so-called 'real' economy remains mired in debt and doubt. Mervyn King this week said, 'to paraphrase a wartime leader, never in the field of financial endeavour has so much money been owed by so few to so many'. Contrary to expectations UK Q3 GDP shrank by 0.4%, the sixth consecutive quarterly decline (the longest on record) so that annually the drop was 'just' -5.2% from -5.5% in Q2. Great! With VAT set to return to 17.5% in January, the boost from its reduction to 15.0% has been minimal, Retail Sales flat on the month to September as they were in August, though +2.4% Y/Y from May's low of -2.3%. Next: the £400M 'cash for bangers' will run out. Meanwhile Royal Mail is on strike protesting management chaos.

Underlying Themes

Fat cats' pay and banker bonuses castigated in the media and pounced upon by politicians trying to garner public support. Without a hint of irony UK MP's, whose snouts have been in the expenses trough for a decade or more, appoint the unelected to arbitrarily decide on compensation. Ahead of a government-commissioned review of corporate governance the Confederation of British Industry issued a warning on pay and the reputational risk involved because, 'unless they find some way of hitting the reset button over the next year or two, politicians around the world will attempt to do the job for them'. The US is no different with its 'pay tzar' (czar?) Kenneth Feinberg this week slashing top execs cash pay at TARP bailout firms by up to 94% and stopping country club membership fees among other perks. The rules are not retroactive and hadn't some of these chaps already agreed to work for $1? Meanwhile not a peep as to what to do with Fannie Mae and Freddie Mac, the government sponsored agencies that are the rotten core at the very centre of this putrid barrel. The risk and reality is that vast swathes of US business have been nationalised and now there will be no really talented individuals who will want to work at these defunct industries because of political interference and an economic straightjacket. They are doomed to lumber on as inefficiently as any arm of a bureaucratic nightmare, needing regular intravenous top-ups of their drug of choice - taxpayers' money.

What to watch for next week

Monday the 26th holidays in Austria, Hong Kong, Ireland and New Zealand and just UK October Hometrack Housing Survey and German November GfK Consumer Confidence. Tuesday US August CaseShiller Home Prices, EZ16 September M3 Money Supply, UK October CBI Distributive Trades and US Consumer Confidence. Wednesday Japan September Retail Trade and October Small Business Confidence, CPI for the various German states, US September Durable Goods Orders and New Home Sales while the Norges Bank decides on rates (expected +25 basis points to 1.50%). Thursday Japan September Industrial Production, Corporate Services Prices, UK Net Consumer Credit, Mortgage Approvals, Bank Lending and Money Supply, German October Unemployment, Eurozone Consumer Confidence, and US Q3 GDP. Friday Japan September Jobless, Household Spending, Housing Starts, Construction Orders, National CPI, Tokyo October CPI, UK GfK Consumer Confidence. Then German September Retail Sales, EZ16 Unemployment, US Personal Income and Spending, Core PCE, Q3 Employment Cost Index, October Chicago Purchasing Managers and final University of Michigan Confidence. Sunday November 1st All Saints Day with presidential elections in Tunisia and Uruguay; All Souls holidays the day after.

Positioning and Technical Analysis

Jumpy, nervy markets are likely during this last week of October, each instrument working to its own dynamics and liable to bad news coming from offside; US dollar weakness might take a breather but don't bank on it. Treasury yields should hold at current levels with a wary eye on indices where there is no room for complacency.

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.

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