Monday, November 16, 2009

Weekly Market Commentary

Overview Money market futures have clearly got the message that interest rates are likely to stay low for a very long time, most rallying to new contract highs – highest Dec09 Fed Funds future at 99.870. For those whose memories are shorter than ours we would like to point out that front month Euroyen futures traded between 99.850 and 99.950 from April 2001 to February 2006. Two-year Treasuries are trading close to record lows, yields on five-year paper dropping the most this week, and ten-year JGB’s reversing dramatically from 1.485% to 1.350%. Equity indices are hovering precariously at this year’s highs, Sweden and the Dow Jones Industrial Average inching to new ones for the year, and China’s ‘B’ share index (dollar denominated) soaring by 15% on renewed rumours of a merger with the bigger (and more expensive) ‘A’ share index. The US dollar lost ground against all currencies except the Brazilian real, whose Finance Minister said it was overvalued, with Sweden and Eastern Europe doing best. Most metals continue with a bid tone, spot Palladium rallying to $356.75 per ounce, highest since August 2008, and spot Gold to a new record $1122.85.

Political and Economic Developments

Third quarter economic growth for several countries was better than Q2, but then again that was not difficult. In Germany it was +0.7% Q/Q and -4.8% Y/Y; France +0.3% Q/Q and -4.6% Y/Y; EZ16 +0.4% and –4.1%. A small step in the right direction but when measured against the size of the stimulus packages involved so far it looks very paltry indeed. Next: what happens when these are removed?
Slightly more upbeat news from the UK where the RICS House Price Balance rose to 34%, the highest since December 2006 and comparable to peaks of the 1990’s and so far this century. The number of jobless claims shrank in September to 12.9K and ILO Unemployment dropped to 7.8% from 7.9% the previous month. This can be explained by workers accepting wage and work hour cuts, so that overall Average Earnings including bonuses rose by just 1.2% Y/Y, among the lowest in fifty years. No wonder they are cutting up their credit cards; the number of these in circulation dropped by 8% to levels last seen in 2003. Spending on these fell by 27% (though debit card sales are up by 9%) and repayments have outstripped sales every month since 2006. The Bank of England’s Quarterly Inflation Report was notable for the degree of uncertainty attached to forecasts.

Underlying Themes

In what has to be one of the biggest faux pas ever Goldman Sachs boss Lloyd Blankfein was quoted in The Sunday Times as saying bankers ‘do God’s work’, plastering on the stuff by adding they also serve a social purpose. Luckily he added ‘I know I could slit my wrists and people would cheer’, thereby suggesting the first comment was a slip of the tongue rather than what he really believed. The PR people who dreamt up this charm offensive, to counter Rolling Stone’s image of the investment bank as ‘a giant vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money’, must be turning in their new graves. Roberto Calvi was known as ‘God’s banker’ because of his close association with the Vatican, but then he was found in 1982 hanging in mysterious circumstances under London’s Blackfriars Bridge. And of course, those who work at the Istituto per le Opere di Religione (Vatican Bank) might just about be able to carry out worthwhile ‘work’ for God . But Wall Street!

What to watch for next week

Monday the 16th Mexican holiday to celebrate the Revolution, Japan Q3 GDP, EU27 October New Car Registrations, EZ16 CPI, US Retail Sales, November Empire State Manufacturing Survey, UK Rightmove House Prices and US September Business Inventories. Tuesday Japan September Tertiary Industry Index, EZ16 Trade Balance, US Long Term TIC flows, UK October CPI, US PPI, Industrial Production, Capacity Utilisation and November NAHB Housing Market Index. Wednesday EZ16 September Current Account, Construction Output, UK November CBI Industrial Trends, Minutes from the Bank of England’s 4/5th November MPC, US October CPI, Housing Starts and Building Permits. Thursday Japan September All Industry Activity Index, October Department Store Sales, UK Mortgage Approvals, Retail Sales, Money Supply and Public Finances, plus US October Leading Indicators and November Philadelphia Fed Survey. Friday, a Brazilian holiday, just Japan October Convenience Store Sales and German PPI, while the Bank of Japan concludes a two-day rate-setting meeting (expected unchanged at 0.10%). Sunday 22nd first round of Romanian presidential election; Monday Japan Labour and Thanksgiving holiday.

Positioning and Technical Analysis

We continue to feel that stock indices have probably put in this year’s highs, or are about to do so, and are more likely to drift in thin markets over the next six weeks. FX will continue to consolidate, as should most commodities, with a tendency for the Yen to strengthen slightly and for the US dollar to weaken medium term. Treasury yields might drift lower too.
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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