Sunday, November 22, 2009

Weekly Market Commentary

Overview A week with many subtle changes in a series of different markets and instruments. Most notable was the continuing trend to lower interest rates, new record low yields set on benchmark 2-year Swedish Treasuries (0.555%), US 2-year interest rate swaps (just under 1.00%), and Brazil’s USD 2014 bond (3.595%). Many money market futures contracts rallied yet again to new record highs and the effect rippled out through to longer dated paper, Swiss 10-year Conf testing the psychological 2.00% and US TNote futures at their highest since late May. Several equity indices inched their way to new highs for this year, the Dow Jones Industrial Average to 10,438, before drifting back to close roughly unchanged or slightly lower on the week; the Nikkei 225 a notable exception as it dropped for a fourth consecutive week to close on its 200-day moving average at 9,500, the lowest since July, dragged down by banking stocks. The US dollar strengthened a little, Aussie and Kiwi hardest hit, the Yen again the exception trading at a low of 88.63, perilously close to January’s low and key support at 87.00 yen. In fact discontent with the greenback’s weakness has led to mutterings from authorities in Chile and China, South Korea and Taiwan, while Brazil slapped another 1.5% tax on foreigners converting US ADR’s into local shares. Metals remain well bid, spot Silver leading by rallying to $18.83 per ounce, Gold to another new record $1152.55, and LME 3-month Copper at $6,985 per tonne higher than it has been since September (likewise Baltic Dry freight rates). Other commodities are mixed at best, though CBOT Wheat at 583.5 cents per bushel is at its most expensive since June.

Political and Economic Developments

In case anyone needed reminding, British finances are in tatters. Public Sector Net Borrowing hit £11.41B in October taking the total so far this fiscal year to £86.9B, higher than the £84.7B of fiscal 2008/2009. The OECD predicts this will rise to 13.3% of GDP, higher than any other G20 economy, though dwarfed by the massive absolute levels of the US. Corporate tax receipts are down by 25%, while income tax and VAT shrank too. Meanwhile Core CPI is running at 1.8%, equal to 2005’s peak and close to the peaks of 2007 (2.0%) and 2008 (2.2%). Then again, so is Canada’s while inflation Ex-Food&Energy is running at 1.7% in the States. US Business Inventories declined for a thirteenth consecutive month, admittedly at a slower –0.4% pace, putting paid to any hopes of an inventory-led recovery. However, Capacity Utilisation did pick up to 70.7% in October from June’s record low at 68.3%.

Underlying Themes

Hot on the heels of October’s 10.6% decline in Housing Starts (529K and one quarter of previous peaks), the US Mortgage Bankers Association reported that during Q3 delinquencies rose to a new record 9.64% of total loans outstanding, foreclosures to 4.47%, taking the not seasonally adjusted total to 14.41% where at least one payment is overdue. For the first time ever there were more prime fixed-rate loans in trouble than sub-prime ones because these are more difficult to modify and are caused by job losses. Also very worrying is the fact that there are more troubled mortgagees than there are existing homes for sale. With unemployment unlikely to improve soon, and the vast supply overhang (let alone those waiting to put their home on the market as soon as prices improve), the outlook for residential property remains very bleak indeed. One small ray of ‘hope’ though is that just 4 US states account for a whopping 43% of foreclosures: Florida, California, Arizona and Nevada.

What to watch for next week

Sunday the 22nd the first round of Romania’s presidential election. Monday 23rd and Thursday 26th Thanksgiving holidays in Japan and USA while many Middle Eastern ones start the Eid Al Adha holidays from Friday. German October Import Prices are due from Monday, US Existing Home Sales, UK November Nationwide House Prices and Manufacturing PMI’s for various European countries. Tuesday final US and German Q3 GDP, EZ16 September Industrial New Orders and CaseShiller Home Prices, UK October BBA Mortgage Approvals, Germany November IFO, US Consumer Confidence and Minutes of the Fed’s FOMC meeting. Wednesday Japan October Trade Balance, Corporate Services Prices, November Small Business Confidence, revised UK Q3 GDP, US October New Home Sales, Core PCE, Durable Goods Orders, Personal Income and Spending, November final University of Michigan Confidence and German December GfK Consumer Confidence. From Thursday November CPI for the various German states, EZ16 October M3 Money Supply and UK CBI Quarterly Distributive Trades. Friday Japan October Jobless, Household Spending, Retail Trade, National CPI and Tokyo November CPI, EZ16 Business Climate and Confidence numbers. Sunday 29th presidential elections in Equatorial Guinea and Uruguay.

Positioning and Technical Analysis

Stock indices should drift through to year-end, but not collapse. 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. Longer-dated Treasury yields will move lower as investors realise that ultra-low official target rates are likely to be with us for a very long time and that inflation will probably be subdued 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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