Monday, November 30, 2009

Weekly Market Commentary

Overview Optimists are blaming holiday-thin conditions for large moves in many markets. Being of a gloomier bent we see this as another 'emperor' found to be wearing no clothes as year-end pressures mount. This time round it was Dubai World and Nakheel's request for a moratorium on debt repayments while they are restructured by Delloitte LLP. It could have happened to any one of hundreds of other heavily indebted organisations. Bank and construction shares hit first, questions later, iTraxx Crossover index widening from 510 to 555. Stock Indices lost up to 5% on the day (Hang Seng), Russia down almost 8% on the week, the Nikkei with a weekly close below 9,300 thereby completing a 'head-and-shoulders' top (as has Istanbul's index). A rush into 'safer' products took Treasury yields lower, US TIPS out to 2013 now yielding up to a negative 86 basis points. Lowest ten-year maturities are Switzerland (1.85%) and Japan (1.25%), lowest two-year US (0.616%) and Sweden (0.513%), and slight jitters in front money market futures as one wonders who has the biggest exposure to Dubai. The yen and Swiss franc gained against all currencies, the former to 84.82 and its strongest since 1995's record 79.75, the latter to CHF0.9910 weakest greenback since April 2008. The Euro slipped from a new high for this year at $1.5145, similarly Singapore from SGD1.3769. Commodities mixed, spot Gold retreating sharply from a new record high at $1,194.90 per ounce, Base Metals off recent highs, Energy prices stuck for a sixth consecutive week.

Political and Economic Developments

Though events in the Middle East have overshadowed all else, some of this week's economic numbers are worth considering. Japanese October Supermarket Sales were –5.2% Y/Y, close to February's –5.4% and not far off the record low –7.1% of 2005; Large Retailers Sales –7.2% (negative territory that has dominated for most of the last fifteen years), while nationally CPI is running at a new record –2.5%. Q3 GDP figures tweaked: US's down a little, UK's a little less negative, and Germany's unchanged from the original estimate – German precision. Eurozone October M3 Money Supply growth has collapsed to just +0.3% Y/Y (record low) from a peak at +12.5% this time in 2007, while Bank Lending to the private sector is shrinking at an even faster pace than the previous month, -0.8% versus –0.3% (another record).
Underlying Themes
Economists say 'global imbalances' are to blame for the world's current woes, pointing to China's mammoth foreign exchange reserves and the US's twin deficits. While in absolute terms these dwarf anything else, 'imbalances' can be found much closer to home. Valuations on almost any financial and quasi-financial asset are dubious at best, or inflated. Some are beginning to wonder what will happen to these as and when government stimulus packages are withdrawn. On a corporate and individual level the gap between the haves and have-nots has also ballooned over the last twenty years. A case in point: ex-topless actress and soon to be ex-Mrs Berlusconi's demands for alimony equivalent to £39 million per annum. Ex-model Carla Bruni-Sarkozy's childhood castle near Turin is up for sale again for €19 million, just months after being bought by Saudi billionaire Prince Alwaleed bin Talal. One wonders why flip so soon, though do note that local pilgrims at this year's Hajj are estimated to be down by 40% (the authorities blame it on swine flu fears).

What to watch for next week

Sunday 29th presidential elections in Equatorial Guinea and Uruguay and Eid Al Adha holidays in several Middle Eastern countries up until Thursday at the latest. Monday Japan October Industrial Production, Labour Cash Earnings, Housing Starts and Construction Orders, Vehicle Production, German Retail Sales, UK Consumer Credit, Mortgage Approvals, November Hometrack Housing Survey and GfK Consumer Confidence, EZ16 CPI and Chicago Purchasing Managers. Tuesday the 1st December the Reserve Bank of Australia decides on rates (almost unanimously expected to raise by 25 basis points to 3.75%), Eurozone October Unemployment, US Construction Spending and Pending Home Sales, November UK Halifax House Prices, US Manufacturing ISM and Vehicle Sales. Wednesday EZ16 October PPI, UK November Construction PMI, US Challenger Job Cuts, ADP Employment Change and the Fed's Beige Book. Thursday Japan Q3 Capital Spending, EZ16 October Retail Sales and Q3 GDP, UK November Services PMI, US Non-Manufacturing ISM and the ECB decides on rates (expected unchanged at 1.00%). Friday US October Factory Orders, November Non-Farm Payrolls, Unemployment, Hourly Earnings and Workweek. Sunday 6th the second round of Romanian presidential election.

Positioning and Technical Analysis

The 'funicular railway' that are stock markets came to a sudden, juddering halt and rallies linked to stimulus packages and/or investors embracing 'riskier' assets are due for a clear-out. However, though the initial reaction may be to buy US dollars again, we caution against this. Instead the value of the greenback is likely to get hit as problems in the Middle East spread, because their currencies are pegged to it. Also, with precious little left to repatriate and shore up balance sheets, the effects will not be the same as in 2008.
Have a nice weekend!

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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