Sunday, December 6, 2009

Weekly Market Commentary

Overview As is so often the case, after last week's serious financial jitters this one was spent waiting for US Non-Farm Payroll numbers (details below). The biggest loser was the Japanese yen, dropping from a multi-decade high of 84.82 to 89.90, no doubt to the relief of the authorities; the Mexican peso gained the most, up 3.1% to 12.4942. Bond yields backed up a bit, and money market futures dipped, admittedly from fairly extreme levels. Stock index futures continue to hover unsteadily at this year's highs while the Nikkei 225 rallied to 10,022, its best level in four weeks. Spot Gold retreated from another record high at $1,226.10 though Base Metals remain well bid, LME 3-month Aluminium rallying to $2,165 per tonne.

Political and Economic Developments

Thursday the White House let slip that US Unemployment might increase yet again, while welcoming the decline in the Weekly Jobless number, and inviting top brass business men to discuss how to create new jobs. Smacks too much of desperation and a dodgy PR-inspired move, as President Obama agrees to send another 30,000 troops to Afghanistan. In the end these were much better than expected, Non-Farm payrolls shrinking by a tiny 11K, the smallest decline in almost two years, Unemployment dropping to 10.0% and the workweek expanding to 33.2 hours.
After a unanimous decision to leave interest rates unchanged at 1.00% because 'uncertainty remains high', 'price developments to remain subdued', and the economy will recover 'at a gradual pace', the ECB decides to tinker with this month's planned unlimited offer of one-year money (and promising another six months' worth in March). Fearing that some banks are becoming too addicted to these handouts, this batch comes with a variable interest rate to be calculated at the end of the loan and is part of the 'exit strategy'. Oh really? The Fed sent out a similar message by doing a 'live test' with $180M reverse repos to see how the market took it. How pathetic! Do they really believe that a minuscule amount of a long-standing procedure needs to be tested on investment bankers?
Under government pressure, the Bank of Japan held an emergency meeting, reminding markets of their intention to keep three and six-month funds at ultra-low rates and injecting another 10 trillion yen into the banking system. Yields on benchmark two-year JGB's dropped to 0.169%, lowest since October 2005, and Euroyen futures rallied March 2010 to 99.700.

Underlying Themes

Shocking results in a first of its kind US FDIC-commissioned survey on retail banking. Seventeen million American adults have no access to any bank accounts, at all. Another 43 million rely on non-bank operations such as pawn shops, pay-day lenders and cash-converters. The most commonly cited reason for not opening a bank account was having too little money to need to. Needless to say the racial mix was very skewed with 22% of black households without compared to just 3.3% of white ones; in the city of St. Louis, one of the Federal Reserve's outposts, the numbers are a staggering 31% versus 1%. Compare these numbers with the 46 million Americans with no health insurance, President Obama's big platform, and those out of work, and one sees a life of relentless misery. US outstanding consumer credit shrank by 6% in Q3, Fitch Ratings noting that, 'consumer credit quality remains under significant strain as a result of the persistent weakness in the labour markets', 60-day delinquencies running at 4.41%, 31% higher than a year ago.

What to watch for next week

Sunday 6ththe second round of the Romanian presidential election. Monday just German October Factory Orders and US Consumer Credit. Tuesday (Immaculate Conception holidays for some) Japan October Trade Balance, Leading and Coincident Indices, November Money Supply, Economy Watchers' Survey, UK BRC Retail Sales Monitor, RICS Housing, NIESR GDP, Industrial Production for Britain and Germany, UK CBI December Industrial Trends and the Bank of Canada decides on rates (unanimously expected unchanged at 0.25%). Wednesday German and UK October Trade Balances, US Wholesale Inventories, Japan November Machine Tool Orders, UK Nationwide Consumer Confidence and Darling's Pre-Budget Report. Thursday Japan October Machine Orders, November Domestic CGPI, US October Trade Balance and the Bank of England decides on rates (unanimously expected unchanged at 0.50%), as does the Swiss National Bank (likewise at 0.25%). Friday Japan November Consumer Confidence, UK PPI, US Import Price Index, Retail Sales, October Business Inventories and December University of Michigan Confidence Survey. Sunday the 13th Chilean parliamentary and presidential elections.

Positioning and Technical Analysis

Difficult as thin year-end markets dominate. Caution is warranted and knee-jerk reactions likely to prove expensive.

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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