Sunday, December 20, 2009

Weekly Market Commentary


Incredibly equity indices continue to hover close the this year's highs, five consecutive weeks of tiny ranges, and many range-bound for a fourth consecutive month. However BRIC indices sold off this week: the China Enterprise index hardest hit off 5%, Shanghai Composite 4% and Hang Seng 3% on fears for the property sector because bank lending might be reined in considerably next year. Brazil's Bovespa formed a 'bearish engulfing' weekly candle as it lost 4.3% from this year's peak while Mumbai's Sensex closed at the mid-point of Q4's range. The US dollar strengthened against most currencies, the Euro at $1.4300 and CHF 1.0500, hardest hit the Australian dollar off 2.6% on the week at $0.8800. Fixed income and money market yields are a bit lower, most bonds retracing all or much of the previous week's move, JGB's the best performers along with several Index-Linked issues (Germany 2016 new record low 0.745% and France 2015 0.668%). In fact some are suggesting these, like front month money-market futures which have traded through central bank targets, are priced for Armageddon. Commodities mixed again, some sidelined, Base Metals with a steady bid tone, Softs the stars. London Cocoa futures at £2,350 per tonne – a 32-year high with the 1977 record of £3,512 still holding - and Sugar a record $680.70 per tonne on supply concerns. While Crude Oil remains steady around $74.00 per barrel, January Natural Gas Futures rallied to $5.926 per MMBtu from $4.432 at the start of this month.

Political and Economic Developments

Monday the Austrian government nationalised Hypo Group Alpe Adria and rumours swirled that the country's fourth largest, Volksbanken, was on a 'watch list'. This sent the line of fire back onto the troubled conditions in Eastern Europe and the Baltic states though whether this had anything to do with the Czech Republic's 25 basis point cut to 1.00% on Wednesday is unclear. Norway simultaneously surprised with a 25 basis point hike to 1.75% while a dovish Reserve Bank of Australia noted that its (unchanged) target at 3.75% was probably the new 'normal' (which many had assumed to be 4.75%).

November UK jobless dropped by 6.3K keeping those out of work at 5.0%, admittedly the highest since 1997. This probably has something to do with Retail Sales dropping by 0.3% in the same period, another disappointment to struggling retailers who are already offering 20% and 50% discounts on some items. Meanwhile supermarkets are desperately trying to offload own-brand champers at supposedly half price – at £14.99 per bottle! Yeah, right.

Underlying Themes

The idea that financial decisions are made in January, and held come hell or high water until the end of the year, is asinine. Myopic, especially when the one-year straight-jacket is then overlaid with the mantra that shares are the best investment in the five-year plus time horizon. Beware those with 20:20 hindsight, the creeps and the crooks. General themes for next year will probably be similar to ones faced over the last two, viz: the banking system is not fixed and will not be for a very long time. The value of any asset is only what someone else will pay for it, and at times there may be no buyers at all. Despite ultra-low central bank targets for interest rates, spreads will remain wide and some will not be able to get credit at all. Eventually we will see which governments find they are no longer able to raise the money they need, who is the first to realise this and who is the last man standing the only things that count. Only the very best quality assets are worth looking into, and having a steady job is probably the best one of all.

What to watch for next week

Monday early Japan October All Industry Activity Index, November Trade Balance, Convenience Store Sales and December Bank of Japan Monthly Report with German November Import Prices and December IFO due from this day. Tuesday Japan November Supermarket Sales, December Small Business Confidence and German January GfK Consumer Confidence; then UK and US final Q3 GDP, US October House Price Index and November Existing Home Sales. Wednesday Minutes from the Bank of England's MPC, October Index of Services, November BBA Mortgages, Eurozone October Industrial New Orders, US November PCE, Personal Income and Spending, New Home Sales and final December University of Michigan Survey. Thursday Minutes from the Bank of Japan, Q4 Business Outlook Survey and US November Durable Goods Orders. Friday Japan November Jobless, Household Spending, Vehicle Production, Housing Starts, Corporate Service Prices, Construction Orders, National CPI and Tokyo December CPI.

Positioning and Technical Analysis

Holidays: Wednesday the 23rd the Emperor's Birthday holiday in Japan, then Christmas Eve and Christmas Day, Boxing Day for many on the 26th and 28th take us into the following week with New Year's Day on Friday the 1st January 2010. Ignore the markets and enjoy spending time with friends and family. Try not to over-indulge and to piece together the bigger picture.

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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