Weekly Market Commentary

Overview Thin markets as the northern hemisphere suffers an unusually cold snap, some not yet back from holidays and others reluctant to commit to new strategies. FX on the whole held at December’s ranges, best performers the South Koran won (+3%) and the Australian dollar ($0.9268), the Swiss franc and Norwegian krone gaining against the Euro. Many money market futures rallied to new record highs while Treasury yields reversed some but not all of the back up they saw the previous fortnight, though ten-year JGB yields backed up to 1.375% on comments (see below). Best foot forward as most indices started the year by rallying, Argentina’s Merval to a new record at 2,411 despite president Cristina Kirchner sacking the head of the central bank for misconduct and dereliction of duties when in fact he had refused to hand over bank reserves to pay debt. Most commodities traded higher too, some weather-related like the energy group and FCOJ while Softs and Base Metals continue well bid (especially the Platinum group). Baltic Clean and Dirty tanker rates are at their best in a year, doubling from October’s very depressed levels.

Political and Economic Developments

Unemployment centre-stage this week, markets marking time waiting for today’s US Non-Farm Payroll. Also released today was Switzerland’s which inched up to 4.2% in December, highest since April 1998, the Eurozone’s at 10.00% likewise, and Italy up to 8.3%. Canada’s stuck at 8.5%, while Spain said on Tuesday it’s had increased by 54.7K to 3.9 million - so no wonder annualised Retail Sales have been running at a negative for two consecutive years. Interesting too that in Germany, while sentiment surveys are stronger than they have been in a while, Retail Sales fell unexpectedly in November to –2.8% Y/Y, a feature replicated across EZ16. Jobless dropped by 3K, Unemployment remaining at 8.1% or 3.4 million, well below 2005’s peak at 12.1% thanks to structural reforms and part time work subsidies. German Exports increased by 1.6% in November, and Imports dropped by 5.9%, so that, at +€17.4B, the Trade Balance stands at the average for Q3 2007-Q3 2008. While US Unemployment was steady at 10.0% many had hoped for job creation; they were disappointed by a drop of 85K after a revision to plus 4K to November’s figure.
FOMC Minutes stated that the planned last phase to buy almost $2 trillion in agency debt would be completed by Q1 2010, and ‘a few members noted that resource slack was expected to diminish only slowly and observed that it might become desirable at some point in the future to provide more policy stimulus by expanding the planned scale of the Committee’s large-scale asset purchases and continuing them beyond the first quarter, especially if the outlook for economic growth were to weaken or if mortgage market functioning were to deteriorate’.

Underlying Themes

Japan got a new finance minister, Naoto Kan and the tenth in this slot in nine years, because the newly elected Democratic Party of Japan’s last one (Fujii) was too old and too ill. And the first thing he does at his inaugural press conference? He says, ‘it would be good if the yen would weaken a little…we have to work to bring the exchange rate to an appropriate level (suggesting 95.00 per USD), including co-operating with the Bank of Japan’. You don’t say! He also said he never believed that fiscal austerity was a good thing while unveiling a package aimed at stimulating domestic demand by creating new jobs in healthcare, tourism and environment-related businesses. Forced to backtrack today by PM Hatoyama (the sixth since 2001), whose cabinet’s inexperience in government marks it out for criticism and whose approval ratings are below 50%, he said FX rates were best left to the market having earlier stated, ‘answering such questions carelessly can lead to terrible things’.

What to watch for next week

Monday Japan Coming of Age holiday and UK December Nationwide Consumer Confidence due from this day, while the heads of central banks meet at the BIS in Basel. Tuesday Japanese November Trade Balance, December Money Supply and Bank Lending, Economy Watchers’ Survey, UK RICS House Price Balance, November DCLG House Prices, Trade Balance and the US Trade Balance. Wednesday Japan December Machine Orders and Bankruptcies, German 2009 GDP and Budget Deficit, UK and Eurozone November Industrial Production, US December Monthly Budget Statement and the Fed’s Beige Book. Thursday Japan November Machine Orders and December Domestic CGPI, Tokyo and Nationwide Department Store Sales, the ECB decides on rates (unanimously expected unchanged at 1.00%), US December Retail Sales, Import Price Index and November Business Inventories. Friday EU27 December New Car Registrations, EZ16 CPI and November Trade Balance, US December CPI, Industrial Production, Capacity Utilisation, January Empire State Manufacturing and University of Michigan Cofidence Surveys. Sunday 17th presidential elections in Chile and the Ukraine; Monday the 18th Martin Luther King holiday in the US.

Positioning and Technical Analysis

Continue to watch and wait, keeping in mind the big picture, trying not to be swayed by recent events and rumours. We are certainly not out of the woods yet. Have a nice weekend!
Mizuho Corporate Bank
Disclaimer
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.