Weekly Market Commentary

Overview
Once again many money market futures rallied to new record highs while Treasury yields continued to reverse some of the back up they saw during the holiday season. Danmarks Nationalbank trimmed another 5 basis points off its key rate to 1.05% while Swedish two-year Treasuries hit a new record low yield of just 0.295%. Currencies are mainly unchanged against the US dollar, though the yen and sterling have gained by 2.00% this week taking EUR/GBP to £0.8811, the pound's best level since September. In fact the Euro lost ground against most other European ones (see below). Commodities on the whole are consolidating following last week's gains, the Platinum group clearly trading higher with Palladium up at $451.00 and Rhodium to $2,700 per ounce. LME Tin, exchange volumes down 1.00% in 2009 from the previous year, posted a recent high at $18,475 and its best since September 2008. Baltic Clean and Dirty tanker rates burst higher again so that they are now trading close to the median since 2002. CME Lean Hogs also traded up, April delivery at 73.325 cents per pound and one standard deviation above the long term mean.

Political and Economic Developments

Bank lending in China, after more than doubling to Rmb9,000 billion last year (and rumours that in first week of 2010 hit the monthly average of Rmb 600B), rocked the People's Bank. For the second time this year it increased the interest rate on its TBills and more importantly, raised bank reserve requirements by 0.50%. It may also be worried that M1 Money Supply is running at a record +34.6% Y/Y and that a housing bubble could be forming. This tempered stock market rallies, especially in Asia, though the Nikkei managed to close at a fourteen month high at 10,982.

UK Apple iPhone users have a new APP: Wonga will lend you money instantly to tide you over to pay day at a cost of 7% per £100 – per week! Compounded this gives you and APR of goodness only knows where. QE or no QE.

Underlying Themes

A lot spouted about the spread of Greek government bond yields over those of so-called 'core' EZ16. Benchmark ten-year is trading around 280 basis points, close to the 300 it reached at the height of the financial crisis in 2008, and Credit Default Swaps hit a record 345K per €10M insured. At yesterday's ECB press conference Mr. Trichet rightly said that talk of Greece leaving the Eurozone was an 'absurd hypothesy', but then added fuel to the debate saying the country would not get any 'special treatment' as 'the problem is to do the job, to take the appropriate decisions'. Singling them out misses the point; all too many countries are in serious debt, the price at which this trades constantly varying depending on the likelihood of default. Rating agency Moody's warned today that government debt was crowding out local authority paper, increasing the chance of these being downgraded this year, pension black holes another problematic layer of icing on the cake. This is a global phenomenon, exacerbated by banks' need to recapitalise and stock market downturns since 2000.

An EU Commission report found the Greek budget deficit for 2009 to be 12.5% of GDP, way over the 3.7% predicted in April, with political issues hampering data collection and widespread falsifying of accounts and statistics since 2001. Where were the auditors, checks and balances for nine years? Another set of regulators asleep at the wheel.

What to watch for next week

Sunday 17th presidential elections in Chile and the Ukraine. Monday Martin Luther King holiday in the US with just UK January Rightmove House Prices due while the EU27 finance ministers start a two-day meeting in Brussels. Tuesday Tokyo December Condominium Sales and Consumer Confidence, UK CPI, EZ16 November Construction Output, US TIC Flows, January NAHB Housing Market Index, Germany and the Eurozone's ZEW Surveys while the Bank of Canada is expected to keep rates unchanged at 0.25%.

Wednesday Japan November Tertiary Industry Index, December Convenience Store Sales, German PPI, UK Unemployment and November Average Earnings with Minutes from the Bank of England's 7th January MPC meeting; then US December PPI, Housing Starts and Building Permits. Thursday UK December Money Supply, Public Finances and Mortgage Approvals, CBI Industrial Trends, US December Leading Indicators and January Philadelphia Fed Survey. Friday Japan November All Industry Activity Index, December Supermarket, Nationwide and Tokyo Department Store Sales, January PMI's for various European countries, EZ16 November Industrial New Orders and UK December Retail Sales while the US House Financial Services Committee discusses bankers' bonuses.

Positioning and Technical Analysis

Momentum is building in a number of different markets as the unwinding of some December's excesses gathers pace. This should continue and investors must keep in mind that the banking sector and economic recovery are very shaky indeed. While we may not officially be in recession, Joe Public is understandably not in a good or rosy mood. Taxed to the hilt and employment prospects bleak, there is little room for manoeuvre regardless of low interest rates. These, we think, will be with us for a very long time.

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.