Sunday, January 24, 2010

Weekly Market Commentary

Overview Stock markets sold off, some for a second consecutive week, the Hang Seng losing 4.25% and testing its 200-day moving average, Brazil’s Bovespa –5.0% and Athens off 6.00%. Most others, while dropping less,are also close to 50-day moving averages though Egypt and Turkey managed to rally a little. In the usual rush from so-called risky assets investors bought yen and US dollars, Kiwi hardest hit at $0.7090, sold commodities (partly linked with Mr. Obama’s plans – see below) and bought Treasuries. Once again money market futures are trading at new record highs, most expensive the March10 Fed Funds future at 99.860, closely followed by EuroSwiss at 99.730, and yields on one-month US TBills a mere one basis point. And the authorities wonder why more individuals are tempted to speculate, either in financial instruments, dodgy investment schemes or the lottery.

Political and Economic Developments

Markets rocked by a series of factors, starting with the People’s Bank of China raising the rate on one-year TBills by 8 basis points to 1.9264%, another in a series of moves aimed at curbing bank lending and property speculation. EU finance ministers and credit rating agencies continued to strong-arm Greece into cutting its budget deficit, despite trade union objections and the threat of social unrest, the interest rate premium demanded by investors in this week’s auction of €1.2B 3-month TBills hitting 1.67% against 0.35% October’s auction. Other weaker EU members, plus Iceland, have also seen yield spreads over Bunds widen, as well as Credit Default Swaps, and the Eurozone currency dropped to $1.4029, the pound gaining to £0.8650. Eastern European currencies lost only a very little ground against the Euro.

Confusing UK statistics this week, so much so that one begins to question their veracity and/or methodology. The good news is that Unemployment dipped by 15K in December keeping the Claimant Count rate at 5.00%, while on the ILO basis November’s fell to 7.8% from 7.9%. Average Earnings are running at +1.6% Y/Y including bonuses, above March’s record –0.50% but among the lowest since records began in 1964. M4 Money Supply fell by 1.1% at Christmas, the first negative number since the series began in 1982, while Retail Sales were running at just +2.1% Y/Y. More worryingly CPI leapt from +1.9% to +2.9% Y/Y between November and December, a jump the Bank of England had warned of and brushed aside as ‘temporary’. Let’s hope so.

Underlying Themes

President Obama, having lost the long-held Democrat Senate seat of Massachusetts and thereby forced to give up his beloved healthcare reform bill, came out fighting Thursday. While denying this was timed to coincide with the furore over bankers’ bonuses, using veteran Paul Volker to add gravitas and keeping away a slightly less fragrant Treasury secretary Geithner (who is alleged to have his doubts about the plan), he appeared to address the ‘too big to fail’ problem head on. Nevertheless the proposals are vague, will be debated at length with plenty of lobbying, but generally aim to stop proprietary trading and banking support of hedge funds and private equity, plus limiting deposits to 10% of the total any one institution can hold. European politicians, clutching for approval from the braying mob, generally appear to be in favour of similar moves in their countries.

What to watch for next week

Monday the Bank of Japan starts a two-day rate-setting meeting (obviously unchanged at 0.10%), German December Import Prices are due from this day, US Existing Home Sales and Germany’s February GfK Consumer Confidence figures are published. Tuesday Australia Day and India’s Republic Day holidays with presidential elections in Sri Lanka. Japan December Corporate Services Prices, January Small Business Confidence, Germany’s IFO, Eurozone November Current Account, US FHFA House Price Index, CaseShiller Home Prices, January Consumer Confidence, UK Q4 GDP and December BBA Mortgages.

Overnight the Reserve Bank of New Zealand decides on rates (unanimously expected unchanged at 2.50%). Wednesday early Japan December Trade Balance, January CPI for the different German states due, UK CBI Distributive Trades Survey, US December New Home Sales, the Fed starts a two-day FOMC meeting and is expected to keep rates on hold at 0.25%, as Iceland’s Sedlabanki sets rates (currently 10.00%). The World Economic Forum starts in Davos and continues until the end of the week. Thursday Japan December Retail Trade, German January Unemployment, EZ16 Business Climate and Confidence and US December Durable Goods Orders. Friday Japan December Jobless, Household Spending, Industrial Production, Vehicle Production, Housing Starts, Construction Orders, CPI and Tokyo January CPI. Then UK GfK Consumer Confidence, Eurozone CPI, December Money Supply and Unemployment, US Q4 GDP, January Chicago Purchasing Managers and University of Michigan Confidence Survey. Sunday 31st first round of presidential elections in Guinea.

Positioning and Technical Analysis

Expect Treasury yields to drop slowly, and equity indices too, with nasty swings in the FX market where the yen is expected to outdo all others. Anything deemed ‘non-essential’ is subject to sudden liquidation.
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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