Sunday, January 31, 2010

Weekly Market Commentary


Stock markets sold off again, so that many formed 'bearish engulfing' monthly candles. These should mark an important top to the rallies that started around March 2009 and the question now is which ones will lead on the way down, and at what speeds. So far Dubai, Mumbai and Spain are in pole position with losses of about 10%, Hong Kong and Shanghai not far behind at 8.5%, several testing their 200-day moving averages.

Money markets still seized up and their futures contracts are close to record highs. Treasury yields held steady though Mediterranean countries' spreads over Bunds widened, 10-year Greek to a record 380 basis points, as investors ponder who might bail out weak Eurozone members if necessary. The US dollar strengthened, most notably against the Euro which dropped to $1.3903 and the Brazilian real at 1.884 against 1.714 at the start of this year. Commodities sold off though front month ICE #11 Sugar set a new record high at 30.10 US cents per pound

Political and Economic Developments

UK Q4 GDP grew at a measly 0.1% Q/Q, though in economists' eyes this ends the recession that has lasted six consecutive quarters. The Y/Y figure at -3.2% is still negative as it has been over the last four quarters, just a little less so. US Q4 GDP grew a better than expected 5.7% annualised, against +2.2% in Q3 after shrinking in the previous four.

The number of US residential real estate units sold dropped significantly in December, from 6.54 million Existing Homes the previous month to 5.45 million, and from an upwardly revised 370K New Homes to 342K. This was because the rush to buy in November - the cut off date for government incentives for first time buyers - ended. The mean price achieved was slightly higher reflecting demand from those trading up to larger properties.

Deflation in Japan, excluding fresh food and energy, hit a new record low of -1.2% in the year to December.
Following in China's footsteps the Reserve Bank of India increased banks' cash reserve requirements by 75 basis points, warning of increasing inflationary pressures

Underlying Themes

The International Labour Organisation says global unemployment was 212 million, or 6.6% and is likely to exceed 213 million this year with joblessness increasing in developed countries but shrinking a little in others; this compares to 178 million in 2007 before the financial crisis started and 185 million in 2008. Youth unemployment hit 83 million (13.4%) and with 45 million youngsters entering the labour market every year it is very important to take steps to target job creation for this group. NEETs (Not in Employment, Education or Training), as 16 to 24 year-olds are classified by the UK government, accounted for almost 10% of that age bracket in 2007; more now. In the US 20% of black men aged 20 to 24 are in the same position. Only 26% of 16 to 19 year-old US teenagers had jobs, the lowest since records began in 1948. Greece, with all its woes, is in a similar position with 18% of 15 to 29 year-olds out of work. Japan puts those aged 15 to 34 who are single, unemployed and not even thinking of studying into a similar group and estimates that in 2003 there were 520K of these. Also known in middle class circles as 'boomerang' kids, they are supported by their families and are likely to find it increasingly difficult to find work later in life and to integrate into society. The long term social and economic costs are incalculable

What to watch for next week

The knees-up in Davos ends on Sunday. Early Monday 1st February Japan January Vehicle Sales, UK Hometrack Housing Survey, Manufacturing PMI, December Consumer Credit, US Personal Income and Spending, PCE Deflator, Construction Spending and January Manufacturing ISM. Tuesday the Reserve Bank of Australia decides on rates (a 25 basis point increase to 4.00% is expected), Japan December Labour Cash Earnings and Overtime, Eurozone PPI, US Pending Home Sales, January Vehicle Sales and UK Construction PMI. Wednesday the Norges Bank decides on rates (currently 1.75%) and the Bank of England starts a two-day MPC meeting (unchanged at 0.50%), plus the US Quarterly Refunding announcement. Earlier UK January Nationwide Consumer Confidence, BRC Shop Price Index, Services PMI, Official Reserves, US Challenger Job Cuts, ADP Employment Change, Non-Manufacturing ISM, plus EZ16 December Retail Sales. Thursday the ECB meets to set rates (unchanged 1.00%), German and US December Factory Orders and US Q4 Unit Labour Costs. Friday (and Saturday) G7 finance ministers meet in Iqaluit, Canada, Japanese December Leading and Coincident Indices, German Industrial Production, US Consumer Credit, UK January PPI, US Non-Farm Payrolls and Unemployment. Sunday presidential elections in Costa Rica and the Ukraine.

Positioning and Technical Analysis

Stock markets may hover at current levels next week but are expected to drop over the coming month. The knee-jerk reaction to this will probably be to buy US dollars, something Pavlov's dog learnt in the meltdown of 2008. We feel this time round the greenback is far from being a 'safe haven' and more importantly, there is precious little 'repatriation' left to do. Watch all currencies, not just the Euro, because many have been range bound for months.

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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