Weekly Market Commentary

Overview

Late last night the US Federal Reserve surprised by increasing the discount rate by 25 basis points to 0.75%, insisting 'the modifications are not expected to lead to tighter financial conditions for households and businesses and do not signal any change in the outlook for the economy or for monetary policy'. Begs the question: why do it then? Probably as a reminder to banks that government slush funds will be removed - eventually. It might also be a way for the Fed to gauge the health of the interbank money market, something we feel is likely to disappoint. The US dollar strengthened, to $1.3443, Libor unchanged, and fixed income yields backed up a tad. Meanwhile Russia cut their key rate this morning, 25 basis points to 8.50%, to stimulate lending, economic growth and reduce the appeal for speculative foreign capital. Equity indices rallied steadily all week though Asian ones were knocked back by the Fed's move, and the Swiss Market Index posted a new high for this year at 6,707. Commodities have been sidelined though ICE Cotton at 78.18 cents per pound is at its best since April 2008 and over one standard deviation above its very long term mean.

Political and Economic Developments

UK January Retail Sales were truly dire, mainly because of the freezing weather but possibly other factors were also involved. Household goods dropped 13.4% M/M, the worst since 1988, and auto-fuel down 11.5%, presumably because only those with 4X4's were able to manoeuvre untreated roads. Food sales dropped 2.4% and the overall figure at -1.8% the worst in 18 months. With Jobless Claims simultaneously up 23.5K, average APR on credit cards at 18.8% and the highest in 12 years, plus retailers managing their Christmas stock better thereby lessening the need for subsequent discounts, the man on the Clapham omnibus chose to stay home - literally as 8.08 million people are classed as 'economically inactive', highest since records began in 1971, and another 2.8 million are 'underemployed' of a total 29 million working. Piling on the misery Average Earnings (including bonus) in the three months to December rose at +0.8% annualised while RPI excluding interest payments is running at +4.6% Y/Y. Icing on the cake: instead of income tax flowing in to HMCR during January we were left with a public sector deficit of £4.3B. Cable weakened to $1.5345, benchmark 10-year Gilt yields backed up to 4.27%, 50-year Index-Linked likewise to 0.67%.

Underlying Themes

Figures from the Bank of England show that money supply and bank lending fell, commercial lenders focusing on repairing damaged balance sheets. M4 Money at +5.1% Y/Y, lowest since 2000, and excluding intermediate financial companies is running at just +1.0% Y/Y, the difference being Quantitative Easing. Trends in Lending to companies weakened in Q4 2009 for a third consecutive quarter, and smaller companies are postponing investment plans. The Council of Mortgage Lenders said loans dropped by one third from year-ago levels, partly because stamp duty incentives were withdrawn, making January's figure the worst in a decade. Meanwhile sovereign debt issuance this year is estimated at $5,500B, double 2007/2008's level, and will crowd out at least some corporate bond issuance. Add to that private equity which will have to refinance existing arrangements and IPO's that fail to take off, the dash for ever more elusive cash is on.

What to watch for next week

Monday early Japan January Supermarket and Convenience Store Sales then Minutes of the Bank of Japan's January meeting very late in the day. Tuesday German February IFO Survey, US Consumer Confidence, December CaseShiller House Prices and UK January BBA Mortgages. Wednesday Japan January Corporate Services Prices, Trade Balance, February Small Business Confidence, German final Q4 GDP and March GfK Consumer Confidence, EZ16 December Industrial New Orders and US January New Home Sales. Fed chairman Bernanke gives his semi-annual testimony on the economy to congress. Thursday Eurozone January Money Supply, February Business Climate, German Unemployment, UK Q4 Business Investment, CBI Industrial Trends, US January Durable Goods Orders and December House Price Index. Friday Japan January Retail Trade, Industrial Production, Housing Starts, Construction Orders, CPI and Tokyo February CPI. Then German January Import Prices, February CPI for the different states, EZ16 January CPI, UK and US final Q4 GDP, US January Existing Home Sales, February Chicago Purchasing Managers and University of Michigan Confidence Survey. Several Middle Eastern countries are on holiday celebrating the birth of the Prophet. Saturday and Sunday G20 finance ministers and central bankers' meeting in South Korea.

Positioning and Technical Analysis

Think carefully who and what will suffer most as and when government stimulus packages are withdrawn and credit becomes more expensive. Those able to generate steady income streams will be best off, assuming they know how to manage money properly. Allow for small cautious moves again as we weigh up probabilities and assess the likely timing of a known looming problem.
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.