Saturday, December 11, 2010

Two weeks before Christmas, not the time for big financial decisions

Chaotic moves in many Treasury markets as thin conditions and a reluctance to purchase sent prices tumbling for, relatively speaking, one of the steepest quarterly back-up in yields and steeper curves in a long time. Mercifully, pressure on peripheral EZ16 bonds abated, in part helped by ten-year benchmark Bund yields rallying to 3.037%, even as ratings agency Fitch downgraded Ireland to BBB+ and Moody’s that of Hungarian bonds to Baa3 with the outlook remaining negative. Not that they are by any means out of the woods yet: Greek benchmark five-year yielding 12.57% while Argentina’s B- rated 2015 Boden yields 9.13%. Germany’s Dax managed another new high for this year at 7,042, also Helsinki (2,591) and Nasdaq (2,535), while Mexico set another new record high (38,119). Front month Nymex Crude Oil hit $90.76 per barrel (spot Brent $93.37), highest since October 2008 and OPEC says it has no plans to increase production ahead of tomorrow’s summit in Quito. Spot Gold inched to a new record at $1,430.95 per ounce and spot Silver soared to $30.68, so that the Gold/Silver ratio dropped to 47, while LME 3-month Copper hit a record $9,069 per tonne. FX sidelined with the US dollar gaining marginally.

Political and Economic Developments
President Obama agreed with Republicans to extend President Bush’s tax cuts for all Americans for another two years, and also extended Unemployment benefit for another thirteen months. Though some Democrats have opposed the bill it is unlikely to be blocked by the Senate.
Iceland’s Sedlabanki cut the official interest rate target by 100 basis points to 4.50% as the country approaches a compromise deal to reimburse the British and Dutch governments for the $5B deposits lost in Icesave. With interest set at 3.30% and 3.00% respectively, the final repayment has been extended from 2016 to 2046 with annual repayments not to exceed 5% of government revenues.

UK Manufacturing grew by a very welcome 5.8% in the year to October, the fastest pace since a blip in 1994, likewise German Industrial Production +11.7% maintaining 2010’s blistering pace. EU harmonised CPI a subdued +1.6% Y/Y to November while Britain’s looks set to regularly exceed its 3.00% target.

Underlying Themes
Bristling construction cranes as landmark ‘iconic’ skyscrapers go up in central London belie the fact that outstanding commercial real estate lending shrank from £228B at the end of 2009 to £215B this year, split between 58 different lenders. Of this approximately £42.8B is in breach of its terms or in default, says a study by De Montfort University, and while banks have been able to restructure, extend and/or take equity stakes in exchange there is an awful lot more work that needs to be done. Similarly with US residential property where the scale of non-performing loans is currently alarming and the overhang of homes available for sale will cloud the horizon for ages. No wonder so many bankers are reluctant to repossess and sell into weak markets, further eroding the value of their assets, preferring to lend and pretend. In fact the savvy mortgage holder’s best tactic is to make small, irregular repayments thus living as close to rent-free as possible. Owners’ equivalent rent might decrease even as many are priced out of mortgages.

What to watch for next week
Sunday parliamentary elections in Kosovo and Monday just UK December Rightmove House Prices. Tuesday Eurozone October Industrial Production, UK DCLG House Prices, November RICS House Price Balance and CPI, Tokyo Condominium Sales, US NFIB Small Business Optimism, PPI, Retail Sales, October Business Inventories, Fed FOMC meeting plus December ZEW Surveys for Germany and the Eurozone. Wednesday Japan Q4 Tankan Survey, UK October Average Earnings and ILO Unemployment, November Jobless Claims and Unemployed, US CPI, Industrial Production and Capacity Utilisation, October TIC Flows, December Empire State Manufacturing Survey and NAHB Housing Market Index. Thursday and Friday Ashura holidays in some Asian nations with December PMI’s for various European countries, UK November Retail Sales, EZ16 CPI, US Housing Starts and Building Permits, December Philadelphia Fed Survey and the Swiss National Bank decides on rates (expected unchanged at 0.25%). Meanwhile EU leaders hold a two-day summit in Brussels to see what they can do regarding bank and sovereign debt pressures. Friday German December IFO, US November Leading Indicators, Eurozone October Construction Output and Trade Balance. Sunday 19th a presidential election in Belarus.

Positioning and Technical Analysis
Two weeks before Christmas is not the time for big financial decisions, just as January is not necessarily the best time to shuffle these around. Beware pundits laying out sweeping macro strategy which lines up exactly with the calendar year and where returns are around 7-10% per annum. Glib assumptions and received wisdom are unhelpful in an environment which is unlikely to improve significantly over the mess that presided in 2010.

Have a nice weekend!

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