• Home ::
• Fundamental ::
• Market View

• Send
• Print
• Add To

Weekly Market Commentary

Economic growth around the world has been slowing and now it's official

Mon, Aug 18 2008, 07:33 GMT
by Nicole Elliott

Mizuho Corporate Bank

Overview

The US dollar took centre-stage again, strengthening against all currencies, Cable suffering the most as it plunged to $1.8500. The Euro dropped to a multi-month low of $1.4700, six cents below the $1.5300 to $1.6000 range that had held since March. These two are so oversold is it not even funny and having been stretched so far on the way down the likelihood of a sharp snap-back later this month is high. Consensus opinion is so one sided in favour of the greenback that one wonders whether there is anyone left in our camp. While rattled, we feel this is a much-needed clear-out in thin summer markets, and we maintain our long-held view of further persistent USD weakness. Many commodities traded lower because of the US dollar’s strength, especially precious metals, yet Lumber managed a one year high (at almost half 2004’s peak). Most Treasury yields dipped again as many reconsider the economic recovery prospects for H1 or H2 2009. Interbank markets remain seized up and the tic-tock of approaching year-end book-squaring is getting louder. Many equity indices drifted lower, Dubai, Egypt, the Hang Seng and Malaysia testing pivotal support.

Political and Economic Developments

Economic growth around the world has been slowing and now it’s official. Second Quarter GDP shrank in: EZ15 (-0.2% Q/Q and the first contraction since the Euro’s introduction in 1999), France (-0.3% Q/Q), Germany (-0.5% and leaked as is so often the case with their statistics), Hong Kong (-1.4%), Italy (-0.3%), Japan (-0.6%), and Singapore (-6.0% annualised). Finland’s GDP dropped 1.5% in June to an annualised rate of –0.2%. Spain’s, while +0.1% Q/Q, is the slowest in 15 years forcing Prime Minister Zapatero to call an emergency cabinet meeting in a boiling hot Madrid (in the middle of the sacrosanct summer holidays). Politicians and central bankers remain pretty tight-lipped on the subject; cold comfort from Mervyn King who said inflation would peak at 5.00% (or does he just hope it will?) and that economic growth would be ‘broadly flat over the next year or so’. The only sensible words on the subject came from UK Liberal’s Vince Cable: ‘when I talk about recession, I’m talking about it not in the economic sense but as most people see it, with job losses, house repossessions and a lack of consumer spending. The doomsday scenario would be that we finish up like Japan did, with ten years of stagnation’. On the subject of job losses, UK Unemployment jumped 60K in Q2 and an extra 20K claimed jobless benefits in July, the biggest monthly increase in 16 years. A total of 29.56 million people are employed, almost a record, as the retired go back to work (presumably to be able to pay utility bills which are due to go up again). US Weekly Jobless Claims are running at a recessionary 450K.

Underlying Themes

We, among many I am sure, had to come to grips with yet another complex debt product called ‘auction-rate securities’ (mercifully not another acronym). This is a long term debt instrument, mainly issued by US corporates or municipalities, where the dividend is set at short term intervals via a Dutch auction. State regulators have subpoenaed about 30 US financial institutions and the SEC is investigating to whom these were sold by banks and brokers. The four biggest issuers of this type of instrument, Citi, JPMorgan, Morgan Stanley, and UBS, have agreed to buy back $33.5B from individuals and pay fines totalling $310M. The market is estimated at $330B. No doubt there will be yet more fancy structured products we will learn about in months to come.

What to watch for next week

Monday the Bank of Japan starts a two-day MPC meeting (expected unchanged at 0.50%) and the Reserve Bank of Australia publishes the Minutes of its August rate-setting meeting, the Bank of England does so on Wednesday, and Japan’s Friday. Early on Monday UK August Rightmove House Prices, July Tokyo and Nationwide Department Store Sales, June EZ15 Trade Balance and later US August NAHB Housing Market Index. Tuesday US and German July PPI, August ZEW Surveys, June Eurozone Construction Output, US July Housing Starts and Building Permits. Wednesday Japan July Convenience Store Sales, UK Money Supply, Public Finances and CBI August Industrial Trends. Thursday the Federal Reserve hosts its annual Jackson Hole, Wyoming, symposium which continues until Sunday. Japan’s July Trade Balance, UK Retail Sales, US July Leading Indicators, August PMI’s for various European countries and Philadelphia Fed Survey. Friday Japan July Supermarket Sales, EZ15 June Current Account and Industrial New Orders, UK Q2 GDP. Monday August 25th is UK Bank Holiday.

Positioning and Technical Analysis

Reality is beginning to sink in, explaining the slow start to market moves. Treasury yields should lead the way lower, for equity indices too, and the credit crunch is likely to worsen so credit spreads to widen. Recent dramatic US dollar strength is not to be trusted and we feel it will reverse, possibly dramatically, over the next month or two. This will of course affect the way commodities behave, as well as reduced demand from cash-strapped shoppers. Above all these should move broadly sideways in very wide ranges for another six to twelve months, and will therefore be hard work.

• Download Full Weekly Market Commentary

Published on  Mon, Aug 18 2008, 07:33 GMT

Archive

• Economic growth around the world has been slowing and now it's official
  Published On Mon, Aug 18 2008, 07:33 GMT
• The US dollar strengthened against all currencies bar none and consensus opinion
  Published On Fri, Aug 8 2008, 10:59 GMT
• Banker shouting into Blackberry on a Sussex-bound train
  Published On Mon, Aug 4 2008, 06:28 GMT
• Tough times for Britain, we know, and now it's official
  Published On Mon, Jul 28 2008, 08:07 GMT
• Inflation is currently a big problem
  Published On Mon, Jul 21 2008, 08:55 GMT

[ View All ]

• More Reports from this Contributor

Mizuho Corporate Bank  | 1-3-3, Marunouchi, Chiyoda-ku, Tokyo 100-8210
http://www.mizuho-cb.co.uk | Nicole.Elliot@mhcb.co.uk