Overview
The slow and subtle trend to US dollar weakness gathered a little pace this week led by the Swedish krona which gained 2.2% to the dollar, and 9.0725 to the Euro, its strongest since April and March 2005 respectively. The South African rand also did well adding 2.00% to the greenback and Cable, at $1.9175, is at its strongest since April 2005. The Yen lost ground against other currencies, fetching a record 151.50 to the Euro. Fixed income yields, and most money market ones, moved a little lower despite central bankers’ actions (see below). US Index-linked paper reversed all of Friday’s back up in yields, long dated paper led other maturities’ yields lower, and more curves are edging into inverted territory. Dollar-denominated commodities rallied, led by precious metals, and zinc set a new record at $4572 per tonne. Energy products nudged up a little, Unleaded Gasoline leading the way, and NYMEX Crude Oil touched $61.33 per barrel. Stock indices edged a little higher, and the usual suspects posted new all-time highs: Australia, Hong Kong, Indonesia, Mexico, Mumbai, New Zealand, Singapore and Switzerland.
Political and Economic Developments
The Bank of England raised the Base Rate 25 basis points to 5.00%, no doubt to the dismay of those with mortgage debt five times joint salary (Abbey National’s new deal), 125% of the value of the property (new from HBOS), or 40 rather than the standard 25-year term (HSBC and Alliance and Leicester). The Reserve Bank of Australia also raised their key rate 25 basis points to 6.25%, while South Korea kept theirs at 4.50%, partly to do with the fact that the won is at its strongest against the Yen since November 1997. Meanwhile Indonesia cut theirs by 50 basis points to 10.25%, its sixth trim this year, and suggested that more are in the pipeline because inflation plunged in October. In the US Republicans lost control of both houses of Congress in the mid-term elections, a first in 12 years, probably because of the unpopular war in Iraq. Defence Secretary Donald Rumsfeld had to go.
Underlying Themes
There has been a lot of discussion following Dr. Nicholas Stern’s report on climate change. Much nit-picking over the discounted cash flows used in his assumptions, plus many missing the obvious: doing something now will save money in the long run. More interesting has been the response of the aviation industry. Typical of his style, Ryanair boss Michael O’Leary said, ‘there’s a lot of misinformation and lies being put about by eco-nuts in this country on the back of a report put about by an idiot economist. If you listen to them you would think aviation was responsible for melting the polar ice caps, heating up the globe, and for every war, pestilence and SARS epidemic.’ With impeccable timing Richard Branson last month said, ‘we are very pleased today to be making a commitment to invest 100% of all future proceeds of the Virgin Group into tackling global warming’ ($3 billion over ten years). What neither seem to have grasped is that flying looks like becoming the new smoking. What to watch for next week Monday early Japan’s September Trade Balance, October Domestic CGPI, Consumer Confidence, Export and Import Prices; then UK October PPI and US Monthly Budget Statement. Tuesday Japanese, German and Eurozone Q3 GDP, UK October CPI, November’s ZEW Survey, US September Business Inventories and October PPI and Retail Sales. Wednesday Japan’s September Tertiary Industry Index, October Tokyo Condominium Sales and Bankruptcies, UK September Average Earnings and October Jobless plus the Bank of England’s Quarterly Inflation Report. E12 September Industrial Production, US November Empire Manufacturing Survey and Minutes of the Fed’s October 24th FOMC. Thursday the Bank of Japan concludes a two-day rate-setting meeting where they are expected to keep the target rate unchanged at 0.25%, UK October RICS House Price Balance and Retail Sales. E12 and US October CPI, September’s Net Foreign Security Purchases, October Industrial Production, November’s Philadelphia Fed Survey and NAHB Housing Market Index. Friday just E12 September Trade Balance, US October Housing Starts and Building Permits.
Positioning and Technical Analysis
While many interest rates will hold again within the ranges set in October, there is an increased chance that they will start trading down steadily through to the end of this year. Yield curve flattening or inversion should continue and may gather pace from mid-month. The steady move to generalised US dollar weakness that we have been waiting so patiently for appears to be shifting up a gear, at last! Watch as one by one currencies move through good chart levels and beyond medium term ranges. As each in turn breaks key points it will cause others to ‘catch-up’ thereby propelling one another and gathering momentum. Remember, thin year-end markets can cause explosive moves. Equity indices are likely to consolidate in relatively narrow ranges for another week, and if US and European ones slip it will cause small corrective moves in all others. The energy group has eventually shown slightly better signs that it s trying to base, but this long drawn-out process has probably a lot further to go. When they start to move more steadily higher Sugar is likely to get swept along too from current relatively low levels. Precious metals have completed interim bases and may drag base metals with them. Have a nice weekend!
