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Weekly Market Commentary

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Dry Goods indices retreated from record highs

Sat, Dec 1 2007, 08:15 GMT
by Nicole Elliott

Mizuho Corporate Bank

Overview
Another volatile week where equity indices rallied very strongly from critical support on hopes that another round of rate cuts is in the offing. This started when Citigroup announced that the Abu Dhabi Investment Authority ploughed $7.5B into a mandatory convertible yielding 11% with free stock options. Interesting that Dubai Port World’s money was not good enough for the US authorities but Middle Eastern money is welcome in a headless bank drowning in dodgy debt. Treasury Note and Bond traders are probably a lot less optimistic than stockbrokers and have pushed yields way below official target rates. Meanwhile money market yields, especially two and three-month maturities, have edged higher pushing the spread between December 2007 interest rate futures and further out contracts to extremely inverted levels. The FX market has been one of two halves again, the US dollar losing against the Brazilian real and South African rand, gaining against the Yen and Swiss franc. Scandinavian currencies have weakened against the Euro while Eastern European ones gained, the Czech koruna to a new all-time low exchange rate of 26.178. Most commodities are down on the week, a combination of a stronger dollar and questions over next year’s demand. Interestingly Baltic Dirty Tanker rates to the US Gulf have almost tripled this month while Dry Goods indices retreated from record highs.

Political and Economic Developments
Figures from the housing market get no better. US October Existing Home Sales dropped to their lowest since records began in 1999 while New Home sales are running at almost half July 2005’s record. Case-Shiller’s Q3 US Home Price Index dropped 4.5% Y/Y, OFHEO’s Q3 Index -0.4%, almost as low as it was in 1990. The UK’s Nationwide reported a 0.8% November drop in prices, the first negative number since 1995. British Mortgage approvals have slumped to their lowest in a decade and the value of loans secured on dwellings shrank by a third this year. Same idea in Ireland’s once-booming property sector with new mortgages dropping 25% from a year ago. Needless to say sentiment has dipped, both business and consumer, on either sides of the Atlantic. Eurozone November CPI is running at 3.00%, its highest ever and way over target.

Underlying Themes
German Finance Minister, and second-in-command of the SDP Peter Steinbrück said, ‘the snooty attitude (of bankers and financiers) that we have sometimes seen – under the motto of ‘we are cleverer than the others’ – ended in disaster’. Following the $5.6B bailout of IKB and resignation of WestLB’s chairman Rolf Gerlach he also said ‘the crisis management in Germany worked well’. Florida’s state-run Local Government Investment Pool, originally worth $27B, was forced to freeze redemptions after $10B was withdrawn within a fortnight. Reporting that $900M securities, originally sold to them by Lehman Brothers, had defaulted or no longer were of investment grade one sees how the multiplier effect means decisive action is essential. Four Arctic Norwegian municipalities have lost $731M on fund-linked notes sold by Terra Securities which went bankrupt on Wednesday. Bank of England governor Mervyn King at a Treasury Select Committee said they had been ‘marginally’ more successful than the ECB in bringing Libor closer to Base rate and ‘certainly more successful’ than the Fed. The Fed’s Kohn mentioned ‘the recent turbulence in financial markets’, and chairman Bernanke, ‘the outlook has been affected over the past month by renewed turbulence’. Sorry, money markets seized up in July and US New Home Sales have been collapsing since July 2005. Another lot whose eye was not on the ball trying to score cheap points.

What to watch for next week
Sunday, the first in Advent, Russian Parliamentary elections. Monday EU Finance Ministers meet in Brussels, Japan Q3 Capital Spending, October Labour Cash Earnings, Eurozone Unemployment, November Manufacturing PMI’s for the different EU countries and US vehicle sales late in the day. Tuesday UK November BRC Retail Sales Monitor, Construction PMI, EZ13 October PPI and the Bank of Canada decides on rates (almost unanimously expected unchanged at 4.50%). Wednesday OPEC meets and the Reserve Bank of Australia decides on rates (unanimous unchanged 6.75%), November Services PMI’s for EU countries, UK Official Reserves, Eurozone October Retail Sales, US Factory Orders, November Challenger Job Cuts, and Non-Manufacturing ISM. Thursday Japan October Leading and Coincident Indices, November Machine Tool Orders, UK October Industrial Production, German Factory Orders, the Bank of England and ECB decide on rates (almost unanimously expected unchanged at 5.75% and 4.00% respectively). Friday early Japan final Q3 GDP, German October Industrial Production, US Consumer Credit, November Non-Farm Payrolls and Unemployment, plus December University of Michigan Confidence Survey. Sunday presidential elections in Bosnia-Herzegovina.

Positioning and Technical Analysis
The credit crunch is here to stay, so plan accordingly. The ramifications of this and of toxic investment vehicles is global and will affect all too many businesses and individuals. Heads rolling and redundancies will be the crowning glory of this turbulent year. In the end the taxpayer will pick up the tab, as always.

Have a nice weekend!

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Published on  Sat, Dec 1 2007, 08:21 GMT