Overview
Year-end money market yields edged up again, probably to the dismay of central bankers. The ECB did add €60B three-month funds at 4.61%, but the 130 banks wanted a total of €147B. Sterling three-month Libor at 6.52%, the US equivalent 5.04%, and in the Eurozone 4.70% -all are well above the overnight target rates. Meanwhile investors are rushing out of banks and into Treasury paper so that two-year TNotes yield 4.36%, 3.00% and 3.65% respectively. At 200 basis points the TED Spread is wider than it was in 1997/1998 and as wide as August 1987. This rippled through all maturities so that Treasury paper yields less than it has done since about the summer of 2005. A reverse effect was seen in emerging market debt where risk aversion meant some of these bonds were sold taking yields higher, weakening their currencies in the process. Once again Sterling lost ground against all other currencies, trading at a four-year high of £0.7216 to the Euro, while the Yen gained against most others to a low at 107.55 to the US dollar. The Euro and Swiss franc set new records against the greenback at 1.4968 and 1.0889 respectively. Most equity indices sold off again and are testing pivotal support. The glaring exception the Egyptian Hermes index that set a new record high at 86,447. Commodities a mixed bunch, some up some down, with CBoT Soybeans, Bean Oil, and NYMEX Crude Oil ($99.29) setting new record highs.
Political and Economic Developments
Should anyone need reminding that the financial system has seized up completely, this week’s decision by the European Covered Bond Council to suspend market-making in all issues underlines what happens when the music stops. The B.I.S. says there are €1.7 trillion of these outstanding, the bulk in Germany, and now we have no prices. So much for transparency! Freddie Mac, the US’s second biggest mortgage lender, said it lost $2B and urgently needs a cash injection. The shares dropped to $24.20, the lowest since December 1996 and a fraction of last year’s high at $71.92. Fannie Mae shares plummeted to $26.85, from $70.23 in August, the other Government Sponsored Enterprise that at one point had been tipped to help stem repossessions. Fitch ratings welcomed Bradford & Bingley’s decision to sell their £4.2B commercial property and housing association loan books. They believe the liquidity position has been strengthened enough to weather current turmoil well into 2008. Compare with Nationwide, Britain’s biggest Building Society, where deposits were up 96% from six months ago and profits jumped 29%. Size, and reputation, matter.
Insurers have been hurt too, the world’s biggest reinsurer Swiss Re writing down $1.0B on credit default swaps. French bank Natixis was bailed out by Banque Populaire and Caisse d’Epargne who bought its monoline insurer CIFG. Providing guarantees for structured finance, a roughly €1.5B capital injection preserved its triple A rating, an essential for this type of business. Credit checking company Experian says trading conditions are ‘exceptionally difficult’, warning of a further slowdown because banks and credit cards are fussier about extending loans.
Underlying Themes
Today, the day after Thanksgiving, Americans officially start their Christmas shopping. ‘The Holidays’, as they are called, are key for many retailers’ solvency and mutterings abound as to who will and who won’t pull through. If the UK is anything to go by, so long as we have not suddenly lost our job we will go out and spend as usual, but only if the price is right. Many shops are already giving discounts of up to 30% and we’ve got another five weeks to go before the January sales. Compare with Japan where Nationwide Department Store Sales have been down year-on-year most of the time since 1997’s VAT increase from 3% to 5%.
What to watch for next week
Saturday 24th November Federal elections in Australia and a general election in Croatia on Sunday. From Monday November CPI for the different German states and Nationwide House Prices. Tuesday German November IFO, US Consumer Confidence and September Case-Schiller House Prices. Wednesday early Japan October Retail Trade, German December GfK Consumer Confidence, Eurozone October Money Supply, US Durable Goods Orders, Existing Home Sales and the Fed’s Beige Book. Thursday Japan October Industrial Production, November Small Business Confidence, German Unemployment, UK October Net Consumer Credit and Mortgage Approvals, plus CBI November Industrial Trends. Then US Q3 GDP, Core PCE and OFHEO House Price Index, October New Home Sales and Help Wanted Index. Friday Japan October Jobless, Household Spending, Housing Starts and Construction Orders, Nationwide CPI and November Tokyo CPI. Then German October Retail Sales, Eurozone November CPI, Business Climate Indicator and Confidence Surveys, Q3 GDP, UK November GfK Consumer Confidence. Later US October Personal Income and Spending, Core PCE and Deflator, Construction Spending and November Chicago Purchasing Managers. Sunday, the first in Advent, Russian Parliamentary elections.
Positioning and Technical Analysis
Markets thin and thinner; anything might happen. It would be nice if the US dollar went into correction and consolidation mode and keep a close eye on top-heavy Yen crosses. The credit crunch is not about to go away. Instead the desperate hunt for cash continues. Have a nice weekend!
