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Weekly Market Commentary

Rating agencies are (belatedly perhaps) downgrading some sovereign debt

Mon, Jan 26 2009, 05:56 GMT
by Nicole Elliott

Mizuho Corporate Bank  |  View company's profile

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Overview

Without wanting to make light of the momentous inauguration of the US’s 44th President, the week was almost overshadowed by yet more turmoil in financial markets. Banks and bankers are at the eye of the storm, the ultimate bogey men (and women, to be PC) and many feel they ought to be hung out to dry because shooting them is too kind. Britain, being heavily reliant on financial services, tried and failed with a second stab at bailing out its banks leading to red faces all round and another severe attack on all things Sterling. Cable dropped to $1.3500, the lowest since September 1985, 1.60 Standard Deviations below the mean of the last 27 years and below which it only traded between July 1984 and August 1985 (followed by the Plaza Accord on the 22nd September 1985). The Yen continues to be FX’s top dog, GBP/JPY dropping to an all-time low of 119.00, Eastern European ones suffering the most so that the Hungarian forint at 291.50 per Euro is at its weakest ever. Equity indices, having hovered nervously on key support levels all week, are starting to drop and close lower led by Australia’s S&P/ASX; not far behind are Dubai, Helsinki, Milan, Paris and the Stoxx50. Interest rates are a bit mixed, Euribor futures and Schatz at their lowest ever yields (1.60% and 1.36% respectively), ultra-long dated Treasuries backing up considerably (US 30-year +46 basis points to 3.35% this week), and 10-year New Zealand dropping to a record low yield of 4.28%.

Political and Economic Developments

Yes, you guessed it, more rate cuts: 75 basis points from Malaysia to 2.50% (taking 5-year Treasuries to a record low 2.70%); 50 from Canada, Saudi Arabia and Hungary to 1.00% (a record low), 2.00% and 9.50% respectively. Rating agencies are (belatedly perhaps) downgrading some sovereign debt. Portugal and Spain down a notch to A+ and AA, Ireland placed on credit watch negative, and last week Greece to single A. Note that this is the lowest acceptable level for collateral at the ECB. Their government bonds were hit some more, Greece’s 10-year a record 297 basis points over Bunds, Ireland not far behind at 273, Italy 170, Portugal 159 and Spain 124. Note that Credit Default Swaps are also at record highs, Germany 60 basis points and the US 75, while iTraxx Crossover junk bond spreads back at December’s 1100 record.

Underlying Themes

A sad day on The Mound in Edinburgh as three-hundred plus year-old Bank of Scotland’s blue and white ‘chips and peas’ flag was struck from the imposing head office building. Hard to believe that a nation famed for its thrift and financial acumen has managed, as Lady Bracknell might say, ‘to lose one ‘bank’ may be regarded as a misfortune…to lose both seems like carelessness’. With financial services accounting for 10% of the city’s jobs, and chancellor Alastair Darling’s political seat, the Scottish Parliament is very concerned. Come to think of it, the British Parliament is riddled with politicos from north of the border, every other presenter on BBC radio seems to have a Scottish accent, and still they keep coming and celebrating Burns night on the 25th in England! It makes one almost want to attempt a reverse version of the 17th century Darien colonial scheme.

What to watch for next week

Monday the 26th Lunar New Year (of the Ox) holidays which in some countries last the whole week, with German December Import Prices and January CPI for the different states due from this day. Also UK December BBA Mortgage Approvals, US Existing Home Sales and Leading Indicators. Tuesday Eurozone November Current Account, US CaseShiller Home Prices, Bank of Japan December 19th Minutes, German January IFO, UK CBI Distributive Trades, and US Consumer Confidence. Wednesday Japan January Small Business Confidence, German February GfK Consumer Confidence, the Fed decides on rates (unanimously expected unchanged at 0.25%) as does the Reserve Bank of New Zealand (expected –100 basis points to 4.00%) and thousands gather in Davos for the World Economic Forum which runs until the 1st February. Thursday Japan December Retail Trade, EZ15 Money Supply, German January Unemployment, Eurozone Business Climate and Confidence, US December Durable Goods, New Home Sales and Iceland decides on interest rates (currently a record 18.00%). Friday Japan December Jobless, Household Spending, CPI, Industrial Production, Vehicle Production, Housing Starts, Construction Orders and January Tokyo CPI. Then German December Retail Sales, UK Consumer Credit, January GfK Consumer Confidence, Eurozone CPI and December Unemployment, followed by US Q4 GDP, January Chicago Purchasing Managers and final University of Michigan Confidence.

Positioning and Technical Analysis

The pace should pick up as investors realise that the problems we faced in October/November were postponed and did not go away. More banks are bankrupt and will not admit it, eye-watering amounts will be needed for re-capitalisation, and those in need of credit will have to pay through the nose, regardless of official interest rates. Some equities are not worth the paper they are written on and decent dividends a distant dream. With that in mind deciding where to park your money, assuming you still have some that isn’t needed urgently elsewhere, gets a lot easier.

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Published on  Mon, Jan 26 2009, 06:01 GMT

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