Overview

Markets started the year very slowly, almost reluctantly, after the carnage of 2008. Stock markets tried to look on the bight side but many ended down a tad on the week. Interest rate futures remain bid, front month Eurodollars setting a new record high at 99.125 and Schatz at 107.89 (yield 1.53%). FX was mixed, Cable gaining the most to $1.5375 (£0.8885 to the Euro) and the South Korean won hardest hit against the US dollar at 1345; the Romanian leu at 4.2425 per Euro is at its weakest ever. Baltic Dry Freight, Capesize and Clean Tanker rates to Japan are at their lowest in a decade, Dirty ones to the US Gulf not far off. LME Plastic futures trading at their lowest since introduction two years ago, while Base Metals continue to inch higher, Lead taking the lead this week; Grains and Oilseeds are creeping up too.

Political and Economic Developments

Central Banks are reacting the only way they know: rate cuts. Indonesia down 50 basis points to 8.75%, South Korea, Taiwan and Britain trimmed yet another 50 off their targets, to record lows at 2.50% (Korea) and 1.50%, the lowest rate since the UK institution was established in 1694. Trying to stem economic contraction, as car maker Ssangyong files for protection, Taiwanese exports collapse 42% from a year ago, and the Bank of England is bullied by the Treasury.
Job losses mount daily as firms close or restructure. German Unemployment edged up to 7.6%, the first increase after almost four years of declines; Spain’s hit 11.3%, comparable to the old methodology’s 1987 level. Canadian Unemployment rose to 6.6%, the highest in two years. US December Non-farm Payrolls dropped by 524K, slightly less than the ADP’s 693K job losses, and Unemployment soared to a sixteen year high of 7.2%. Retailers are having to be more creative to attract the cash-strapped or the worried. Discount supermarket Aldi UK is to sell cheap holidays, while travel agents predict an increase in long haul and overland adventure trips for those on ‘gardening leave’; Intrepid Travel is offering 15% discounts to those made redundant. If you buy a new car from Hyundai America, it will pay off your car loan without affecting your credit score should you lose your job, become disabled or file a small business bankruptcy. Lawyers in the UK’s ‘Magic Circle’, where partners’ average earnings top £1M per annum, are being hit now too with Clifford Chance announcing a 10% headcount reduction. Some of the 400 partners claim that they will have to borrow the £100K for the simultaneous capital call.

Underlying Themes

In tough economic conditions it is imperative to distinguish between good and bad businesses, between the cash-strapped and the crooks. The temptation to ‘cook the books’, as was the case with India’s Satyam Computer Services (PwC audited four years’ worth of accounting fraud), increases. In the UK the FSA slapped a £5.25M fine (cut from £7.5M because the company cooperated) on US insurance broker Aon, for bribery and corruption in Europe, the Middle East and Asia. Some firms which have struggled for years trying to fob off tawdry tack on unwilling customers go straight to the wall. Others whose model is fundamentally sound have trouble refinancing at anything less than usurious rates with crippling fees. And cash rich firms curtail expansion and regard their corporate banker with utmost suspicion. Nothing is easy.

What to watch for next week

Sunday 11ththe BIS hosts a meeting for the heads of central banks. Monday is a Japanese holiday and there are no economic numbers; some would say a blessed relief after recent grim statistics. Tuesday Japan November Trade Balance, December Money Supply, Bank Lending, Bankruptcies and Economy Watchers Survey, UK RICS House Prices and BRC Retail Sales early in the day; then UK and US November Trade Balances plus December’s US Monthly Budget Statement. Wednesday Japan December Machine Tool Orders, Eurozone November Industrial Production, US Business Inventories, December Import Price Index and Retail Sales. Thursday Japan November Machine Orders, December CGPI, Tokyo and Nationwide Department Store Sales, EZ15 CPI, the ECB decides on interest rates (mainly expected to cut by 50 basis points to 2.00%), US PPI, January Empire State Manufacturing Survey and the Philadelphia Fed’s one. Friday Eurozone November Trade Balance, US Long Term TICS flows, December CPI, Industrial Production and January University of Michigan Confidence Survey. Monday the 19th is a US holiday and Treasury Secretary Paulson steps down from his job.

Positioning and Technical Analysis

We continue to caution against hasty decisions and would prefer sitting things out for another week or so. The big question again this year is whether the interbank money markets will resume something closer to normal functioning. Many Central Bank target rates are as close as zero as possible so Libor’s spread over these will obviously not get back to the eighth or so it used to be; how close? Mistrust between financial institutions, and therefore their clients too, might ease but not enough to oil the cogs sufficiently. Authorities’ time is probably best spent drafting rules to keep banking, a necessary evil, in line.