Some stock indices may hold above last week's lows all week and possibly all month

Overview

Battle-weary traders and investors had what might turn out to be an all-too brief respite this week as stock indices staged impressive two/three-day corrective rallies. Hauling themselves off recent lows, the S&P 500 from a low at 666.92 which is exactly a 61.8% retracement of the move from 1982 to 2007 – eerily uncanny. Russia did best, up 15%, Dow Jones Euro Stoxx up 9.65%, though some Middle Eastern indices are down on the week. The US dollar has generally lost ground against most currencies, although at almost 1.2000 the Swiss franc is weaker than it has been since mid-December. Many Yen crosses have inched up to new recent highs as another Japanese stimulus package is debated. Baltic and Eastern European currencies have retreated from the extremes set last month. Interest rates are mixed, most treasury yields at or close to last week’s levels.

Political and Economic Developments

Yet more interest rate cuts: 50 basis points from the Reserve Bank of New Zealand to a record low 3.00% and 150 in Brazil, also to a record low 11.25% The Swiss National Bank cut its Libor target to 0.25% from 0.50% because inflation will probably be –0.5% and GDP will shrink in 2009, plus it will also buy bonds and foreign currencies. Massive FX reaction with EUR/CHF seeing its biggest ever daily rally (5.5 centimes to 1.5400). The Bank of England started buying Gilts for its Quantative Easing programme, something that few have ever attempted and whose efficacy in Japan in the 1990’s is questionable, taking the Long Gilt future to a record high price of 126.74 and benchmark 10-year yields sub-3.00%. This has helped the UK, US and German Treasury curves flatten, something we feel should gather pace over the coming month. While not suggesting extremes as in Japan, perhaps one ought to start thinking of yield curves closer to those than the very steep ones we have in many countries at the moment. Austria, Lichtenstein and Switzerland eased bank secrecy rules.

Underlying Themes

We’re all getting poorer and billionaires are suffering too, many probably with a little help from their old pal Bernard Madoff who has pleaded guilty to all sorts of nasties in New York. Forbes magazine reports that the absolute number of men (who totally dominate the list though Oprah Winfrey and J. K. Rowling sneak in) whose wealth has 9 zeros on the end of it shrank from 1125 to 793 (18 because they died). Quite how they are measured is not clear but on average their money (if not their girth) shrank by 23%, Russian oligarchs hardest hit 55 of them dropping off the list. Messers Bill Gates and Warren Buffet still alternating for the top slot (the former this year with $40B) and Mexican drug baron Joaquin Guzman (who has been on the run from prison for 8 years) is in with $1B. A handful got richer, Michael Bloomberg by buying the 20% stake of his media empire Merrill Lynch owned – obviously bought at a knockdown price. With the average US home worth 26.7% less than its July 2006 peak, household wealth collapsed by 9% in Q4 2008 taking the annual decline to 18%, equivalent to $11,200B and almost the $14,200B size of the US economy.

What to watch for next week

Saturday G20 finance ministers conclude their UK meeting; let’s see what they come up with. Monday early UK March Rightmove House Prices, Japan February Department Store and Tokyo Condominium Sales, EZ16 CPI and Q4 Employment, US January Net TIC Flows, February Industrial Production, March Empire Manufacturing Survey and NAHB Housing Market Index. Tuesday Japan January Tertiary Industry Index, UK DCLG House Prices, March German and Eurozone ZEW Indices, US February PPI, Housing Starts and Building Permits. Wednesday the Bank of Japan decides on rates (unanimously expected unchanged at 0.10%), Minutes from the Bank of England’s March 5th MPC meeting, and the FOMC is expected to keep rates at 0.25%. UK January Average Earnings, February Unemployment, US February CPI and Q4 Current Account. Thursday Japan January All Industry Activity Index, February Supermarket Sales, UK Public Finances, M4 Money Supply, March CBI Industrial Trends, Eurozone January Industrial Production, US February Leading Indicators and March Philadelphia Fed Survey, while Iceland decides on interest rates. Friday 20th Vernal Equinox holiday in Japan with just German February PPI, EZ16 January Trade Balance and Construction Output. Sunday parliamentary and presidential elections in Macedonia

Positioning and Technical Analysis

Some stock indices may hold above last week’s lows all week and possibly all month. However by May we feel they should be slipping to new recent lows as reasons for buying all and any equities get fewer and fewer. Treasury yield curves should flatten significantly over this time frame with benchmark ten-year paper moving towards the 2.50% area in Germany, UK and US, sub-2.00% for Swiss Conf. Partly as a function of this credit spreads will probably widen, the long end affected the most. Foreign exchange should continue very difficult indeed, possibly with a tiny bias to US dollar weakness against the majors. Emerging market currencies are likely to come under renewed pressure, and could weaken yet further, very late this month.