Overview

Markets kept to fairly narrow ranges as we waited for Friday’s US Employment report. Equity indices sneaked to new highs for the year, great excitement at stockbrokers and fund managers, but then retreated slowly to end fractionally lower – China-related and several Asian ones dropping the furthest, Istanbul and Eastern European ones holding up best. The US dollar lost a little ground against everything except the South African rand which dropped 4.50% this week to 8.1485; many currencies hit their strongest this year including the Euro at $1.4448 and Cable $1.7044. This helped nudge commodities prices up another notch, ICE Sugar to 20.39 cents per pound (highest since 1981), more than double the mean of the last decade. Credit markets suffered a series of big intra-day swings around current levels, curves flattening as short dated yields backed up a bit, Eurodollar and Euribor futures dropping suddenly taking March 2010 contracts towards 1.20% and 1.35% respectively. Biggest gyrations in the Gilt market where 50-year yields dropped from 4.55% to 4.15%, 10-year veered between 3.91% and 3.54%, while US Treasuries are close to this year’s highest - five-year 2.86% and ten-year 3.88%.


Political and Economic Developments

Russia’s central bank clipped rates by 25 basis point to 10.75% as 2,000 car plant workers stage street protests because of wage cuts and a shorter working week. The Bank of England kept Base Rate at 0.50% but added another £50B to its Quantative Easing programme because, ‘though there are signs that credit conditions may have started to ease, lending to business has fallen and spreads on bank loans remain elevated’. The ECB also kept rates unchanged at 1.00%, Mr. Trichet saying that ‘further fiscal stimulus is not warranted’. The Reserve Bank of Australia was more upbeat today, though keeping rates unchanged at 3.00%, it revised 2009 GDP growth up to +0.5%, +2.25% in 2010 and +3.75% in 2011.
US July Non-Farm Payrolls down just –247K, the smallest rate of job losses since August and a fraction of January’s –741K, so Unemployment shrank to 9.4% from 9.5%. However, those working are earning less, -1.3% June Y/Y to be precise and one of the steepest declines in a series going back to 1946. Things are even worse in Japan where wages declined by a record –7.1% Y/Y caused by a massive average cut of -17.5% in summer bonuses.


Underlying Themes

Some banks reported Q2 profits ahead of (low) expectations, some lost money – guess which fit into which category – and one managed to make a total $3.44B on 63 of the 65 trading days in Q2, hoovering in $100 million or more on 46 of them. Big margins or what? A theme common to all though was increased loan impairment and greater loan loss provisions while claiming the worst of the financial crisis was probably over. Residential property price declines have slowed, at least in the US and UK, but are still negative and this may not be the start of a new trend; UK landlords are reporting higher rent arrears and bad debts. As reported here earlier this year, the heavily indebted commercial property market is well down from its peak with no light at the end of the tunnel. In June UK and US credit card issuers wrote off 10% of balances, hardest hit the poorest (as always). With people saving more and stringent credit scores, we can expect reduced profits here for some time.


What to watch for next week

Monday 10th August holidays in Singapore and South Africa; Japan June Trade Balance, Machine Orders, July Bankruptcies, Economy Watchers’ Survey, Money Supply and Bank Lending as the Bank of Japan starts a two-day rate-setting meeting (expected unchanged at 0.10%), plus Eurozone August Sentix Investor Confidence. Tuesday Japanese July Consumer Confidence, UK BRC Retail Sales Monitor, June Trade Balance, US Wholesale Inventories, Q2 Nonfarm Productivity and Unit Labour Costs. Wednesday Japan July Domestic CGPI, UK June Average Earnings, ILO Unemployment, July Jobless Claims, Claimant Count Unemployed and the Bank of England’s Quarterly Inflation Report. The Norges Bank decides on rates (expected unchanged at 1.25%), EZ16 June Industrial Production, US Trade Balance, July Monthly Budget Statement and the FOMC decides on rates (unanimously expected unchanged at 0.25%). Thursday Tokyo July Condominium and Department Store Sales, German and EZ16 Q2 GDP, the ECB’s Monthly Report, US June Business Inventories, July Import Price Index and Retail Sales. Friday (and Saturday) Feast of the Assumption holidays in several countries, Japan June Tertiary Industry Index, Bank of Japan Minutes of July’s MPC meeting, Eurozone and US CPI, US Industrial Production, Capacity Utilisation and August University of Michigan Confidence Survey.


Positioning and Technical Analysis

Stretched equity indices and small signs of instability mean we shall be looking for interim highs to form, part of a process of establishing wider trading bands. We continue to favour more generalised US dollar weakness through the summer and probably until year-end. Commodities should continue benefit from this, though not in a straight line. Fixed income yields are increasingly unstable at current levels, looking for direction; yield curves should flatten further, Bunds and Gilts doing better than US TNotes. Have a nice weekend!