Overview
A holiday-shortened week in the UK and looming US employment figures today meant that many markets moved sideways in small ranges. Stock indices eased from this summer’s highs, many having become very overbought along the way, banks leading the way down as jitters over financials resurface. This helps explain spot Gold’s allure, $997.20 with Silver rallying further to $16.26 per ounce. Some Base Metals were dragged higher too (Lead and Zinc) and Sugar futures hit a 25-year high at 24.85 cents per pound. Not all commodities are riding high though: CBoT Wheat at 447.25 cents per bushel is close to the lowest in three years and Natural Gas at $2.467 per 10K MMBtu the lowest in almost eight years and a fraction of last year’s high at $13.694.
Political and Economic Developments
The Swedish Riksbank and ECB kept rates on hold, 0.25% and 1.00% respectively, and Mr. Trichet said September’s offer of one-year money would again be at 1.00% taking Shatz yields down to March’s record low 1.097%, and the Swedish equivalent to 0.822%. Several money market futures set new records, highest Sep09 Fed Funds at 99.840. The Democratic Party of Japan and its leader Yukio Hatoyama saw a landslide election victory, the first in fifty years, pledging to buy the economic recovery that has eluded the ruling LDP for so very long. Worth a try, I suppose. Eurozone July Unemployment hit 9.5%, just shy of the record 9.9% eleven years ago. US August Unemployment is 9.7%, the highest since 1983 and too close for comfort to the post-war high of 10.8% of 1982. Second quarter Unit Labour Costs dropped by 5.9%, almost the biggest decline over the same long term period.
Underlying Themes
Bank lending is down, sparking irritable comments from finance ministers and central bankers; some vote-hungry heads of state trying to make political capital by threatening to limit bonuses. Well, that’s certainly one way to shrink the sector which has ‘swollen beyond its socially useful size’, to quote FSA chairman Lord Turner. Needless to say many do not agree with this view and the Mayor of London called it ‘crackers’. UK Net Consumer Credit was a negative £0.2B in July, the first drop since the series began in 1994, with households paying down £0.4B of mortgages. German and Italian employer groups wrote to EU Commission president Barroso saying, ‘there are worrying signs of a credit crunch underway (which) could have dramatic consequences for investments and employment…The EU must urgently ease the capital requirements of banks’. The German government has allocated another €17.5B to ward off a credit crunch despite a Bundesbank report published August the 28th saying banks will increase lending in H2 2009. Writing in today’s Financial Times US Treasury secretary Geithner proposes an across the board increase in capital requirements for banks – joined-up thinking as usual. China’s banking regulator has prohibited banks with less than 9% capital adequacy from starting new business or opening new branches. The US Fed’s balance sheet liabilities rose to $2.069 trillion in September, up from $2.052 in August. The banking system is not working and despite massive injections, credit is not getting to where it is needed – because of banks’ overriding need to shore up balance sheets.
What to watch for next week
A G20 finance ministers’ meeting in London Saturday will probably result in another round of banker-bashing. Monday Labour Day holidays in Canada and the US just German July Factory Orders and Eurozone September Sentix Investor Confidence. Tuesday German and Japanese July Trade Balances, August Money Supply, Bankruptcies and Economy Watchers’ Survey, UK RICS House Price Balance and BRC Retail Sales Monitor; also German and UK July Industrial Production plus US Consumer Credit. Wednesday Japan July Leading and Coincident Indices, August Machine Tool Orders, UK Nationwide Consumer Confidence, BRC Shop Price Index and July Trade Balance with the Fed’s Beige Book late in the day while the Reserve Bank of New Zealand decides on rates (expected unchanged at 2.50%). Thursday Japan July Machine Orders, UK August NIESR GDP, the Banks of Canada and England decide on rates (unanimously expected unchanged at 0.25% and 0.50% respectively), then the US’s July Trade Balance. Friday Japan August Consumer Confidence, UK PPI, US Import Price Index, Monthly Budget Statement, July Wholesale Inventories and September University of Michigan Confidence Survey.
Positioning and Technical Analysis
Nervous markets and a US holiday Monday mean we might burst out of recent ranges, possibly gapping over the weekend. Short-dated Treasuries are key, yields likely to drop to unprecedented levels, with credit spreads widening again next week. Foreign exchange should remain range-bound though dollar/Yen and Yen crosses might drop suddenly – a baptism by fire for the newly elected government whose attitudes to intervention are possibly not as strong as their predecessor’s. Metals should remain well bid and precious ones could easily post new highs for the year (note spot Gold record high was $1030.80 in March 2008) if, as it has been rumoured, the Chinese authorities are encouraging their people to use this as a store of wealth and an alternative to stock market speculation.
