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Weekly Market Commentary

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Funicular railway mode for equities

Fri, Mar 2 2007, 16:44 GMT
by Nicole Elliott

Mizuho Corporate Bank

Overview

After creeping higher for umpteen weeks in what we describe as ‘funicular railway’ mode, the winch for equity indices came unstuck and the process unravelled quickly. Some blamed the Shanghai indices, others Mr. Greenspan (who said a recession in the US was a possibility), while others focused on the Iran threat. One way or another, markets that are propped up by hope risk collapse at the mere whiff of a change in sentiment. What is also interesting is that despite the acres of space discussing the pros and cons of one share versus another, one sector as compared to any other, and emerging versus G7 economies, when push comes to shove they all topple together. The worst performers were some of the Asian indices, dropping up to 9.75% on the week. European and US indices had between 3% and 6% wiped off them, while the Dow Jones Utilities Index barely budged. As is always the case in such situations, cash is king and yields on short-dated securities dropped across the board. Longer term US Treasury yields got caught up in the flow, dropping from 4.68% to 4.45%, well below 5.25% Fed Funds.

The other big theme, discussed ad nauseam, was whether ‘the carry trade’ had come to an abrupt end and to what extent there was more unwinding to be done. The Swiss franc has certainly gained against the Euro, from a multi-year 1.6295 to 1.6065. Of more interest to most was what the yen was up to: from 121.00 to 116.75 against the US dollar, and a massive 6% up against the worst performer, the South African rand, and up at least 2% vs all others. The jury is still out here but we favour a lengthy bout of consolidation below this year’s highs rather than a top.

Commodities were pretty much static when compared to the big moves outlined above, but note that energy products, especially gasoline, rallied some more. Metals and grains gave up much last week’s gains.

Political and Economic Developments

Numbers this week were a mixed bunch from which no hard and fast conclusions can be drawn. Staggeringly weak US January Durable Goods Orders appear to be caused mainly by a drop in Boeing’s orders. US Q4 GDP was revised down to 2.2% from an initial 3.5% growth, while Chicago Purchasing Managers in February posted their weakest reading since April 2003. US New Home Sales dropped to 937K in January, their lowest since February 2003. On a more positive note were US February Consumer Confidence at 112.5 (highest August 2001), Existing Home Sales (up again from September’s trough), and Personal Income up 1% M/M.

Underlying Themes

The local government of Brighton and Hove has decided to select secondary school places by lottery – literally! I mean, we all know our children’s chances in life are subject to the whims of Lady Luck, but this takes the biscuit. Education is universally accepted as the best route out of poverty and to happier lives. And it would seem that the poorer the family, the more they are willing to sacrifice. Sixty-five percent of the slum children in Hyderabad are privately educated, as are 75% of those in poor urban areas of Lagos state. Meanwhile almost one third of Indian girls aged 15 to 24 are illiterate. Research by Professor James Tooley of the University of Newcastle upon Tyne suggests that just as governments can’t run farms and factories, education is too important not to be run by the private sector. Being accountable to parents and not bureaucrats means even cheap private schools gets better results, have less teacher absenteeism, and cost less per capita than state-run ones.

What to watch for next week

Parliamentary elections in Estonia Sunday, where a healthy economy is masking other social problems. A quiet week numbers-wise with key data not due until Friday. Monday February Services PMI’s for the different European countries and the US, plus UK Official Reserves. Tuesday Eurozone Q4 GDP and January Retail Sales, British Retail Consortium February Sales, US Q4 NonFarm Productivity and Unit Labour Costs, January Factory Orders and Pending Home Sales. The Bank of Canada decides on rates (expected unchanged at 4.25%). From Wednesday German February WPI, Japanese Leading and Coincident Indices and UK February Consumer Confidence early in the day, Germany’s January Factory Orders, US Consumer Credit, February ADP Employment change, and the Fed’s Beige Book. Thursday Japan’s February Money Supply, Bank Lending, Machine Tool Orders and Economy Watchers’ Survey; then German January Industrial Production while the ECB and Bank of England are expected to keep rates unchanged at 3.50% and 5.25% respectively. Friday Japanese January Machine Orders, US and German Trade Balances, UK Industrial Production, Eurozone OECD Leading Indicators, US Wholesale Inventories and February’s US NonFarm Payrolls and Unemployment.

Positioning and Technical Analysis

At the time of writing markets that moved the most this week are precariously poised at the lower end of this week’s range, suggesting more of the same early next week. Moves will probably be accompanied by much media-hype and rushed, poor quality analysis, so watch carefully and use your own knowledge and instincts. Do not follow the herd and do not act like a headless chicken. Let the dust settle in the stock markets, a process that may take up to three weeks. In the meantime gentle but steady pressure for lower yields remains, commodities sidelined and energy up a bit again.

Have a nice weekend!

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Published on  Fri, Mar 2 2007, 16:47 GMT