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Weekly Market Commentary

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A quieter week with the credit markets still completely snarled up

Mon, Dec 10 2007, 07:07 GMT
by Nicole Elliott

Mizuho Corporate Bank

A quieter week with the credit markets still completely snarled up. Interbank rates are way over central bank overnight targets while Treasury paper yields below them. The FX market consolidated at recent levels, Sterling weakening to $2.0180 and Kiwi gaining to $0.7800. Against the Euro the Polish zloty strengthened to 3.5715 and the Czech koruna hit a new all-time low of 26.044. Benchmark Treasury bond yields backed up from pivotal levels but on the whole remain within last week’s ranges. On the other hand December 2007 dollar, sterling and euro money market futures dropped to their lowest levels in months (see below). Equity indices are in a world of their own, seeing silver linings inside every cloud. The main focus seems to be the prospect of lower interest rates next year, presumably which will stem the sub-prime/SIV mess and boost corporate earnings. Most indices are up a little on last week and Brazil’s Bovespa set a new record high at 66,528, as did Egypt’s Hermes (90,039) and the Dow Jones Utilities Index (550). Commodities are mixed, precious metals up a little and energy futures trying to form interim bases. Baltic Clean tanker rates to Japan have followed the Dirty ones to the US Gulf a lot higher.

Political and Economic Developments

Interest rate moves left, right, and centre. The ECB, as widely expected, left rates on hold at 4.00%; same for the Reserve Banks of Australia (6.75%) and New Zealand (8.25%), as well as South Korea (5.00%). Rather hawkish comments from New Zealand have sent AUD/NZD down to almost 1.1200, the Aussie’s weakest in months. In a surprise move the Bank of Canada trimmed 25 basis points off their target rate to 4.25% and the Bank of England was bullied into doing the same taking Base Rate to 5.50%. Indonesia played copy-cat so their key rate is 8.00% as inflation pressures ease. In the other camp the Reserve Bank of South Africa hiked by 50 basis points to 11.00% and China says it might tighten further to cool the economy. Other than providing journalists with headlines, does anyone care? The pressure on three-month Libor is relentless: EZ13 4.89%, GB 6.63% and US 5.14% today. Legg Mason’s CEO, with a 47-year career in finance says, ‘I have not seen anything like this, where nothing is traded’.
US Q3 Mortgage Delinquencies at 5.59% are at their highest since March 1986. President Bush announced a grand, means tested, privately funded plan to freeze repayment rates that are due to re-set higher, thereby slowing repossessions. Details are as yet unclear and one must question what this does for the long-term profitability of mortgage lenders. Or was the thought of poor families being thrown onto the streets during the Holidays too much?

Underlying Themes

Some have asked (any many have bought EUR/GBP taking it almost to its all-time high of £0.7249) why only the UK has had to bail out a mortgage lender? Not quite so. In the US at least a dozen have filed for Chapter 11 protection and Georgia-based NetBank Inc is the largest one to fail since 1993’s Western Federal Savings and Loan. Allianz’s credit insurance unit expects insolvencies to increase in 2008: France +3.4% to 51,600, UK +8.3% to 22,100 and Germany unchanged at 28,500.

What to watch for next week

This weekend in Bali twenty trade ministers meet to discuss climate change and Sunday a presidential election in Bosnia-Herzegovina. Monday early Japan October Machine Orders, November Money Supply and Economy Watchers’ Survey. Then German October Trade Balance, UK DCLG House Prices, November Money Supply, EU December Sentix Investor Confidence and US October Pending Home Sales. Tuesday Japan November Consumer Confidence, UK October Trade Balance, EZ13 and German December ZEW Surveys, US October Wholesale Inventories and the FOMC’s decision on interest rates. Wednesday early Japan October Trade Balance, November Domestic CGPI and Bankruptcies, UK Unemployment and October Average Earnings, Eurozone Q3 Employment, October Industrial Production, US Trade Balance, November Import Price Index and Monthly Budget Statement. The Norges Bank meets to decide on rates (expected +25 bp to 5.25%). Thursday UK November RICS House Prices, Tokyo Condominium Sales, the ECB’s Monthly Report, UK CBI Industrial Trends, US PPI and Retail Sales, plus October Business Inventories. The Swiss National Bank quarterly MPC meeting and news conference (target rate expected unchanged at 2.00%). Friday Japan Q4 Tankan Survey, EZ13 and US November CPI, Industrial Production and Capacity Utilisation. Sunday 16th parliamentary elections in Kyrgyzstan.

Positioning and Technical Analysis

With only ten working days to Christmas now is probably not the time to dream up any grand plans. Pity the poor people sitting at the funding desks who have year-end requirements looming ever closer. They need money to tide themselves over until then, and then some more. Upward pressure on three-week and three-month money will continue. Funds will probably freeze withdrawals, in ever increasing numbers, as that is about the only option left to them. This will not do anything to improve the ‘Christmas spirit’, so retail discounting before the great day will continue, and increase. Bah humbug! Have a nice weekend!

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Published on  Mon, Dec 10 2007, 11:55 GMT