Overview
Another busy week where ripples from the US sub-prime fiasco continue to spread, geographically and through industry sectors. Just how long it will take for all and sundry to realise there is no cheap money! Downgrades and changes in outlook from the rating agencies will not only become commonplace but also exacerbate the problems. Stock markets dropped a little further after rallying mid-week, glaring exceptions Brazil (unchanged and close to the record high) and Mumbai (up on the week and also very close to record highs). Treasury yields dropped a tad. In the FX market Sterling and the Norwegian krone were hard hit, the former because of downbeat BoE forecasts for economic growth, the latter on lower Crude Oil prices and a narrower trade surplus. EUR/GBP hit £0.7171, highest since June 2003, Cable dropped to $2.0350, Yen crosses and EUR/CHF sold off. The Czech koruna and Polish zloty are at some of their strongest ever levels. Most commodities sold off a little, except CBoT Soybeans where Jan08 delivery set a new record of 1079 ½ US cents per bushel. We remind that a price of 1063 was reached in May 2004, at which point Chinese ports turned away Brazilian cargoes full of beans because they felt they had overpaid. Capesize Freight Index new high of 16,236 today.
Political and Economic Developments
In a highly unusual move Standard Life Bank will raise the interest rate charged on their standard variable rate mortgages although the Bank of England has not altered the Base Rate since July. This reflects the squeeze in money markets since August which, if anything, has got worse as we prepare for year-end. Sterling 2-month Libor is 6.44% at the time of writing, up almost 10 basis points since first thing this morning, nowhere near the 5.75% Bank of England target yet still below their 6.75% penal borrowing cost. This despite the Bank of England’s Quarterly Inflation Report where the MPC assumes the ‘Bank Rate follows a declining path implied by market yields…and the lower value of sterling’. Other useful comments from Mr. King include: (on his reappointment) ‘that can wait until the new year’, and ‘the repricing of risk hasn’t really fed through to markets such as equity markets…there must be some downside risks there…that’s the bigger risk to the global economy’. Problems not confined to the UK but maybe more immediate here considering Northern Rock. Compare and contrast with the Bank of Japan which continues its line in wishful thinking. Phrases such as: ‘although the slowdown in US economic growth could be protracted…overseas economies are likely to keep expanding’, and ‘wages have been somewhat weak…however, with a further tightening of labour market conditions, upward pressure on wages is expected to increase gradually.’ Central Bank of Nigeria Governor Soludo takes the biscuit with: ‘to whoever is keeping dollars under their mattress or in their bank account, I want to say that you will keep losing money. The only currency that will keep giving you value is the Nigerian naira.’ Words like ‘unhelpful’, ‘ill considered’, ‘lies’ and ‘one just cannot get the staff nowadays’ spring to mind.
Underlying Themes
Higher food and energy prices are feeding into inflation. In Britain October Input PPI was running at 8.6% annualised, and more worryingly Output Prices were +3.8% higher on the year (highest since 1995). US October PPI +6.1% Y/Y. Rising food and rents pushed Saudi Arabian inflation to its highest in a decade, the currency peg to the greenback not making things any easier. China October CPI hit an eleven year high of 6.5% because of food prices. The difference is consumer reactions: discounts and ‘three for two’ promotions in G7 countries. Three people were trampled to death at a Carrefour supermarket in Chongqing, south-west China. The store had a special offer on cooking oil, 11.5 yuan for five litres down from 51.4.
What to watch for next week
This weekend G20 finance ministers and central bankers meet in Cape Town. Monday EU foreign and defence ministers meet in Brussels, UK November Rightmove House Prices and US NAHB Index, Japan Nationwide and Tokyo October Department Store Sales. Tuesday Japan October Convenience Store Sales, German Producer Prices, UK Public Finances and Money Supply, Eurozone September Construction Output, and UK November CBI Industrial Trends Survey. Then US October Housing Starts, Building Permits and Minutes of the FOMC’s October 31st meeting. Wednesday early Japan September All Industry Activity Index and October Trade Balance, Minutes of the Bank of England’s 8th November MPC meeting, US October Leading Indicators and final November University of Michigan Confidence Survey. Thursday, a US Thanksgiving holiday, German final Q3 GDP, Eurozone September Current Account and Industrial New Orders. Friday, Labour and Thanksgiving holiday in Japan, just EZ13 November PMI’s and UK revised Q3 GDP. Saturday 24th November Federal elections in Australia and a general election in Croatia on Sunday.
Positioning and Technical Analysis
Thanksgiving on Thursday, and preparations for Christmas and the New Year in full swing; now is the time to decide what’s what. Who are the next victims of the unwinding of the ‘carry trade’, in its broadest sense, what is safe and what is potentially toxic. Realisation could lead to a very unseemly scramble in thin market conditions. The US dollar should consolidate again at current levels but the Yen and Yen crosses will probably outperform all others (except the Swiss franc). Treasury yields of all maturities other than the very, very short end should drift again. Interbank rates over the turn could increase sharply. Nice W/E!
