• Home ::
• Technical ::
• Market View ::
• Weekly Market Commentary

• Send
• Print
• Add To
• Rss

Weekly Market Commentary

7d916bbc-0e22-4155-a628-8858bb16637d

0

0

Another nervous week as the ‘carry trade' unwinds

Mon, Jan 21 2008, 06:45 GMT
by Nicole Elliott

Mizuho Corporate Bank

Overview

Another nervous week as the ‘carry trade’ unwinds. Many equity indices and Yen crosses are poised at key support levels: ‘necklines’ of ‘head-and-shoulders’ patterns or the lower edge of the big trading band of the last year or so. Leading the pack South are GBP/JPY and Sweden’s OMX Index, closely followed by the Dow Jones Industrial Average and FTSE 100. These have already seen weekly closes below these key levels and should, one by one, topple all the other ones over too. An unseemly scramble is likely if not next week then in February; at-the-money implied volatility could soar. Energy products and most metals eased, many thinking if not talking recession, and Baltic Dry and Capesize Freight Indices have halved since their peak at the end of last year. Even the more pessimistic are saying contraction will be shallow and short and that by Q3 2008 things will be mended and economic growth will pick up. We feel this is way too simplistic and that the unravelling of all the mess in the financial system will probably take the whole of this year (and then some more). A ‘flight to quality’ has resulted in Treasury yields moving lower, US ones leading the way to multi-month lows with yield curve steepening seeing two-year TNotes at a mere 2.39% (lowest yield since September 2004). Credit spreads against junk bunds are at July’s record highs. The US dollar has been contained in relatively small ranges around last week’s levels although the Swiss franc did dip very briefly to a new record low (1.0838) as did the Czech koruna (17.318). Sterling has regained some of its composure, EUR/GBP down from a record £0.7614, and the Yen had the best all round performance, dipping to 105.92 to the greenback. Stock indices are all lower, the New Zealand bourse for a staggering twelve consecutive days while Jakarta and Mumbai are down nearly 8% this week alone. US and European indices lost roughly 5%, many now lower than they were at any point in 2007.

Political and Economic Developments

A series of important but not key numbers where the general theme is one of deteriorating economic conditions and lack of confidence. Christmas Retail Sales were down 0.4% both in the UK and in the US, where the National Association of House Builders’ Index remains at a record low. Not surprisingly US December Housing Starts and Building Permits are lower than they have been since 1991 and the Philadelphia Fed Survey is at its lowest since October 2001.

Underlying Themes

Tuesday Mizuho Financial Group bought $1.2B preferred stock in Merrill Lynch with a 9.00% dividend. Thursday the US firm announced another $11.5B or so in mortgage-related write downs and a Q4 loss of $9.8B. They have also taken $3.1B hit linked to the potential downgrading of the bond insurers. Caveat emptor: let the buyer beware.
Ten thousand Indonesians protested at the presidential palace because soybean prices, the poor’s main source of protein, are up 125% in a year. CBOT Soybean futures hit a record high of $1320 per bushel and are currently consolidating neatly just under here. A similar theme running through Corn, Oats, Wheat and to a lesser extent Cotton as US energy policy collides with a finite amount of arable land.

What to watch for next week

Monday, US Martin Luther King holiday, the Bank of Japan starts a two-day rate-setting meeting (expected unchanged at 0.50%), while EU finance ministers meet in Brussels. Numbers-wise we get Tokyo December Condominium Sales and Convenience Store Sales, German PPI, UK Money Supply and Public Finances, plus January Rightmove House Prices. Tuesday Japan December Supermarket Sales, CBI Quarterly Industrial Trends, the Bank of Canada decides on rates (unanimously expected –25 basis points to 4.00%), as does the Reserve Bank of New Zealand (expected unchanged at 8.25%). Wednesday EZ13 November Industrial New Orders and EZ15 January PMIs, Minutes of the Bank of England’s January 10th meeting and UK Q4 GDP plus the Norges Bank should keep rates at 5.25%. Thursday Japan November All Industry Activity Index, December Trade Balance, US Existing Home Sales and German January IFO. Friday Japan December CPI and Tokyo January CPI, Bank of Japan Minutes of December 20th meeting and Germany’s Import Price Index.

Positioning and Technical Analysis

The possibility of markets ‘gapping’ lower on Monday is high; if so they might try and fill this next week before moving seriously, furiously lower in February. If they do not gap lower, then down anyway this quarter, but probably more elegantly. The US dollar could, in theory, become the new engine of the ‘carry trade’ but we feel there are too many other things to sort out before investors cotton on to this one. As for the financial crisis spilling into the ‘real economy’, it must and has done so already. Borrowing is now more complex and more costly for everyone and will in turn cause more pain and more defaults/bankruptcies. The new game in town will not be ‘investing’ but ‘capital preservation’. Headless chickens are distracting and unhelpful.

• Download Full Weekly Market Commentary

Published on  Mon, Jan 21 2008, 11:15 GMT