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Weekly Market Commentary

April vehicle sales plunged in America and Toyota

Mon, May 12 2008, 06:45 GMT
by Nicole Elliott

Mizuho Corporate Bank

Overview

Despite corrective US dollar strength, which saw the Euro drop to $1.5285 and Cable to $1.9459, Nymex Crude Oil set a new record high of $126.20 per barrel. Not surprisingly Gasoline and Heating Oil also set new records at $3.1860 and $3.6125 per gallon. This allowed the CRB Index to reach a new record high at 424.59 despite most other commodities doing nothing of the sort. With the exception of CBT Corn which set a new record at $6.27 per bushel (and CME Lean Hogs towards the highest price of the last decade at 79.375 cents per pound) all others were sidelined. Baltic Dry Freight Rates are very close to last year’s record highs. Some fairly sizeable moves in the currency crosses, with the Yen, Polish zloty and Swiss franc gaining against most, hardest hit the South Korean won, Brazilian real and South African rand. Iceland’s crown is also under increasing pressure with the Central Bank’s chief economist noting today that they are ‘on very dangerous economic terrain. Our main problem is to stabilise the currency’. Yields on all maturities eased a little, inching just below the lows of the last fortnight, even though money markets remain seized up. Stock indices continue to struggle with fairly pivotal chart levels and moves are still inconclusive although some formed small ‘spike highs’ this week. Russia’s main index exploded to a new record high as Vladimir Putin became Prime Minister.

Political and Economic Developments

April vehicle sales plunged in America and Toyota, the world’s second largest car maker, warned of difficult trading conditions ahead because of a stronger Yen, costly raw materials, and a slowing US economy. Total sales dropped to 10.6 million annualised, the lowest since February 1993 and well below the 14 million average of the last decade. Sales of light trucks, both domestic and imported, suffered the most falling by up to 43% from the previous month. Trade is unlikely to improve this year as 81% of Americans surveyed said they would not use their government rebate cheques to buy a new car.
Other numbers this week continue to ram home the message of an embattled consumer. British Services PMI at 50.0, Industrial Production down on the month and flat over the year, Eurozone Retail Sales –1.6% Y/Y and the lowest since the single currency was introduced. Nothing catastrophic, more like a steady stream.

Underlying Themes

The sharp increase in the cost of living, especially for the very poorest in society, is under scrutiny. Front page of Tuesday’s FT was a picture of rioting in Mogadishu. Politicians are being forced to confront these issues and, as is so often the case, feel goaded into ‘doing something’ without really thinking it through. These are often the very same people who passed legislation to increase the bio fuel content in gasoline, slapped more taxes on energy products, raised income tax and so on. When the weak have to compete with gas guzzlers there really is no contest; those who can pay, buy. Examples of knee-jerk reactions are: India which has banned the trading of futures contracts in lentils, potatoes, rubber and soya oil. Higher export tariffs on wheat (Argentina), temporary suspension of import tariffs on rice (Nigeria), a ban on all grain exports (Kazakhstan), and a US CFTC investigation into the profile of commodity speculators. Now China is supposedly considering buying agricultural land in Africa and South America to ensure future food and feed needs. The ultimate Sovereign Wealth Fund?

What to watch for next week

Sunday May 11th parliamentary elections in Serbia, then Whit Monday and Buddha’s Birthday holidays in several countries. Japanese April Bankruptcies and Money Supply, UK Trade, BRC Retail Sales, and PPI, then the US Fed’s Budget. Tuesday UK April CPI, US Export and Import Prices, Retail Sales, and March Business Inventories as Eurozone finance ministers start a two day meeting. Wednesday Japan April Capital Goods Price Index, March Trade Balance, UK Average Earnings and April Unemployment, Eurozone March Industrial Production and US April CPI. Thursday Japan March Machinery Orders, German and Eurozone April CPIs and Q1 GDPs, US May Surveys of Empire Manufacturing and the Philadelphia Fed; March TICS, April Industrial Production and Capacity Utilisation, and May NAHB Builders’ Survey. Friday Japan Q1 GDP, March Industrial Production and Capacity Utilisation, April Consumer Confidence, the EZ15’s March Trade Balance, US April Housing Starts and Building Permits, then May University of Michigan Confidence Survey.

Positioning and Technical Analysis

With a little luck we will form ‘spike highs’ on the weekly charts of Yen crosses and some stock indices. This should set the tone for a drop in these over the rest of this month. Moves are likely to accelerate as they mature and may therefore extend beyond what many would consider ‘normal’ and what they can afford. Note that cash-strapped bankers no longer have a ‘cushion’ in their trading activities and will therefore be forced to stop themselves out sooner than they might have done a year ago. This should also add to volatility. Treasury Notes and longer-dated Bonds (which yield quite a bit more than these) will be used as safe havens, flattening yield curves. The US dollar will continue in correction and consolidation mode, possibly for up to three months, meaning many commodities will act accordingly.

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Published on  Mon, May 12 2008, 06:49 GMT

Archive

• Another knock for US equity indices this week as more wake up to reality
  Published On Mon, Jul 14 2008, 06:57 GMT
• Stock markets took centre stage again with many shares dropping 25% or more in a day
  Published On Mon, Jul 7 2008, 06:00 GMT
• Interest rates continue to operate in some sort of vortex
  Published On Fri, Jun 20 2008, 15:47 GMT
• ECB calls for more access to sensitive information from commercial banks
  Published On Tue, Jun 17 2008, 12:34 GMT
• Commodities and currencies should continue mixed and sidelined
  Published On Thu, Jun 12 2008, 06:48 GMT

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Mizuho Corporate Bank  | 1-3-3, Marunouchi, Chiyoda-ku, Tokyo 100-8210
http://www.mizuho-cb.co.uk | Nicole.Elliot@mhcb.co.uk