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Weekly Market Commentary

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Interest rates continue to operate in some sort of vortex

Fri, Jun 20 2008, 15:47 GMT
by Nicole Elliott

Mizuho Corporate Bank

Overview

After recovering a little early in the week equity indices generally lost ground to end about 3% down. Thailand was hardest hit because of political instability (-7%) and Mumbai is at its lowest since August 2007, while Transports ended a little higher on the assumption that people will turn to public transport because they are being priced out of driving their cars. Interest rates continue to operate in some sort of vortex, rumours and predictions swirling and reversing at an alarming rate. In the end both money market and fixed income yields consolidated around last week’s high levels, Thai and India benchmark five-year Treasuries hitting multi-month highs at 5.85% and 8.65% respectively. Currencies were mixed and inconclusive although Eastern European ones did well: the Czech koruna powering to a new record at 23.895 to the Euro and 15.369 to the US dollar. Base and Precious Metals rallied, taking the CRB Index to a new record high at 458.70, while CBT front month Corn set another new record at 760 cents per bushel and Cocoa is more expensive than it has been in years. Energy futures retreated a little and Baltic Freight Rates collapsed from record highs. Note that despite the hysteria linking speculators and high Crude Oil prices, two cash-settled futures contracts launched on the Dubai Mercantile Exchange this month have seen dismally poor trading volumes.

Political and Economic Developments

It would appear that the Brits are now wearing the shopaholic crown instead of the Americans. Admittedly the warmest May ever, UK Retail Sales by volume up a record 3.5% on the month powered by seasonal food and clothing, and +8.1% Y/Y to an average £5.3B weekly. Prices were down 0.3% and April’s revised to –0.2%, showing that discounting is still necessary to convince us to part with what’s left after below-inflation pay rises. The bad news is that seeing as we cannot afford homes, utilities or petrol any more we are stuffing our faces (and slipping on strappy sandals) in a bid to power ahead in the obesity stakes. Interestingly May M4 Money Supply dropped to an annual rate of 10.0% its lowest in a year (still way too high for some although targeting it has become so unfashionable that the young may not be aware of this concept). Mexico’s food industry association Concamin agreed to freeze the price of 150 different basic products in order to ease pressure on household budgets. Last month import tariffs on some commodities were reduced while this week the head of state-run oil monopoly said output cannot be increased. Today the Mexican Central Bank raised rates by 25 basis points to 7.75%. Governments have little room to manoeuvre and in difficult conditions careful thought on how interest rate rises will help is needed. Trigger-happy solutions have the potential to kill the patient.

Underlying Themes

Consumers are gloomy and business is worried too. Germany’s June ZEW Survey of Economic Sentiment is almost as low as 1992’s record low; the Eurozone’s ZEW is at a record low of –52.7. US ABC Consumer Confidence in May was also at a record low of –51. The Philadelphia Fed’s June Survey of business conditions, while just off recent lows, has been bumping along at under –15 all year which are some of the lowest points of the last twenty years. The finance industry is still facing a black hole, desperately trying to raise capital.

What to watch for next week

The Summer Solstice today, the longest day in the Northern hemisphere, and soon the end of H1 2008 for many companies. Obviously a time to take stock and plan for the second half in a year where conditions are unlikely to improve. Monday Japan May Supermarket Sales, UK June Rightmove House Prices, German IFO and Services PMI’s for the different European countries. Tuesday US April Case-Shiller and OFHEO House Prices, British May BBA Mortgage Approvals and US June Consumer Confidence. Wednesday Eurozone April Industrial New Orders, Japan May Trade and Corporate Services Prices, US Durable Goods and New Home Sales. UK June Nationwide House Prices, CBI Distributive Trades, Japanese Small Business Confidence, German July GfK Consumer Sentiment, plus the Norges Bank decides on rates as does the FOMC (expected unchanged). Thursday EZ15 May Money Supply, US Existing Home Sales, Help Wanted Index, final Q1 GDP and Core PCE. Friday Japan May CPI, Household Spending, Industrial Production, Retail Sales, Unemployment, June PMI and Tokyo CPI. Then Eurozone April Current Account and June Economic Sentiment, UK final Q1 GDP, US May Personal Income and final June University of Michigan Sentiment.

Positioning and Technical Analysis

Watch for weekly and monthly closes below pivotal levels in many equity indices. Things will then slide more quickly than many can imagine and Treasuries will revert to safe-haven status regardless of inflation. Interbank yields will remain very difficult and probably high, the medium and long term outlook anybody’s guess. These will depend on the authorities’ view, and ability, in dealing with the continued credit crunch. FX and commodities will probably be sidelined. Weekly Market Commentary will be away until Friday 4th July (a US holiday).

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Published on  Fri, Jun 20 2008, 15:55 GMT