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Weekly Market Commentary

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Several asset classes might continue to struggle at key chart levels, but will eventually break

Mon, Sep 15 2008, 06:44 GMT
by Nicole Elliott

Mizuho Corporate Bank

weekly market commentary is away next week, back on friday the 26th september

Overview

Echoes of last week with sharp global market moves. The initial euphoria, and knee-jerk selling of bonds and buying of shares, following the US Treasury’s nationalisation of Fannie Mae and Freddie Mac faded all too quickly. In fact the US Long Bond’s yield was back to where it was on Friday afternoon (4.30%) by 14:00 GMT Monday and dropped to a new recent low of 4.17% Tuesday. The biggest bailout in history and it only bought half a day’s worth of breathing space. Traders’ mindset: who’s next? ‘There seems to be a lot of financial institutions that are too big to fail’ said speaker of The House of Representatives, Nancy Pelosi.

The general theme is of de-leveraging, raising cash, avoiding risky assets, and flight to quality. Therefore the Yen gained against all currencies, as to a lesser extent did the Swiss franc, and the US dollar strengthened until Thursday. The Euro hit a low at $1.3883, Cable $1.7445, and the Yen 106.07. These moves began to reverse today, for no apparent reason, other than that in our view buying dollars in the first place was wrong. Charts appear to be forming ‘spike lows’ after the carnage of the last nine weeks. The pound has stabilised and regained some lost ground against other majors, likewise Eastern European currencies, although Scandinavian ones have weakened against the Euro. Most commodity prices are down in line with the greenback, Nymex Crude Oil touching a low of $100.10 per barrel. On the whole Treasury bond yields are lower, except Brazilian and Russian ones, while South Korea had to withdraw a new sovereign offering today because of poor demand. Equity indices are broadly unchanged, thrashing around at key chart levels; BRIC ones are lower.

Political and Economic Developments

Brazil upped its key Selic rate by 75 basis points to 13.75% (to fight inflation) while the Reserve Bank of New Zealand cut theirs by 50 to 7.50% (because they are now officially in recession). Eurozone Consumer Confidence has been battered, dropping close to a record low at –20.2 in September from +18.1 a year ago. Wholesale price inflation is easing, admittedly from terribly high levels, and Industrial Production slowing. US weekly Continuing Unemployment Claims, at 3525K, are towards the higher end of the last twenty years, and more banking and financial jobs are set to go.
RealtyTrac said August foreclosure filings by US homeowners were +12% from July and a record +27% from a year ago, the highest rate at the metropolitan area of Stockton, California. Emergency measures to help the housing market may be slowing the process, with default notices (the first step to eviction) lower in some states

Underlying Themes

‘In the end, these changes are not dramatic’ said Russian President Dmitry Medvedev of the stock market, ‘the situation will straighten out (and) we will return to the levels that we saw at the start of the year’. The central bank threw 273B overnight roubles at the banking system; stock index losses (50% down from May’s peak) roughly 18,750B roubles and the oligarchs are said to be struggling with margin calls. Over in Pakistan newly elected President Asif Ali Zardari hopes the stock index (down 41% since April’s peak) falls no further as its board proclaimed a floor at 9,144 (presumably they just close the stock exchange). Inexperience of capitalist systems, naïve local investors, and potential pyramid schemes are just some of the many obstacles in fledgling capital markets. Outflows from emerging market bond and equity funds topped $29.5B in the last three months.

What to watch for next week

Saturday the 13th EU Finance Ministers meet; let’s see if they can come up with any gems! Monday holidays in China, Japan and South Korea with just US August Industrial Production and September’s Empire State Manufacturing Survey due. Tuesday Japan August Consumer Confidence and Tokyo Condominium Sales, EU25 July Car Registrations, UK, EZ15 and US CPI, German and EZ15 September ZEW Surveys, US NAHB Housing Index, and July Long Term TIC Flows. The FOMC decides on interest rates (expected unchanged at 2.00%). US Democrat Dodd, chairman of the Senate Banking Committee, plans a hearing on the Treasury’s takeover of the two GSE’s (Democrat Frank, chairman of the Financial Services Committee, plans another on the 24th). Wednesday Israel leadership elections, the Bank of Japan decides on rates (should be unchanged at 0.50%), the Bank of England releases Minutes from the September 3rd/4th MPC meeting, UK July Average Earnings, August Unemployment, September CBI Industrial Trends, Eurozone July Trade Balance, then US August Housing Starts. Thursday Japan July Tertiary Industry Index, August Department Store Sales, UK Retail Sales, PSNCR, Money Supply, US Leading Indicators and September Philadelphia Fed Survey. Friday just German August PPI. Monday 22nd Japan’s ruling LDP party elects a new leader.

Positioning and Technical Analysis

Several asset classes might continue to struggle at key chart levels, but will eventually break. The debate between moral hazard and throwing money at the problem will rage, those with the most to lose the noisiest and politicians up for re/election pushing for a ‘fix’. Just because news is unpalatable, there is no need to shoot the messenger. We do not have a crystal ball, nor a direct line the Almighty, but authorities denying responsibility and/or failing to come up with credible solutions are pathetic.

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Published on  Mon, Sep 15 2008, 06:50 GMT