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Weekly Market Commentary

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The last week in October and many will be hoping stock markets fall no further

Mon, Oct 27 2008, 05:39 GMT
by Nicole Elliott

Mizuho Corporate Bank

Overview

When there are no bids for Cable on the Reuters Dealing system you know you are in big trouble. Huge bid-offer spreads, record volatility, massive credit spreads and interest rates all over the place. De-leveraging continues with the Yen the main beneficiary (90.87 per USD), closely followed by the US dollar (Cable 1.5260) and Swiss franc (EUR/CHF 1.4400). Stock indices tumbling by up to 10% daily (and some futures limit down) are a side effect, government bonds yields in the spotlight, and some have no working capital. Regardless of central bank rate-setting G7 Treasury yields have dropped, especially at the short end, because of their safe-haven status and expectations of imminent rate cuts. Emerging market government bond yields are a lot higher, Brazil, Czech Republic, Hungary, Poland and Russia among others, shooting to almost double those of a year ago. Interbank rates are anyone’s guess, Russian ones in theory offered at 22.00%, Romania overnight Robor 14.25%/20.25%. Hungary raised their target rate by 300 basis points to protect the forint while India and New Zealand slashed by 100 to prop up their economies. All commodity prices are lower, Crude Oil $62.85 as OPEC opts to cut production to stem the price slide and balance government budgets, spot Gold $683.00 and the CRB index its lowest in four years. Baltic Freight Rates a fraction of this year’s peak and their lowest in four years; rumours of shippers transporting for key customers free of charge to avoid docking fees. Corporates are ripping up business forecasts.

Political and Economic Developments

Mervyn King kindly warned us Tuesday that the UK faces recession, while government finances are among the worst ever, and digging our way out will be a lengthy process. Q3 GDP was –0.5% Q/Q, up a mere 0.3% Y/Y, and Retail Sales dropped 0.4% last month. The volume of food and drink sold declined for the first time ever (a good thing too, some might say in this nation of fatties) although rising prices meant we spent 6% more to buy fewer goods. Accounting for 43% of all consumer spending, of which 37% is in supermarkets, belt-tightening is real (and internet searches for second-hand goods are up by 22%).
Belarus, Hungary, Iceland and Ukraine have gone cap in hand to the IMF. Investors are protesting outside Kuwait’s stock exchange, where the main index dropped 33% since July, despite the Kuwait Investment Authority spending hundreds of millions to support the bourse. Rumours swirling of a fortnight’s closure on some stock exchanges.
President Bush has called for a G20 leaders’ summit in Washington November the 15th to discuss the financial turmoil. Let’s see if we can hang on in there until then; Tower of Babel springs to mind.

Underlying Themes

Italian ten-year government BTPs yield 94 basis points over their German equivalent, a record high since the introduction of the Euro. Lotto mania grips the country, estimates that one in every three Italians own a ticket for this week’s draw, some ploughing in their life savings hoping to win the record €100 million jackpot. Judging by the state of financial markets at the moment, some might suggest this is a fairer casino!

What to watch for next week

The last week in October and many will be hoping stock markets fall no further. From Monday UK October Nationwide House Prices, EZ15 M3 Money Supply, US New Home Sales and German October IFO. Tuesday US August Case/Shiller House Prices, Japan September Retail Sales, UK October CBI Distributive Trades, US Consumer Confidence, German November GfK Consumer Confidence and the US FOMC starts a two-day rate-setting meeting (many expect a 50 basis point cut to 1.00%). From Wednesday October CPI for the different German states, Japan September Industrial Production, UK Consumer Credit and US Durable Goods Orders. The Norges Bank decides on rates (expect a 25 basis point cut to 5.00%). Thursday German September Retail Sales and October Unemployment, EZ15 Business Climate, US Q3 GDP and Core PCE. Friday Japan September Jobless, National CPI, Housing and Construction, October Tokyo CPI and the Bank of Japan meets (no change at 0.50% expected). Also UK October Gfk Consumer Confidence, EZ15 CPI and September Unemployment, US Personal Income and Spending, Core PCE, October Chicago Purchasing Managers, final University of Michigan Confidence and Q3 Employment Cost Index.

Positioning and Technical Analysis

We repeat what we said last week: dysfunctional and irrational markets will continue until month-end at the very least as the need to raise cash and prop up edifices intensifies. Some will have to dump valuable assets at rock-bottom prices so the canny investor must keep his eyes and ears open for once-in-a-lifetime opportunities. Current financial chaos will have ever more immediate effects and its tentacles will eventually spread to unimagined and surprising parts of this global edifice. These will vary from nation to nation but the overall effect is that running any business will become terribly difficult, and possibly come to a complete standstill. Expect cliff-hanger weekends from now until the end of the year as we speculate who will be next to go bust. Hedge fund managers are warned not to expect any sympathy.
Clocks go back one hour in Europe Sunday as Summer Time ends. Have a nice weekend!

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Published on  Mon, Oct 27 2008, 07:17 GMT