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Weekly Market Commentary

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Quieter holiday−thin markets despite the political turbulence in Thailand and Mumbai

Mon, Dec 1 2008, 05:45 GMT
by Nicole Elliott

Mizuho Corporate Bank

weekly commentary will be away next week; back friday 12th december

Overview

Quieter holiday-thin markets despite the political turbulence in Thailand and Mumbai. Stock indices have bounced from last week’s lows and most are now trading just above October’s lows, percentage gains over the week impressive as we start from very low bases, Asian ones lagging behind. Volatility has eased a little, but by historical standards remains terribly high for a whole raft of instruments. The rush into Treasuries continues, many yields tumbling to post WWII lows, and curves flattening at the fastest pace in years (US 10-2 year from 260 to 180 basis points in just a fortnight). Credit spreads and the cost of insuring against default continue to widen, much to central bankers’ dismay, though Germany’s Angela Merkel warned that ‘excessively cheap money…(means) we could find ourselves in five years facing the exact same crisis’; a reality check at last! The FX market has been sidelined, Eastern European, Scandinavian currencies and Sterling recouping some lost ground in the process. Commodities have died a death although spot Gold perked up to $830 per ounce (with worldwide retail demand for coins strong). Plastic prices have halved since the summer, in line with Natural Gas, while Nymex Crude and Gasoline are down by two thirds. The Baltic Capesize Freight Rate Index is back down to January 2002’s lows and the Dry Index is lower than it has been since January 1987. We understand that re-sale prices of luxury yachts are down about 30%.

Political and Economic Developments

With striking taxi drivers as backdrop, the Chinese authorities have taken some dramatic steps to slow the deceleration in economic growth. Interest rates were slashed by 108 basis points to 5.58% on loans (from 7.50% in September), the biggest cut in a decade. Reserve requirements for large banks cut by 100 basis points and for small banks 200. Official figures are not available but anecdotal evidence suggests many have become unemployed as exporting factories close. As most of these are not ‘permanent residents’, therefore not entitled to education or medical benefits, they are forced to return to the countryside.
US October Existing Home Sales prices dropped 11.3% from a year ago, the biggest since records began in 1968, while New Home Sales are down yet again to 433K annualised (versus a peak 1,389K in July 2005).

Underlying Themes

The beleaguered consumer, having been castigated for his/her profligate ways over the last decade, many borrowing much more than they earn and using the home as an ATM, is now being exhorted to go out and shop ‘till they drop to prop up the nation. The UK Chancellor Monday estimated the size of the Gilt market would double plus he cut VAT from 17.5% to 15% within the week. This merely serves to display his complete disconnect from reality as a meagre 2.5% will do nothing when 20% discounts and ‘three-for-two’ offers by retailers are now the norm. Meanwhile shops have a logistical nightmare and the nigh impossible task of reducing prices in such a short space of time.
In the US revised Q3 Personal Consumption as a proportion of GDP dropped 3.7%, the biggest decline since Q2 1980; note that in 2007 domestic consumption hit a peak of about 72% of GDP. Personal Spending slumped 1% in October alone, a bigger decline that just about anytime except January 1987. It would therefore seem that despite government’s largesse (another $800B thrown at the problem this week as well as bailing out the world’s biggest bank), short arms and deep pockets are in evidence.

What to watch for next week

Monday the first of December starts the countdown to the festive season and Eurozone finance ministers meet in Brussels. Numbers wise we get Japan October Labour Cash Earnings, November Vehicle Sales, Manufacturing PMI’s for the US and various European countries, US Vehicle Sales, UK October Net Consumer Credit, Mortgage Approvals and US Construction Spending. Tuesday just Eurozone October PPI. Wednesday UK November Nationwide Consumer Confidence, Official Reserves, BRC Shop Price Index, US Challenger Job Cuts, ADP Employment Change, Non-Manufacturing ISM, EZ15 October Retail Sales plus the Fed’s Beige Book. Thursday Eurozone Q3 GDP, US October Factory Orders, the Bank of England and ECB decide on rates (expect cuts from both with anything up to 100 basis points each). Friday German October Retail Sales and Factory Orders, US Consumer Credit, November Non-Farm Payrolls and Unemployment.

Positioning and Technical Analysis

The three weeks before Christmas are not the time for adopting grand financial plans or getting over-excited about potential market moves. Book-squaring and battening down the hatches until January are the order of the day. Increasingly thin conditions might make for some very tempting one-off opportunities but we urge caution as these could easily fizzle out and/or occur again in Q1 2009. Beware of recent converts to market trends as in order to justify their volte-face they will have to have very aggressive targets. Interbank lending is not going to improve and politicians will be tempted into increasingly ‘dirigiste’ policies as they try to get us out of the mess they helped us get ourselves into.

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Published on  Mon, Dec 1 2008, 06:03 GMT