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Weekly Market Commentary

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Weekly Market Commentary

Fri, Oct 2 2009, 23:05 GMT
by Nicole Elliott

Mizuho Corporate Bank

Overview 

Even before today’s eagerly awaited US Non-Farm Payroll number (-263K and 9.8%, highest since 1983) markets had started champing at the bit and/or breaking out of recent ranges. Leading the way were US Treasuries where yields broke below support to their lowest levels since May: two-year 0.837%, five-year 2.125% and ten-year 3.105%. Money market futures rallied a little but gains continue to be hampered the closer they get to 100.000 (Dec09 Fed Fund futures 99.855), so that yield curves flattened. Notwithstanding Swiss National Bank intervention to weaken their currency, Confederation government bond yields dropped to 1.955%, within a whisker of the all-time low of 1.900% of December 2008. Credit spreads widened slightly from what had been their lowest points this year, Moody’s BAA to 303 from 282 basis points and iTraxx from 515 to 600 over. Equity indices rallied Monday, a handful to new highs for the year, then gave back even more to end lower for a second consecutive week; the Nikkei 225 led the way, down 5.2% this week and FTSE 100 dropped below the psychological 5000 level. In the FX market the US dollar managed to recoup some of last month’s losses, except against the Yen which continues to trade between 88.00 and 90.50 per greenback - too close for comfort to its lowest ever point. The South African rand lost the most this week, 4% moving from 7.3650 to 7.7900. Commodities sidelined again and Baltic Dry Freight rates are half of June’s recent peak (Capesize even less).

Political and Economic Developments

Japan’s quarterly Tankan Survey had business a little more upbeat, or rather, less downbeat, Unemployment down to 5.5% from 5.7% in July, though slightly worryingly exporters are estimating the average value of dollar/yen in the second half of their financial year at 94.80. All Industry Capital Expenditure plans show it shrinking by –10.8% and recurring profits seen slumping 22%. This despite deflation Ex-Fresh Food hitting a new record low of –2.4% in August; the previous cycle low –1.0% in 2001.

Underlying Themes 

Bloomberg estimates that corporate bond issuance in Q3 2009 was $775 billion taking the total this year to $2.75 trillion and higher than 2008’s record $2.73 trillion. Many hail this as a sign of success, of economic recovery and risk appetite returning. We say yes, and no. Yes, in that the issues got away in the first place albeit at credit spreads very much wider than anything seen in the last thirty-eight years (though absolute levels may be lower because of rock bottom central bank target rates). No, in that these may be replacing conventional bank credit lines where the tap has been turned off for many companies and government deficits need financing. The IMF now estimates that total losses from the financial crisis will cost the world $3.4 trillion, where banks have already accounted for $1.3 trillion but have another $1.5 trillion to deal with, this concentrated in the private sector and caused by new non-performing loans. They estimate the US has worked through 60% of their problems but UK and the Eurozone only 40%. Having imposed ‘very hash’ stress tests on 22 cross-border Eurozone banks, the EU authorities published their results this week and claim to be very satisfied that institutions are adequately capitalised and tier one capital ratios would remain above 8%. Needless to say the ECB’s Trichet and France’s Lagarde have issues with the IMF’s methodology.

What to watch for next week 

Saturday G7 finance ministers and central bankers meet in Istanbul to coincide with the release of the IMF’s economic outlook; Sunday snap Greek parliamentary election while China is on holiday until Friday. Monday EZ16 August Retail Sales, UK September Services PMI and Official Reserves, US Non-Manufacturing ISM and Eurozone October Sentix Investor Confidence. Tuesday UK August Industrial Production, September NIESR GDP, the Reserve Bank of Australia decides on rates (probably unchanged at 3.00%) while the annual meeting of the IMF and World Bank takes place in Istanbul. Wednesday Japan August Leading and Coincident Indices, German Factory Orders, US Consumer Credit, September Monthly Budget Statement and EZ16 final Q2 GDP. Thursday Japan August Trade Balance, September Bankruptcies, Machine Tool Orders and Economy Watchers’ Survey, German August Industrial Production, US Wholesale Inventories, while the ECB and Bank of England are expected to keep rates on hold. Friday Japan August Machine Orders, German, UK and US Trade Balances, plus UK September PPI. Sunday 11th legislative elections in Guinea.

Positioning and Technical Analysis

Market moves will gather momentum through October, the Yen and Treasuries strengthening – a move which many will put down to safe-haven status. Yield curve flattening will do much to help this move, long end yields dropping rather than short-dated ones rallying, confounding market consensus. Risk aversion is not the issue this year and we feel that repatriation/reversing of the ‘carry trade’ will be limited this time around. In a knee-jerk reaction though peripheral currencies might get sold off for a month or so; likewise equities. The US dollar should consolidate against most currencies for another week or two and then weaken very slowly through to year-end.

Published on  Fri, Oct 2 2009, 23:07 GMT