Overview
Equity indices recovered their poise dramatically gaining around 9.00%, many rallying for five consecutive days to take them back close to this year’s highs, some including Istanbul, Kuala Lumpur, Mexico and Spain’s Ibex pushing slightly above these to the best levels in months. On this, fixed income yields backed up from last week’s lows, the long end leading, but they then recovered to end the week at the middle of the range. Swedish two-year treasuries posted a new record low yield of just 0.798% and some money market futures contracts managed to inch to new record highs. The US dollar lost ground against most currencies, the Canadian leading at just C$1.1117 per greenback, the Yen slipping a tad against many. Commodities very mixed, LME Metals generally with a steady bid tone especially Aluminium and Copper while the Energy complex is attempting to form an interim low around a Crude Oil price of $60.00 per barrel. Grains on the other hand dropped quite sharply in value, Corn to 316 cents per bushel and close to the lowest level since late 2006 while Soybeans have over the last fortnight collapsed from 1265 to 970 cents per bushel.
Political and Economic Developments
In the three months to May UK Unemployment saw its biggest ever increase, 281K, taking the total to 2.38 million or 7.6% on the ILO basis; young people aged between 18 and 24 years hard hit with 17.3% of them out of work. US Continuing Jobless Claims on the other hand dropped by 642K to 6.273 million in the week to July 4th, distorted by previous auto worker layoffs.
Eurozone CPI dropped –0.1% Y/Y to June, its first ever negative print, while France’s was –0.6% Y/Y, also a first. US specialist lender to small business CIT Group Inc. is on the verge of bankruptcy as the FDIC refuses to back it and the authorities are reluctant to be seen favouring one firm over another. The problem also serves to remind us that there are a lot of other financial institutions (as well as the banks) which may too find their business models no are longer workable in the current environment.
The ruling Japanese LDP party suffered a crushing defeat in Tokyo elections so PM Aso announced a general election for the 30th August, probably to give the opposition the minimum time to prepare.
Underlying Themes
In light of the announcement by Toyota to launch a new series of Hybrid car models, the automobile market seems to be picking up at a positive pace despite poor performance in other economic areas. China’s auto sales were reported to be up by 17.69% from a year ago, whilst across Europe, sales of new cars have risen for the first time since April 2008, largely due to various governments’ ‘cash for bangers’ schemes. However, this recent burst in sales has relied heavily on short term incentives which will not carry through in the long run, according to PwC. Figures from the Society of Motor Manufacturers and Traders show that the UK’s rate of decline of new registrations dipped to 15.7% in June 2008 compared with a 25.00% drop in May. There is however a limit to this recent demand from household needs and time limits on government schemes. It is worrying to see car companies advancing into very uncertain futures with sometimes outdated employment practices, poorly conceived vehicles, and now a lack of cheap long term credit.
What to watch for next week
Monday 20th July a holiday in Japan, several Middle Eastern ones (Prophet’s Ascension) and economic releases include US June Leading Indicators, German PPI, UK Money Supply and July Rightmove House Prices. Tuesday Bank of Japan Minutes, June Department and Convenience Store Sales, UK Public Finances, Public Sector Borrowing, Chicago Fed Activity Index and the Bank of Canada decides on rates (expected unchanged at 0.25%). Wednesday Japan June Supermarket Sales, Minutes from the Bank of England’s MPC meeting, CBI Quarterly Industrial Trends, Eurozone May Industrial New Orders and US House Price Index. Thursday Japan June Trade Balance, UK Retail Sales and BBA mortgages, US Existing Home Sales and EZ16 May Current Account. Friday July PMI’s for various European countries and German IFO, University of Michigan Confidence Survey and UK Q2 GDP.
Positioning and Technical Analysis
This week turned out a lot drearier than we had warned; hopefully the next two will be a little more exciting. Rallies in equity indices have postponed the drop we were expecting, but have not turned the outlook to positive. Therefore we shall allow for another two to four weeks of broadly sideways work. This will hopefully enable the Euro, pound and other major currencies to strengthen against the US dollar, causing another round of short-covering. Commodities may benefit from this and perennial gold bugs will be tempted to buy more. Money market futures will probably creep fractionally higher but be careful as the closer they get to 100.00 the greater the chance of a sudden reversal. Fixed income yields should move sideways.
