Overview
Excited stockbrokers as equity indices managed a third consecutive weekly rally, many nudging to this year’s highest levels, Asian ones doing best. Much to their surprise and confounding glib assumptions, Treasuries also traded higher and yields fell, benchmark 10-year Bunds from 3.52% to 3.31%, a move led over the last six weeks by the Swiss Conf (2.50% to 2.00%). Brazil’s 2014 government bond yields its lowest ever at 4.41%, down from 10.00% in 2004. Meanwhile yield curves are flatter, US twos/tens narrowing to 239 basis points as two-year TNote yields rise 25 and ten-year simultaneously drop 20 this week. Euribor and Short Sterling front month futures set new record highs, implying Libor rates at 0.81% and 0.78% respectively. The FX market held around last week’s levels, the Swedish krona doing best and the Swiss franc weakened by Swiss National Bank comments. Likewise many commodities though LME base metals rallied to new highs for the year and ICE Sugar up at 18.91 cents per pound is close to its most expensive ever, fuelled by poor monsoons in India.
Political and Economic Developments
Slightly better news on UK housing – Nationwide House Prices up for a third consecutive month taking the Y/Y decline to just -6.2% and Mortgage Approvals higher for a seventh consecutive one – was tempered by numbers from the Building Societies Association. Savers withdrew a record £2.2 billion in the month of June, following April’s prior record £811 million, almost 10% of the £240 billion they hold. Mortgage lending edged up to £1.98B that month, +40% from May but still well below last year’s £3.25B. The combination of near zero rates, rising unemployment and the desire to repay debt is expected to persist into 2010 making prospects for the sector grim indeed. Consumer Prices in Japan dropped a record –1.8% Y/Y, also a record –1.7% excluding fresh food, caused mainly by lower energy prices but also cheaper clothing, shoes and holidays. Interesting to note that as well as spending less and substituting with lower cost goods, food price deflation continues as retailers are forced to cut margins to sell at all. Hard for some to believe but July Italian CPI was exactly 0% Y/Y, while Germany’s at –0.6% is at its lowest since well before Unification. Looking ahead blinkers are set to the ‘deflation view’, a European Commission survey shows expectations for lower consumer prices are at their strongest since polling started in 1985.
Underlying Themes
Chinese authorities warn banks they must monitor whether loans extended are being used for the good of the real economy. After telling them to lend more – and they did doubling to Rmb 7,370B (about $1,000B) in H1 2009 from H1 2008, estimates for the year as a whole suggesting a 40% increase in total loans outstanding – they are worried about asset bubbles. The Chinese stock market, where volumes have exceeded London and New York and the Shanghai Composite index has doubled since November’s low, is the poor man’s property speculation. Above all, loans are no longer generating the same level of GDP growth. Over the last decade a 15% average increase in bank lending translated into +10% Y/Y GDP. So far this year 33% more loans saw GDP +7.00%. Another version of cash burn, perhaps?
What to watch for next week
Monday 3rd August Bank Holidays in Canada, Iceland and Ireland, Japan June Labour Cash Earnings, July Vehicle Sales, Manufacturing PMI’s for various European countries and the US, Construction Spending and Vehicle Sales late in the day. Tuesday early the Reserve Bank of Australia decides on rates (unanimously expected unchanged at 3.00%), then UK July Construction PMI, Eurozone June PPI, US Personal Income and Spending, PCE Deflator and Pending Home Sales. Wednesday UK July Nationwide Consumer Confidence, Services PMI’s for several EU27 countries, June UK Industrial Production and EZ16 Retail Sales, US Factory Orders, July Challenger Job Cuts, ADP Employment Change, and Non-Manufacturing ISM. Thursday Japan June Leading and Coincident Indices, German Factory Orders, UK July NIESR GDP, New Car Registrations and the Bank of England decides on rates (unanimously expected unchanged at 0.50%), as does the ECB (with just one analyst looking for a 25 basis point cut to 0.75%). Friday German June Trade Balance and Industrial Production, UK July PPI, US Non-Farm Payrolls and Unemployment, plus June Consumer Credit.
Positioning and Technical Analysis
Because most G7 equity indices are up around 35% since this year’s lows, serious follow-through and significantly higher prices next month are unlikely. Therefore we shall continue to allow for another two to four weeks of broadly sideways work, establishing new wider trading bands. We continue to favour more generalised US dollar weakness through the summer and probably until year-end. Commodities may benefit from this, Base Metals and Softs leading the pack. Fixed income yields should move lower though within this year’s broad range, yield curves flattening, Bunds doing better than US TNotes.
