Overview
Money market futures rallied yet again to new record highs, so that some implied yields are below central bank targets, reinforcing the view that ultra-low rates are here to stay for a long time. This dragged Treasury bond yields a little lower, inflation-linked ones to 1.00%. Despite (or some say because of this) equity indices edged higher, many to their highest levels for this year (FTSE 100 high 5038). The US dollar lost ground against all currencies bar none, Kiwi the best performer at $0.7088 closely followed by the Swedish krona which dropped to 6.9445 per greenback, the Euro close behind at $1.4628. This helped nudge some commodities higher, much fanfare as spot Gold touched $1011.00 and Silver more quietly $16.97 per ounce, ICE’s Cocoa the other star rallying to $3,075 per metric ton (not that far off last year’s multi-year peak at $3,385). Freight rates continue spectacularly depressed and FedEx says its is difficult to predict the timing and magnitude of any recovery.
Political and Economic Developments
The current view is that things are less bad because the ‘bad’ economic numbers are marginally smaller, and some sectors are improving ever so slowly, a view echoed by Mr. Geithner who, in a televised interview said, ‘it is realistic to assume recovery will be gradual, with more than usual ups and downs’. The economy was no longer ‘on the verge of collapse’ (as it was a year ago) and that on the 18th the Treasury would be ending their guarantee on money market mutual funds (worth $3.4 trillion). Less upbeat was RealtyTrac which reported August mortgage foreclosure filings +18% Y/Y and ‘its appearing more likely that late 2010 might be the peak year (estimated at 3.4 million households) before things start to moderate’.
Underlying Themes
Big UK law firm Allen & Overy reports a ‘sharp increase’ in debt-for-equity swaps and ‘pre-pack’ bankruptcy agreements ‘as a method of resolving financial problems’. Globally defaults are rising, total speculative grade to 11.5% in August from 2.5% a year ago according to Moody’s as banks tighten credit conditions and try to rebuild seriously eroded capital bases. Despite this (aristocratically titled) German finance Minister Karl-Theodor zu Guttenberg says banks have a responsibility towards economic growth. The US Treasury secretary talks of banks asking themselves what they owe the country - urging a new ethic and sense of responsibility.
The American citizen needs little prodding, the poverty rate rising to 13.2% in 2008 from 12.5% the previous year as median household income drops 3.8% (and more to come this year as Non-Farm Payrolls drop on average 480K). Consumer Credit was paid back at a record $21.6B in July (a series going back to 1943 where on average they have borrowed $10B monthly for the last twenty years), and Retail Sales are in negative territory. Bank deposits have risen to $8 trillion, bond holdings up to over $5 trillion, while agency securities shrink to their lowest in a decade as do equity holdings (to just over $5 trillion from a peak over $10T).
What to watch for next week
Sunday German Chancellor Angela Merkel’s only (live) TV debate with main challenger SDP’s Frank-Walter Steinmeier, both of whom have election rallies at the end of next week. Monday parliamentary elections in Norway, Tokyo August Condominium and Department Store Sales, then EZ16 July Industrial Production. Tuesday UK July DCLG House Prices, August RICS House Price Balance, CPI, US PPI, Retail Sales, July Business Inventories, September Empire Manufacturing Survey, German and the Eurozone ZEW Surveys. Wednesday the Bank of Japan starts a two-day rate-setting meeting (expected unchanged yet again at 0.10%), UK July Average Earnings, August Unemployment, EZ16 and US CPI, Industrial Production and July Long Term TIC Flows, then September Housing Market Index. Thursday the Swiss National Bank decides on rates (expected unchanged at 0.25%), Japan July Tertiary Industry Index, UK August Retail Sales, CBI Industrial Trends, EZ16 July Trade Balance, Construction Output, US August Housing Starts/Building Permits and September’s Philadelphia Fed Survey. Friday German August PPI, Eurozone Current Account, UK August Public Finances and Money Supply. From Sunday the 20th Eid-al-Fitr holidays in many Middle eastern countries, Japanese holidays Monday 21st through to Wednesday 23rd (autumn equinox).
Positioning and Technical Analysis
Generalised US dollar weakness is likely to gather steam, increasing implied volatility. This will be unwelcome news for the new Japanese government who has had to wait fifty years to be elected and now must battle Yen strength (possibly against nearly all currencies as consensus positions are reviewed). G7 Money market yields are likely to post new record lows as many inch their way down to 0.25% (even lower in Japan and Switzerland) despite central bank rumblings; this will eventually force investors out along the yield curve. Metals and a Softs should remain well bid and the Platinum Group could easily post new highs for the year. Grains ought to stabilise.
