Overview
Plenty of FX volatility: Canadian dollar, Mexican peso and Sterling the weakest, South Korean won, Kiwi and Norway the strongest. As well as banking jitters, comments from the Bank of England’s Mervyn King that sterling weakness would help to rebalance the economy away from (nasty) financial services and help exports (what? Vauxhall cars?) pushed Cable down to $1.5917 and EUR/GBP £0.9193 (highest since April fool’s day). The US dollar was fairly weak too, taking the Euro up to $1.4845, the Yen to 89.96 and the Swiss franc to 1.0170 (best since July 2008). Short-dated yields dipped, allowing many money market futures contracts to post new all-time highs, the lowest being one-month US TBills at 0.02%, three-months at 0.09%. Major yield curves flattened slightly, longer-dated Treasury yields dropping further because they are not constrained by the zero level. Equity indices gave up half or all of last week’s gains, Mexico, Hong Kong and Shanghai down 4.5% and the hardest hit. Commodities sidelined to a tad lower.
Political and Economic Developments
The FT reports that US syndicated loan losses rose to $53 billion so far in 2009, greater than the cumulative losses since 2001, according to the Shared National Credit Program, a body set up in 1977 to monitor loans over $20 million from federally regulated institutions - banks and the shadow banking system. Quality has deteriorated badly, because of poor underwriting as well as weak economic conditions, so that 11.5% of bank loans and 33% of quasi-banks’ advances are now bad debts. Hedge and pension funds, securitisation vehicles and their ilk are hanging on to 47% of problem loans while accounting for just 21% of lending. Assets rated as ‘special mention’, ‘substandard’, ‘doubtful’ and ‘loss’ (the four categories of fragile loans) of this $2.9 trillion market stands at $642 billion or 23% of the portfolio, almost double last year’s 13%.
Underlying Themes
A ‘furry’ story: for a decade central bankers increased money supply by about 10% Y/Y, shovelling the money at bankers who in turn lent it out between ten and forty times over to all and sundry – at relatively low rates because there was so much of it. Joe Average, who considered himself ‘worth it’, happily splashed out on designer handbags, SUV’s and McMansions; business-leaders gobbled up a lot of it congratulating themselves on their acumen and entrepreneurial skills; new financial institutions called ‘hedge funds’ and ‘private equity’ sprang up from nowhere; politicians borrowed even more, either to camouflage gaping deficits or in order to employ yet more staff at ever higher salaries. All were happy with the arrangement: the tax take increased, allowing politicians to buy re-election, individual’s net worth made millionaires of millions, the music played and the world turned happily on its axis. Until one day a lone voice asked why the emperor was wearing no clothes. S/he was laughed out of sight and told we had new paradigm, that bankers were alchemists, and we had never had it so good. Some poor souls did not realise the music had stopped, some tried putting their finger in the hole in the dyke, most decided to shovel yet more money at the problem while castigating those in finance, and congratulated themselves on saving the world. Too soon, we fear, because the merry-go-round looks set to move up another punishing gear, leaving most trailing woefully behind once again. (See above).
What to watch for next week
A packed week numbers-wise: Monday Israel’s Yom Kippur holiday, September CPI for the various German states due from this day, and UK August Hometrack Survey. Tuesday Japan August CPI, Tokyo’s September one, Small Business Confidence, UK Q2 final GDP, August Net Consumer Credit and Mortgage Approvals, CBI Distributive Trades, Eurozone and US Consumer Confidence and August CaseShiller Home Prices. Wednesday Japan August Industrial Production, Labour Earnings, Housing Starts, Construction Orders, German Retail Sales, September Unemployment, EZ16 CPI, US ADP Employment Change, Chicago Purchasing Managers and revised Q2 GDP. Thursday October 1st China goes on holiday for a week to commemorate the 60th anniversary of the founding of the People’s Republic, Japan Q3 Tankan Survey, August Retail Trade, September Manufacturing PMI’s for various European countries, Eurozone August Unemployment, US Personal Income, Core PCE, Pending Home Sales, Construction Spending, September Challenger Job Cuts, Manufacturing ISM and Vehicle Sales. Friday Japan August Jobless, Household Spending, EZ16 PPI, September UK Construction PMI, US Non-Farm Payrolls, Unemployment and August Factory Orders. Saturday G7 finance ministers and central bankers meet in Istanbul to coincide with the release of the IMF’s economic outlook.
Positioning and Technical Analysis
Again watch weekly closes tonight to see whether bearish US dollar momentum will maintain the fairly ferocious pace of the last three/four weeks. Similarly equity indices, as many wonder whether momentum will turn bearish in October. Yields on longer Treasury maturities will eventually edge lower, and the spread between ten-year JGB’s and US TNotes might drop well below 200 basis points. Have a nice weekend!
