Weekly Market Commentary

Overview

Equity indices' 'relief rally' fizzled out mid-week as they continue to grapple with pivotal chart levels. Most are now slightly lower than where they started and Brazil's Bovespa has lost over 20% since June's record high. The US dollar strengthened marginally, and especially against the Czech koruna because Vice-governor Hampl said, 'the crown recently has become unhinged…(and) is one of the things influencing the behaviour of the central bank'. The Mexican peso strengthened to 10.00 per greenback, the strongest since November 2002, as the overnight lending rate was raised by another 25 basis points to 8.00% (to fight inflation running at 5.26%). Likewise Brazil +75 basis points to 13.00% and inflation 6.3%. Most commodities are lower, dragged downed by Crude Oil and Natural Gas. Interest rates are very mixed and moving to different dynamics. Most Treasury yields are lower and the Reserve Bank of New Zealand trimmed the Official Cash Rate by 25 basis points to 8.00%.

Political and Economic Developments

Tough times for Britain, we know, and now it's official. Retail Sales collapsed -3.9% in June, the biggest slump since records began in 1986, reversing sunny May's +3.6% leap. Clothing and footwear, the usual victims, suffered badly but interestingly food sales crashed a record -3.6% although the value of retail sales at £5.1B is +3.4% higher than a year ago: spend more get less, great! The Grocer magazine reported that sliced white break and white potato sales are markedly higher, suggesting chip butties all round is the Brits' idea of belt-tightening. Q2 GDP was just +0.2% Q/Q and +1.6% Y/Y, a sharp reduction from Q1's +2.3%. The National Institute of Economic and Social Research predicts it will be +1.5% in 2008 and +1.4% for 2009, well under the 3.1% rate in 2007 and the lowest since Q4 1992. And they suggest a rate hike to tame inflation (potentially killing off the economy too). The number of mortgage approvals are the lowest since January 1996.

Germany is not immune with August's IFO Business Sentiment Index seeing its biggest drop since 9/11/2001. Danish Consumer Confidence is at a 16-year low and the Eurozone's Composite PMI is at a record low at 47.8. Japanese exports unexpectedly shrank for the first time in five years and the Bank of Japan accepts that the country might slip in to a shallow recession because consumer spending would not make up for this decline.

Underlying Themes

The average US home costs $215,000, down 6.1% from this time last year. Foreclosures are +14% in Q2 from Q1, amounting to 739,714 properties, and 121% higher than Q2 2007. These properties, with prices dramatically slashed, account for between 30% and 40% of all June Existing Home Sales. California and Florida were the highest by volume but Nevada, where on in every 43 households received a foreclosure filing in Q2, holds the dubious distinction of the record ratio. Government owned Ginnie Mae, whose share of the mortgage markets has increased from 8% to 20% in 12 months, has lent and securitised $3 billion worth of 'jumbo mortgages' (between $363K and 730K a piece) since the program began in April. To who? On what? Where? Why buy now?

What to watch for next week

A general election in Cambodia on Sunday and July CPI for the different German states due from this day. Monday just UK June Nationwide House Prices and German August GfK Consumer Confidence. Tuesday Japan June Jobless, Household Spending and Retail Sales, UK Consumer Credit and US July Consumer Confidence. Wednesday Japan June Industrial Production, July Small Business Confidence, German June Retail Sales and Eurozone July Business Climate. Thursday Japan June Labour Cash Earnings and Housing Starts, UK July GfK Consumer Confidence and German Unemployment. Then EZ15 June Unemployment and July CPI, US Q2 GDP, Core PCE, June Help Wanted Index and July Chicago Purchasing Managers. Friday the 1st August July Manufacturing PMI's for various European countries, US June Construction Spending, July Manufacturing ISM, Non-farm Payrolls and Unemployment. Saturday a referendum in Latvia on proposed changes to the constitution.

Positioning and Technical Analysis

Thinning markets as we approach August summer holidays and Beijing's Olympics. Allow for another week or two where equity indices trade nervously around these key chart levels. Here, and in a whole range of financial markets, intra-day and weekly prices moves are likely to get bigger and implied volatility higher. Vacations are only part of the story though. Scarce cash means less money for trading; fear of losses encourages super tight stops; a raid on savings to smaller investment pots. When some shares are priced at just one tenth of their peak value, they behave like 'penny stocks'. The media as always terribly quick to point out that A was up 12% that day, or B down 20% the next, and so on. We question whether this sort of instrument should be included at all in a sensible, defensive, investment strategy. The next dilemma is where exactly interest rates should be in the fight between opposing forces: inflation and recession. Getting this right is key, and doing nothing is not necessarily an option. The fragility of the current situation means the slightest miscalculation could topple everything, with dramatic consequences. We doubt the authorities have the necessary skills and tools to walk this tightrope. They also do not have deep pockets.
Have a nice weekend!
Mizuho Corporate Bank
Disclaimer
The information contained in this paper is based on or derived from information generally available to the public from sources believed to be reliable. No representation or warranty is made or implied that it is accurate or complete. Any opinions expressed in this paper are subject to change without notice. This paper has been prepared solely for information purposes and if so decided, for private circulation and does not constitute any solicitation to buy or sell any instrument, or to engage in any trading strategy.