Weekly Market Commentary

Overview

A relatively quiet week for most markets waiting and wondering what July's US Jobs report might be. Hot on the heels of booming Weekly Jobless Claims (+448K and Continuing Claims 3282K, highest since April 2003), Unemployment rose to 5.7% (highest since March 2004) although Non-Farm Payrolls dropped only 51K. Eurozone June Unemployment edged up to 7.3% and Japan's to 4.1% while their wages dropped 0.6% Y/Y and overtime did not make up the difference. The US dollar gained against most currencies although it lost 2.7% to the South African rand while the Brazilian real at 1.5600 is at its strongest since floating. Most commodities traded a little lower again for the third week in a row. Equity indices ended the week pretty much unchanged, low volumes in New York and reduced implied volatility. Money market rates remain stubbornly above central bank targets and Treasury bond yields dropped back down to late May/early June's levels. Some of the best performers have been those of Eastern Europe and South Africa, admittedly because their yields had backed up considerably in June.

Political and Economic Developments

The Fed extended its repo facility until the end of January 2009 introducing 84-day as well as the current 28-day maturities. Treasury secretary Paulson says four of the biggest US banks will back his idea for issuing Covered Bonds to revive the housing market. US second quarter GDP grew 1.9% annualised with Core PCE running at 2.1%.
India increased its main interest rate by 50 basis points to 9.00% in its half-hearted fight against inflation (Wholesale Prices running about +12.00% Y/Y). Zimbabwe today, in time honoured fashion, resorted to introducing a new currency with a lot less zeros (ten of them in fact) and not really bothering to measure inflation running at an official 2.2 million percent.
Hong Kong June M3 Money Supply shrank 3.8% Y/Y, the biggest fall in 18 years as investors sold equities and sent the money overseas. The Nationwide reported that in July UK House Prices dropped 1.7%, the ninth successive monthly decline, and 8.1% Y/Y, the biggest fall since they started compiling the series in 1993.

Underlying Themes

Banker shouting into Blackberry on a Sussex-bound train, 'what do you mean you ignored all the broker's statements because they were wrong?' - his derivatives portfolio had been incorrectly valued for months. Merrill Lynch manages to dump $30.6B worth of CDO's at 22 cents in the dollar; is that cheap? Who knows and we shall have to see but valuing them at 22 cents is as arbitrary as it was valuing them at 80 cents. Random numbers in things one cannot shift. The only mathematically correct thing to do is mark to zero, but nobody can afford that. General Motors long-dated bonds trade at a record low 46 cents in the dollar after another set of awful quarterly results (Q2 loss $15.5B) and all three US automakers were downgraded to 'junk' by Standard & Poors. Daimler, BMW and Nissan issued profit warnings; Toyota slashed sales targets. Spot Platinum on the LME dropped to $1629 per ounce, its cheapest since late January and a 6% decline this week alone.

What to watch for next week

Monday UK July Construction PMI, August Eurozone Sentix Investor Confidence and June PPI, US Personal Income, Core PCE, Factory Orders and July Challenger Job Cuts. Tuesday July Services PMI's for various European countries, UK Official Reserves and June Industrial Production, EZ15 Retail Sales, US July Non-Manufacturing ISM and the FOMC decides on rates (unanimously expected unchanged at 2.00%). The Reserve Bank of Australia also decides on rates (most likely unchanged at 7.25% but the next move should be a cut). Wednesday UK July NIESR GDP, Nationwide Consumer Confidence, BRC Shop Price Index, German June Factory Orders and Japan Leading and Coincident Indices. Thursday Japan June Machine Orders, German Trade Balance and Industrial Production, the ECB and Bank of England decide on rates (both expected unchanged at 4.25% and 5.00% respectively), then US June Pending Home Sales and Consumer Credit. Friday Japan July Money Supply, Bankruptcies, Economy Watchers' Survey, US June Wholesale Inventories and Q2 Unit Labour Costs plus Non-Farm Productivity. The Beijing Olympics start, the eighth day of the eighth month of 2008.

Positioning and Technical Analysis

Being a Friday and starting a new calendar month this might be a good time to scrutinise weekly and monthly candles for decent chart patterns. We feel that last week was the calm before the storm and that despite some taking summer holidays (not bankers though unless they have been 'let go') financial markets look set to move on again. Holding patterns in many instruments since March are likely to give way. Therefore equity indices should drop, possibly very sharply, Treasury yields to drop in tandem albeit more slowly. Renewed US dollar weakness against many currencies with the Yen set to benefit more than most this summer. Commodities mixed and no longer the 'fashionable' trade as novice investors realise they have lost small fortunes in these this year.
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.