Weekly Market Commentary

Overview
A little unwinding of the US dollar's recent dramatic strength took place, Kiwi doing best followed by the Yen and the won worst, which helped many hard hit commodities to also rally. Nymex Crude Oil reached $122.00 per barrel, from a low at $111.50 last week, and spot Gold $839.00 per ounce from $774.00. The best performer this week has been LME Tin, +15.5% to $21,950 per tonne, closely followed by New York's Cocoa futures +12.0% to $2,849 per metric ton. Treasury yields dipped again, probably as a result of a flight-to-quality, while interbank markets remain seized up and rates unchanged. Australian benchmark ten-year government bonds have done best, yields dropping from 6.8% to 5.8% since late June. Equity indices are testing pivotal support, most down by between 2% and 4% since last Friday. Hardest hit was South Korea's Kospi which dropped 7% and closed below key long term support. Their government announced plans to stabilise the housing market which has been hit by the economic slowdown, rising interest rates and indebted households. Sounds familiar?

Political and Economic Developments

The world is still stuck on the horns of a dilemma facing slower growth and very high inflation. German Producer Prices rose an annualised 8.9% in July, way higher than anything since 1981, and likewise US ones at 9.8% Y/Y. UK Q2 GDP was flat, zero, nothing, 'nul points', possibly explaining the 27% drop in Eastern European migrants registering for work here over the same period. US Leading Indicators dropped 0.7% in July, close to the lowest of the last decade. Adding to the problem is the fact that many governments are close to the limits of what they would call 'prudent' government borrowing, or the maximum allowed by the EU (3% of GDP). And the final layer of icing on this toxic cake is the very precarious condition of the financial system. Rumours as to who might be the latest casualty of complex debt structures, those who are in search of working capital, and which business model 'broke' abound. The authorities have been understandably silent on the matter, although astute comments from Swiss National Bank governor warn: 'what we should avoid is some kind of arbitrage by banks, which say they are going to central bank X, instead of central bank Y, because conditions are more attractive'. Maybe they will discuss serious things like this at their annual meeting in Jackson Hole this weekend. The UK's Nationwide Building Society plans operations in Ireland thereby allowing access to ECB funds if needed.

Underlying Themes

What financial market analysts say and what investors actually do can be completely different (some might say a good thing too). For example, while most economists are forecasting a US economic recovery next year, and therefore interest rates back up to more normal levels, Treasury yields have moved relentlessly lower over the last four weeks. Even more interestingly while precious metals prices tumbled over the same period, partly as a function of a strengthening US dollar, there has been a rush to buy one ounce 'American Eagle' gold coins. 'Due to unprecedented demand…our inventories have been depleted' said the Treasury's Mint last Friday having rationed Silver Eagles earlier this year. Conspiracy theorists have had a field day!
For the first time ever there are more old age pensioners living in the UK than there are children under 16, and the fastest growing age group is those over 80 years.

What to watch for next week

Monday August 25th is a UK Bank Holiday as summer drawsto a close. Expect US July Existing Home Sales, Germany's July Import Prices and August CPI for the different states due from this day. Tuesday Japan July Corporate Service Prices, German final Q2 GDP, August IFO and September GfK Consumer Confidence, UK July BBA Mortgages, August Nationwide House Prices, US June Case-Schiller and OFHEO House Price Index, July New Home Sales and August Consumer Confidence, plus Minutes of 5th August FOMC meeting. Wednesday just US July Durable Goods Orders. Thursday German July ILO Unemployment and August Unemployed, Eurozone July Money Supply and August Consumer Confidence and Business Climate, UK CBI Distributive Trades, and US Q2 GDP. Friday UK August GfK Consumer Confidence, Tokyo CPI, Japan Small Business Confidence, July Jobless, National CPI, Industrial Production, Retail Trade and Construction Orders. EZ15 July Unemployment and August CPI, US July Core PCE and Deflator, Personal Income, August Chicago Purchasing Managers and final University of Michigan Confidence. Monday 1st September the US and Canada are on holiday.

Positioning and Technical Analysis

Unfortunately we will probably have to face another week of markets looking for direction after this week's inconclusive price action. Eventually we expect US dollar strength to reverse taking metal prices along for the ride. Likewise Treasury yields which will probably hover at current pivotal levels before taking the plunge (lower yields) in September. Above all investors should opt for safe, conservative places to park their savings, even if inflation chews away at the capital, while considering future borrowing needs. These are likely to be more expensive and limited later this year.
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.