Weekly Market Commentary

Overview

The trend to generalised US dollar weakness was given a shot in the arm by Brazil's President Lula who, in discussions with president Hu Jintao in China, suggested bilateral trade should be settled in their two currencies rather than the dollar. Major currencies joined in the move initiated earlier by the Australian ($0.7868) and Canadian dollars (C$1.1200), the Euro hitting $1.4030 and Cable $1.5950, biggest gainers this week the New Zealand dollar at $0.6250 and the Swedish krona at 7.4420. This took the limelight away from stock markets, where many have been in thrall to the steep rallies since March, so that these held at or below last week's highs. Mumbai's Sensex the big exception, up 14.0% on the week though well below Monday's peak (14,930), on euphoria of the re-election of India's ruling coalition. June 2009 Money Market interest rate futures soared, implying three-month Libor at 0.56% on the dollars, 1.05% on Sterling, and 1.10% on Euros, but then gave up much of these gains to form small reversal candles on the weekly charts. Fixed income yields moved back up to last week's highs, benchmark ten-year Bunds to their highest this year at 3.55% just like their US counterparts at 3.43%, though two-year Treasuries are trading at the exceedingly low levels established months ago. Some commodities rallied, partly as a function of the dollar, New York Coffee futures to $1.3745 per pound, spot Gold to $961.30 and Silver at $14.83 per ounce. Energy futures were very mixed, Nymex Unleaded Gasoline hitting $1.8724 per gallon (highest since early November), Crude inching to $60.48 per barrel, but Natural Gas collapsed to $3.49 per MMBtu. Baltic Capesize and Dry Indices have rallied considerably, the latter more than trebling from January's very depressed 774 to 2786 today.

Political and Economic Developments

Japan managed to top the awful global Q1 GDP numbers (so far) with a record -4.0% Q/Q drop, a fourth consecutive quarterly decline, -15.2% Y/Y. These numbers are the worst in post-war history, even grimmer than 1974's -13.1% decline. Worryingly exports shrank -1.4% while Domestic Demand, fragile at best, dropped -2.6% and is expected to weaken further, increasing the deflationary drag, because of demographics. They are not alone in posting records: US Weekly Continuing Jobless Claims at an all time high 6.662M and roughly double the mean since 1963. No wonder Housing Starts hit a post-1953 record low of 458K. German PPI -2.7% Y/Y, lowest but for 1986's -4.6%. UK RPI a record -1.2% Y/Y for a series that goes back to 1948. Standard & Poors placed UK government debt on watch negative, setting off media angst that the 'treasured' AAA held since first rated in 1978 might be lost. For the record, Japan is rated AA by S&P, as are Greece, Ireland and Spain.

Underlying Themes

US University students started graduation ceremonies, as will many all around the world, proud parents and alumni considerably poorer than when they embarked on their courses. The unspoken words: was it worth it, especially in the light of dire employment prospects. Many of the universities themselves are facing financial problems: how to re-pay what had seemed like cheap loans to expand and improve facilities to attract ever more fodder. With student loans in short supply, and many unable to afford the fees, applications are tumbling, endowment funds have shrunk dramatically, and charitable donations collapsed. Above all, who needs graduates and what are they worth?

What to watch for next week

Saturday German presidential election, Monday the 25th Africa Day with several celebrating, a UK Bank Holiday and US Memorial Day with just Japan March All Industry Activity, German April Import Price Index and May IFO. Tuesday Eurozone March Current Account and Industrial New Orders, Japan April Corporate Services Prices, UK May Nationwide House Prices, German final Q1 GDP and June GfK Consumer Confidence; then US March Case-Shiller Home Prices and May Consumer Confidence. Wednesday Bank of Japan minutes of April 28th meeting, Trade Balance, May CPI for the various German states, UK April BBA Mortgages, US Existing Home Sales and March House Price Index. Thursday Japan April Retail Trade, German ILO Unemployment and May Employment Change, EZ16 May Consumer Confidence, CBI Quarterly Distributive Trades, US April Durable Goods Orders and New Home Sales. Israel Pentecost and Chinese Dragon Boat Festival holidays. Friday Japan April Jobless, Household Spending, Industrial and Vehicle Production, Housing Starts, Construction Orders, Nationwide CPI and Tokyo May CPI. UK May GfK Consumer Confidence, Eurozone April M3 Money Supply, Unemployment and May CPI, US revised Q1 GDP, May Chicago Purchasing Managers and the University of Michigan Confidence Survey. Whit Monday holidays on the 1st June.

Positioning and Technical Analysis

The US dollar is on the back foot and could weaken quickly and dramatically, making up for time wasted so far this year. Equity indices are likely to drift very slowly and fixed income yields should eventually form interim tops. Money markets very tricky indeed.
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.