Weekly Market Commentary

Overview

After their long weekend bond traders came back with a mission -to teach the authorities who's who. Long-dated US Treasury prices slashed, the threat of inflation and devaluation, let alone potential ratings downgrades too much to bear. Benchmark ten-year hardest hit, yields backing up from 3.00% the previous Monday (2.05% at the start of this year) to 3.75% and the spread over two-year yields a record 275 basis points. Thirty-year touched 4.66% from a low of 2.50% at year-end. Ten-year Bunds reached 3.70%, their highest this year and well up from January's 2.85% record low, though Gilts were a lot better behaved. In contrast Money Market and Treasuries out to two-years barely budged from the comatose state and their lowest yields in decades. The US dollar lost ground against most currencies, the South African rand up 4.00% this week, and 25.0% over the last three months, to 7.9200, New Zealand not far behind at $0.6385 and Cable $1.6185. This helped drag some commodity prices higher, Spot Gold to $978.30 per ounce, Silver outperforming at $15.55, Nymex Crude Oil to $66.25 per barrel and Gasoline $1.9355 per gallon. Baltic Dry and Capesize freight rates are higher again though Tanker ones are as low as they have ever been. Equity indices remain stuck just below March's highs for a fourth consecutive week, some emerging market ones fractionally higher, Brazil, China and Russia doing best.

Political and Economic Developments

South Africa slashed their repo target by 100 basis points to 7.50% while Swedish Q1 GDP at -0.9% Q/Q and -6.5% Y/Y was the worst on record. Eurozone May CPI for the first time ever is running at 0% Y/Y, Germany's (on this basis) its first ever negative at -0.1% Y/Y, while Tokyo's excluding fresh food is -0.7%, as low as it got to in 2003 though above the 2001 record low -1.5%.
The Federal Deposit Insurance Corp's Sheila Bair described banking as being 'in the clean up phase'. So far this year 36 US banks and thrifts have failed, following 25 in 2008 and 3 in 2007. In Q1 2009 there are 305 problem banks (highest since 1994), from 252 in Q4, with assets of $220B versus $159B. Non-current loans add up to $291B or 3.76% of the total, the highest since 1991. Meanwhile the insurer's war chest shrank to $13B and were it not for a $100B line of credit from the Treasury one can see how quickly the sums will not add up.

Underlying Themes

Investors must learn to distinguish between sentiment indicators (e.g. Consumer Confidence, GfK Surveys, IFO) and economic figures. Man, the eternal optimist, is programmed to 'look on the bright side' - 'jam yesterday and jam tomorrow, but never jam today'. This week the former were more upbeat, but the latter still grim. US property, the epicentre of financial distress, had Y/Y price declines of -18.7% to March in the 20 metropolitan areas measured by Case-Shiller. The National Association of Realtors reports nationwide declines of -15.4% in the year to April, the median home worth $170,200, condos -18.5%, -21.8% in the West, 45% being distressed sales. On homes worth over $750,000 there is a backlog of 40 months' supply, four times that of new homes. The US Census Bureau reports a doubling of delinquencies on prime fixed-rate loans in April, while Freddie Mac says half past due loans are on empty homes - where the borrowers have given up and moved out. Twelve per cent of all mortgages are delinquent or foreclosure starts, known as 'not current', says the Mortgage Bankers Assoc.

What to watch for next week

Whit Monday holidays in many European countries June 1st as the Reserve Bank of Australia decides on rates (expected unchanged at 3.00%). Japan April Labour Cash Earnings, US Personal Income and Spending, Core PCE, Construction Spending, UK May Hometrack Survey, Manufacturing PMI, and US ISM. Tuesday UK April Consumer Credit, May Construction PMI, Eurozone April Unemployment, US Pending Home Sales and May Vehicle Sales late in the day. Wednesday UK May Nationwide Consumer Confidence, Services PMI, BRC Shop Price Index, US Challenger Job Cuts, ADP Employment Change, April Factory Orders and EZ16 Q1 GDP. Thursday the 4th EU Parliamentary elections start and continue through to Sunday. Japan Q1 Capital Spending, US Q1 Nonfarm Productivity, EZ16 April Retail Sales while the Banks of Canada, England and the Eurozone decide on rates (all expected unchanged at 0.25%, 0.50% and 1.00% respectively). Friday US April Consumer Credit, UK May PPI, US Nonfarm Payrolls and Unemployment. Monday 8th June Orthodox Whit Monday holiday.

Positioning and Technical Analysis

Generalised US dollar weakness should be the focus, possibly because the moves might be very large as many are forced to react. The Yen will continue in a world of its own and there may be a tendency to weakness in Eastern European currencies. This will supply an underlying bid to many things priced in dollars, including shares but not fixed income. For European equities though, particularly those of exporters, is has an opposite effect - a drag on potential gains. Long-dated Treasury yields should retreat, brought back in line by rock-steady short-dated paper, US ones probably lagging badly.
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.