Weekly Market Commentary

Overview

Lots of activity in the foreign exchange market with even US stockbrokers waking up to the problem. The US dollar lost ground against all major currencies except the Yen, reaching $1.4968 per Euro, $0.9270 to the Australian dollar, and 1.6970 against the Brazilian real (these last two this year's best performers retracing over 75% of prior losses). Sterling was this week's big surprise, reversing from £0.9400 to £0.9100 per Euro since Tuesday, jet-propelling GBP/JPY from 141.00 to 149.35 (reversing 'star' and 'dog' status). Some commodities benefited from the greenback's woes, Nymex Crude rallying to this year's high at $78.17 per barrel, likewise Gasoline at $1.9560 per gallon, and spot Gold $1070.40 per ounce. Interestingly ICE #2 Cotton at 69.50 cents per pound is back to August 2008 levels. Nearly all stock indices set new highs for this year, great media excitement as the Dow Jones Industrial Average traded over the psychological 10,000, while the Brazilian Bovespa added 6.50% this week alone to reach 66,700; China a notable absentee from this feeding frenzy. Yields on most Treasury maturities backed up, curves steepening in the process, worries stemming from Euribor futures where traders are beginning to wonder what will happen after mid-November's last cash offer from the ECB (note 3-month Libor at 0.69% this week is still well below their 1.00% target). Will the banks cough up to ensure year-end funds or will they pass up the offer with fingers crossed hoping that it will come cheaper by then?

Political and Economic Developments

Crumbs of better news, something Iceland's Public Health Institute is urging their press to report more of, as UK Unemployment held at 5.00% in September (ILO unchanged at 7.9%), possibly because average earnings including bonus payments grew at just 1.6% Y/Y to August while the Engineering Employer's Federation reports the 4 out of 5 firms have frozen pay (the highest ratio in 20 years). US Empire State manufacturers were also looking on the bright side this month, their index of business conditions rising to 34.5 (from a low of –38.2 in March) and the highest measure since April 2004. In contrast the Philadelphia Fed Survey had business outlook down from September as was the University of Michigan's. Minutes from the FOMC said that 'although the economic outlook had improved further in recent weeks…the level of economic activity was likely to be quite weak and resource utilisation low (so that) inflation would remain subdued for some time'.
US quarterly bank earnings so far reflect a world of 'haves' and 'have-nots', while UK's Lloyds bank was told the government would not support a planned rights issue.

Underlying Themes

Despite trillions of dollars of stimulus packages (though some might say because of them) the financial arena remains fragile indeed, and with many assets trading at extreme levels the chances of upsetting the apple-cart are high. Witness this week's 11% drop in the Thai stock index on rumours of the King's poor health. Or today in South Korea where foreign investors sold a record number of Treasury Bond futures (equivalent to US$2.25B) on rate rise fears compounded by a threat to control foreign currency liquidity at branches of overseas banks. Meanwhile US state revenues (an example of what is going on globally) shrank on average by a record 16.6% in Q2 (following Q1's –11.7%), income tax receipts –27.5% as unemployment rises and sales tax revenues –9.5% as, despite distortions from car-buying incentives, shoppers buy less. The US Treasury's balance sheet increased to $2.174T from $2.120T last week, mortgage-backed holdings +$71B (in one week!) to $762.99B and Treasuries +$4B to $773B.

What to watch for next week

Monday the 19th Diwali holiday in India, Japan August Tertiary Industry Index, Eurozone Construction Output, September Tokyo and Nationwide Department Store Sales, then US October NAHB Housing Index. Tuesday German and US September PPI, Japan Convenience Store Sales, UK M4 Money Supply and Public Finances, US Housing Starts and Building Permits, while the Bank of Canada decides on rates (unanimously expected unchanged at 0.25%). Wednesday just Minutes of the Bank of England's MPC meeting, CBI Quarterly Industrial Trends and the Fed's Beige Book. Thursday Japan August All Industry Activity Index, September Trade Balance, Supermarket Sales, EZ16 August Current Account, US House Price Index, September Leading Indicators and UK Retail Sales. Friday October PMI Surveys for various European countries, UK Q3 GDP, September BBA Mortgages, US Existing Home Sales and EZ16 August Industrial New Orders.

Positioning and Technical Analysis

Allow for a week or two of consolidation close to but not necessarily below current levels in the FX market, moves in the crosses dominating and the US dollar taking a breather from its recent battering. Sterling, and all things UK related remain particularly vulnerable to bad news and sudden moves. Treasuries should regain their composure, yield curves flattening, and the ultra-long term trend to lower yields re-asserting itself. Equities look overstretched because valuations are questionable, FX effects unrecognised and economic prospects cloudy at best.
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.