Weekly Market View

Overview

The rush into top-rated Treasury paper continues, new record low yields set for Swiss ten-year Conf (1.05%), Bund (2.09%), German 30-year (2.58%) and US ones (3.46%%), though Brazilian, Mexican and Russian benchmark yields are up from last week’s record lows. Equity indices are lower, many for a third consecutive week, the Nikkei 225 hitting a low at 8,807 and a weekly close just below key long term support at 9000. Only the Shanghai B share index bucked the trend with its biggest daily rally since November on speculation that it will be merged with the much larger domestic A-share market. Kuala Lumpur inched to its best level since February 2008 (just under the record high 1,521 of January 2008) and Jakarta set a new record at 3,150. The yen and Swiss franc gained against all currencies, another feature of the flight to safety, hitting 85.68 and 1.0220 per US dollar, EUR/CHF a new record low 1.2971. Commodities generally sidelined though 3-month LME Tin at $21,750 is at its most expensive in a year and Nymex Natural Gas at $3.825 per MMBtu cheapest since March and close to its lowest levels this decade.

Political and Economic Developments

A series of downbeat economic statistics from the US have reinforced the new reality many are staring at, which some call gloom. July Existing Home Sales dropped 27.2% M/M taking the annualised number of sales to a record low 3.83 million (from a peak of 7.25 million in 2005). Likewise New Home Sales dropped 12.4% M/M to an annual 276K, the lowest on record in a series going back to 1963. Admittedly the ending of government purchase incentives will have skewed sales, just as cash-for-clunkers brought forward car sales, so that many are now talking of further price falls; note that the average US home is worth $204K, the lowest since 2003 – seven years of depreciation to be written off. The Mortgage Bankers Association reported a small rise to 3.51% for mortgages 30 days past due, seriously delinquent (90 days overdue) 9.85%, and foreclosures 4.57% of all loans. Though Weekly Jobless Claims dipped to 473K from 504K (highest since November 2009) the prior week, obviously a rise here will have an effect on the ability to repay loans. There are suggestions that banks are being lenient, increasingly willing to modify and reclassify debt, because very low interest rates make this the easier option, something many have already done with commercial real estate – keep it as a performing loan for an annual cost of next to nothing rather than write-downs and repossessions.

Underlying Themes

Standard and Poors downgraded Irish sovereign debt one notch to AA- adding a negative outlook on worries that bank bailouts would require even more taxpayers’ money. Interestingly the Irish National Treasury Management Agency disagreed with their methodology. NAMA, the ‘bad’ bank created to offload dodgy debt from financial institutions to create ‘good’ banks refuses to disclose what assets it holds but rather worryingly the Irish Nationwide Building Society says it sold them €591 million with a 72% haircut. Ouch! Generally spreads over ten-year Bund yields have widened to new records, Greece 950 basis points, Ireland 371, Italy 168, Portugal 340 and Spain a not quite record 190.

What to watch for next week

Monday 30th August UK Bank Holiday though the UK’s Hometrack August Housing Survey is out, Eurozone Confidence, US July Personal Income and Spending, plus Core PCE. Tuesday Japan July Industrial and Vehicle Production, Retail Trade, Labour Cash Earnings, Housing Starts and Construction Orders, plus August Small Business Confidence. UK July Money Supply and Consumer Credit, August GFK Consumer Confidence, German Unemployment, EZ16 CPI and July Unemployment, US June CaseShiller House Prices, August Chicago Purchasing Managers, Consumer Confidence and Minutes of the FOMC meeting. Wednesday 1st September, Japanese August Vehicle Sales, Manufacturing PMI’s for various European countries, UK Halifax House Prices, US Challenger Job Cuts, ADP Employment Change, Manufacturing ISM, Vehicle Sales and July Construction Spending; Sweden’s Riksbank starts a two-day rate-setting meeting (some expect a 25 basis point rise to 0.75%). Thursday UK August Nationwide House Prices, Construction PMI, EZ16 Q2 GDP, July PPI, the ECB decides on rates (unanimously expected unchanged at 1.00%), US Q2 Unit Labour Costs, July Factory Orders and Pending Home Sales. Friday Japan Q2 Capital Spending, UK August Services PMI, EZ16 July Retail Sales, US August Non-Farm Payrolls and Unemployment, then Non-Manufacturing ISM. Monday 6th September Labour Day holidays in Canada and the US.

Positioning and Technical Analysis

Summer will be over by the 7th of September and the feel is very much back to school and back to work. And what are we facing? Much the same mess as we did at this time in 2008. Banks are a varied lot, some producing results suggesting they are in rude health, most looking like the walking wounded and some, zombies that even the most creative accountant cannot help. Not surprisingly interbank trust remains at zero, cash parked overnight at central banks, top-ranked paper yielding record low rates. Next, who needs yet more money and where will it come from? Who can cut or is so desperate they must cut spending?