Weekly Market Commentary

Overview

Probably caused by exhaustion rather than anything else, de-leveraging eased this week allowing many instruments to bounce from extremely oversold levels while keeping volatility high. All stock indices and Yen crosses, whose chart patterns look remarkably similar, bounced within normal corrective parameters. Much was made of the Dow Jones Industrial Average's almost record 888 points daily gain while ignoring the Nikkei's plunge to 6,994, its lowest since October 1982, and Dubai's Domestic Financial Market which dropped again to 2,869. As always the hardest hit earlier in the month rebounded the most, Russia +39%, South Korea's Kospi +18.5% and Poland's Wig +14% this week alone. Likewise currencies with the Yen weakening to 99.79 per US dollar, the South African rand and Brazilian real the biggest beneficiaries among Yen crosses. Several commodities tried to do likewise but put on a poor show, NYMEX Crude dipping to $61.30.

Interest rates again centre-stage as markets veer between fears of meltdown and temporary relief as more rescue packages are announced. Hungary got a whopping $25B from the IMF and ECB; the Fed opened swap lines of $30B apiece to Brazil, Mexico, Singapore and South Korea. The IMF announced quick, no questions asked loans to well run emerging market countries. Japan's PM Aso unveiled a second economic package worth $53B injecting funds into banks and possibly re-buying shares. Hopes for concerted interest rate cuts were fulfilled by many central banks, including China, Japan (-20 bp to 0.30% and the first cut in seven years), Norway, South Korea (record –75 bp to 4.25%), Taiwan and the US (-50 bp to 1.00%). Iceland raised theirs by 300 bp to a record 18.00%. Meanwhile short-dated Treasury bond yields in the Eurozone and the UK collapsed ahead of MPC meetings.

Political and Economic Developments

Problems on 'Wall Street' have certainly migrated to 'Main Street'. US October Consumer Confidence dropped to 38, the lowest for the series which started in 1967, as Q3 GDP shrank 0.3% Q/Q and Q4 should be another negative; then officially a recession. October Chicago Purchasing Managers confidence dumped to 37.8, clearly below the key 50 points and one of the lowest readings in its forty-year history. Record low for Germany's October IFO Expectations component. Brits just aren't borrowing: September net Consumer Credit a mere £0.25B, lowest since August 1993 and way below the 2005 peak at £2.375B.

Underlying Themes

Staff at Canary Wharf, London, have received e-mails warning them of a Halloween 'party' tonight. Anarchists, anti-racists and others are planning to 'dance on the grave of capitalism' and nervous HR departments are hoping disgruntled staff will stay away. No doubt some will be sporting the ghoulish Bernanke and Paulson rubber masks that have been selling well this month, not forgetting to bring along the French hit Sarkozy voodoo dolls (complete with pins), keeping an eye out for an old man dressed as 'Goldilocks'. At the start of what is expected to be a grim holiday season, a memo at Barclays Capital said; 'I would like to inform you that we will not be holding our annual Seasonal parties this year. I know this might come as a disappointment to many of you, who look forward to the opportunity to relax among colleagues and celebrate a year of hard work and accomplishment' (our italics).

What to watch for next week

Monday 3rd November is a holiday in Japan and Russia, with US October Vehicle Sales, Manufacturing ISM and September Construction Spending. Tuesday Japan September Labour Cash Earnings, October Vehicle Sales and Construction PMI, EZ15 September PPI and US Factory Orders, plus American presidential elections. Wednesday the 5th November Eurozone September Retail Sales, UK Industrial Production, October Nationwide Consumer Confidence, Official Reserves, Services PMI, US Non-Manufacturing ISM, ADP Employment Change and Challenger Job Cuts. Thursday Japan September Leading and Coincident Indices, German Factory Orders, the Bank of England and ECB decide on rates (cuts expected from both, just a question of how far they are willing to be pushed into aggressive moves), US Q3 Unit Labour Costs and Non-Farm Productivity. Friday German September Trade Balance, Industrial Production, US Wholesale Inventories, Consumer Credit, Pending Home Sales, October Non-Farm Payrolls and Unemployment, while EU leaders meet in Marseilles. Saturday 8th November general elections in New Zealand.

Positioning and Technical Analysis

Having lived through October, a month some regard superstitiously, we are rapidly approaching year-end with US Thanksgiving the 27th November just over four weeks away. Normally by then many banks will have squared up books and closed trading accounts, a process which may gain increased urgency this year, resulting in desperate measures and panic stations. If this is the case, the breather we had hoped for this coming month will not materialise. Instead we shall have to prepare for another deadly round of unwinding of the 'carry trade' a month sooner than we had pencilled in.

Technical Analysis will be away speaking at the IFTA Conference in Paris Friday 7th November; back on the 14th.

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.