Weekly Market Commentary
Overview
Most markets have kept in 'triangle' consolidation patterns within October's large ranges. Yen crosses, equity indices and yields dipped to the lower edge of trading bands Thursday but then rallied, obviously not quite ready for more dramatic falls. Or might this, the third biggest ever rally for US indices, have been helped along with a nudge and a wink? Who knows, but what we can say is that the interbank market is still completely seized up and that awareness of the need to square-up by year-end is growing. Front month money market futures sold off sharply and lending overnight is about as far out along the curve as many will go (and even then some prefer to leave bundles of cash at the central bank). The rush into short-dated Treasuries continues, with US one-month TBills yielding just 8 basis points (yes that means 0.08% annualised!), German and UK two-year 2.22% and terribly steep curves. Some emerging market government bond yields are a bit higher this week as risk-aversion dominates thinking. Trading volumes have shrunk partly because some have less money, others because they cannot find suitable counterparties, and because volatility in many instruments is close to record highs.
The pound has weakened way beyond anything seen in a very long time, to $1.4560 and a record £0.8675 to the Euro, lower than anything since January 1996 on the Bank of England's Trade Weighted Index. Another casualty was Dubai's stock index, lowest since November 2004 and worth less than a quarter of November 2005's peak. Commodities are either sidelined or cheaper, Nymex Crude Oil dropping to $54.67 per barrel.
Political and Economic Developments
Swingeing job cuts over the last month have seen US Continuing Jobless Claims at their highest since December 1982 (3897K) and UK October Claimant Count Unemployment rise by 36.5K, the biggest monthly increase since December 1992 to just over 2 million out of work. November will probably be worse, bankers hastily booted out of the door before bonus time, while the US auto industry goes begging for handouts because of huge potential job losses were they to file for bankruptcy.
US Treasury Secretary Paulson decided to re-think his $700B TARP bank bail-out package and will not be buying mortgage-backed securities. What he will do instead is unclear, but with Fannie Mae reporting a Q3 loss of $29B perhaps it's just as well that no more goes towards housing. Germany, Italy and the Eurozone are now in recession.
Underlying Themes
S&P's speculative grade credit spreads widened again to a record 1,446 basis points for 'B'-rated paper, 600 for 'BBB', so loan sharks are moving in. These come in many varieties, starting with your typical high street credit card whose average interest rate in the UK is 17.6% and today Citi bank will up theirs for some customers. Investment banks and some very big corporates are courting large investors by selling parts of themselves at yields between 10.00% and 15.00% annualised. Then there are the failed money-laundering/pyramid schemes of Colombia that have prompted street riots, or Brazilian shops which offer credit terms of up to 100% per annum. In Italy usury is the Mafia's fastest-growing business, estimated at €15B out of a total turnover of €130B, concentrated on 150,000 small businesses who borrow or pay for protection.
What to watch for next week
Saturday leaders from the so-called G20 countries meet President Bush in Washington for an emergency summit to discuss reforms in global finance with Brazil's Lula already saying he is not expecting major results. To re-cap the countries involved are: Argentina, Australia, Brazil, Canada, China, the EU, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, the UK and US. Monday Japan Q3 GDP, UK November Rightmove House Prices and US Empire Manufacturing Survey, October Industrial Production, and EZ15 September Trade Balance. Tuesday Japan October Nationwide and Tokyo Department Store Sales, UK CPI, US PPI, Eurozone September Construction Output, US TICS flows, November NAHB Housing Index; OPEC meet in Vienna. Wednesday Minutes of the Bank of England's 5/6th November MPC meeting, CBI November Industrial Trends, US October CPI, Housing Starts and Minutes of the Fed's 28/29th October FOMC meeting. Thursday Japan October Trade Balance and the Bank of Japan starts a two-day meeting, German October PPI, UK Retail Sales, Money Supply, Public Sector Borrowing, US Leading Indicators and November Philadelphia Fed Survey. Friday just November Manufacturing PMI's for various European countries.
Positioning and Technical Analysis
Having survived October's volatility it now looks as though the final two weeks of November might be even worse. Normally by Thanksgiving many banks will have squared up and closed trading accounts ahead of December's financial year-end, thus allowing the auditors plenty of time to sign off the books. Many might be reminiscing fondly of days gone by when such a feat was possible, as they become ever more desperate for cash to balance their complex crumbling edifices. We doubt whether the authorities have even grasped the key to the problem, realised the urgency, with tools and savoir-faire to implement a serious rescue plan. Have a nice weekend!
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.
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