Weekly Market Commentary

Overview

A busy week with better volumes as many think and re-think strategy. Stock indices gave up part or all of last week's gains, Turkey hardest hit down 8% on political versus military power struggles seen as a threat to its credit rating, according to Fitch. Standard & Poors also warned on Greek debt and Moody's on Iceland's. Money market futures soared to new record highs on dovish comments from Messers King and Bernanke, coupled with leaks from the ECB that yet more easy-money measures might be announced at next week's MPC meeting. Treasury yields dropped, Schatz to a new record low of 0.825%, well below the central bank's 1.00% target, as did UK two and three-year swaps, and ten-year Gilt yields are back below 4.00% (just). As was the case in 2008 when ‘risk-aversion' was de rigueur, investors bought the yen and the US dollar, so that JPY touched 88.80, Cable $1.5164, hardest hit the ZAR at 7.8925. Commodities were sidelined to lower this week, the only interesting one being ICE Cotton which at 81.83 cents per pound is close to 2008's high and over one standard deviation above the long term mean at 63.50.

Political and Economic Developments

The US housing market, at the epicentre of this financial crisis, continues in very precarious form. New Home Sales were running at just 309K in January, a record low for a series going back to 1980, and Existing Home Sales dropped to 5.05 million with 38% of these being distressed sellers and 26% cash buyers. The Federal Housing Finance Agency said the average interest rate on 30-year mortgages was 5.10% (so much for zero interest rates!) in January while house prices dropped 1.6% M/M, almost a record, and Fed governor Bernanke noted that high vacancy rates in rental property was damping shelter costs and inflation. He also said he was concerned as to how the planned exit from their Mortgage Backed Securities programme by the end of March would pan out and that the government must decide what to do with Fannie Mae and Freddie Mac (the latter managed to lose another $7.8B in Q4 2009 and AIG $8.87B). It should come as no surprise that the FDIC reported Q4 702 problem banks, a massive rise from Q3's 552, with dodgy assets running at $403B from $345B the previous quarter. For a twelfth consecutive quarter loan losses increased, to $53B and the highest in over twenty years, on home loans, credit cards and commercial property which rose the most.

Underlying Themes

As we saw in the UK, the very cold winter is having a variety of effects in many countries. Some sectors of the economy have ground to a halt, such as construction, spending patterns have been altered (French January Consumer Spending –2.7% M/M and the worst since 2008's record low), and sentiment has taken a hit. US February Consumer Confidence dipped to 46.0, worse than expected and the lowest since April; something similar happened in the Eurozone with German IFO Business Climate easing contrary to expectations. Moscow so far this week has been hit by 67 centimetres of snow, the heaviest in 44 years, and 15,000 snow-clearing machines and 5,000 street cleaners were pressed into action to keep the city moving. US Weekly Jobless Claims rose to 496K, highest since November, probably because of the snow in the north-east. Continuing Claims remained at 4.6 million but it should be noted that another 5.7 million are receiving ‘extended benefits', which cover weeks 27 to 73 of unemployment, paid directly by the federal government.

What to watch for next week

Saturday and Sunday G20 finance ministers and central bankers meet in South Korea. Monday March 1st UK Hometrack February Housing Survey, Japan Vehicle Sales, German January Import Prices due from this day, UK Net Consumer Credit and Mortgage Approvals, Eurozone Unemployment, US Personal Income and Spending, Construction Spending and Core PCE, plus February Manufacturing ISM. Tuesday Japan January Jobless, Household Spending, UK February Construction PMI, EZ16 CPI and January PPI, the Bank of Canada and Reserve Bank of Australia decide on rates (expected unchanged at 0.25% and 3.75% respectively). Wednesday early UK February Nationwide Consumer Confidence and BRC Shop Price Index, Services PMI, Official Reserves, Japan January Labour Cash Earnings, Eurozone Retail Sales, US February Challenger Job Cuts and ADP Employment Change, plus the Fed's Beige Book. Thursday Japan Q4 Capital Spending, revised EZ16 Q4 GDP, the Bank of England and ECB decide on rates (both expected unchanged at 0.50% and 1.00%), US final Q4 Unit Labour Costs, January Factory Orders and Pending Home Sales. Friday German January Factory Orders, US Consumer Credit, UK February PPI, US Non-Farm Payrolls and Unemployment. Saturday Iceland referendum on Icesave; Sunday and Monday central bank governors meet at BIS.

Positioning and Technical Analysis

Sovereign debt levels, in absolute and relative terms, will continue to be a problem for all too many as governments step into the black hole of banks' deleveraging – nationalisation by the back door. The FX market is overstretched in many areas and likely to correct some of February's moves. Treasury yields should continue to decline, gathering pace as many are reluctantly dragged in.

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.