Weekly Market Commentary

Overview

Big moves and lots of records tumbling as many are belatedly forced round to our way of thinking. Centre stage was a rapidly shrinking US dollar: $1.5240 to the Euro, CHF 1.0425, down to Yen 104.00 and even weaker against some Eastern European currencies. Sterling did not keep up and dropped to £0.7678to the Euro. All sorts of commodity futures, priced in dollars of course, saw new record highs and the CRB Index hit a new record 413.78. Best performer this month was LME Palladium up 50%, then Platinum up 25%, as were Oats and Wheat. The latter saw frantic gyrations on the CBOT as another 'rogue trader' racked up a $142M loss on his personal account. He has been sacked. The Egyptian Hermes Index is the only one to post a new high (99,643). All other indices tried to rally but have ended mostly down on the week. Interest rate futures are higher, and Treasury yields lower, as systemic problems widen; index-linked yields are lot lower. In his semi-annual testimony to the House Financial Services Committee Fed Chairman Bernanke spoke of their preference to alter rates at FOMC meetings and of the possibility of small banks collapsing. Traders are now assuming a 50 basis point cut to 2.50% for the Fed Funds target on the 18th March. Two-year TNote yields dropped to 1.71%, the lowest since April 2004.

Political and Economic Developments

Great 'white hopes' to solve the US's woes are coming and going at an increasingly alarming pace. Government cheques to all; a three billion dollar cash injection (from those who stand to benefit most) and no downgrade in credit ratings has apparently not sorted out the bond insurers; OFHEO lifting the cap on mortgage lending at Fannie Mae and Freddie Mac may have also come unstuck within the week. The Fed's willingness to slash rates is now perhaps perceived as a cast-iron lifebelt. Regulators and the authorities' increasingly desperate searches for quick fixes are just that. Band-Aid.

Underlying Themes

How long will it take stock markets to put two and two together? Chronic US dollar weakness, soaring raw material prices and relatively high borrowing costs are a toxic combination – as bad as 'sub-prime'. Much has been made of Nymex Crude Oil hitting a record $103.05 per barrel this week. According to figures from BP, the previous inflation-adjusted record high was $90.50 in April 1980. Adjusted for FX rates as well, prices are as follows: £51.00 today vs £42.00 in 1980; €67.00 today vs €90.00 then; Yen 10,750 today vs 22,625. If we also adjust for greater efficiency, the numbers are not nearly as shocking (except for US SUV owners).

What to watch for next week

Leap day today and Anglo Saxon superstition says single women may propose to unmarried men. Gents, you have been warned! Sunday March 2nd Russian Presidential election. Monday Japan January Labour Cash Earnings, US Construction Spending, February Manufacturing PMI's for various European countries and the US, EZ15 CPI, EU Finance Ministers meet in Brussels and US Vehicle Sales late in the day. Tuesday Eurozone January PPI and Q4 GDP, Japan February Money Supply and the Bank of Canada decides on rates (expect a cut of 25 to 50 basis points from 4.00%). The Reserve Bank of Australia also meets to set interest rates (expected +25 basis points to a record 7.25%). Wednesday UK February Nationwide Consumer Confidence, European and US Services PMI's, Challenger Layoffs, ADP Employment, Eurozone January Retail Sales, US Factory Orders and then the Fed's Beige Book. The Reserve Bank of New Zealand meets to set the OCR rate (expected unchanged at 8.25%). Thursday Japan January Leading and Coincident Indices, February Machine Tool Orders and the Bank of Japan starts a two-day rate-setting meeting (unanimously expected unchanged at 0.50%). Then German January Factory Orders, the Bank of England decides on rates (expected unchanged at 5.25%), as does the ECB (unanimously expected unchanged 4.00%) and US January Pending Home Sales. Friday German January Industrial Production, US February Non-Farm Payrolls and Unemployment. Saturday Malta and Malaysia hold general elections, Spain on Sunday March 9th when US clocks go forward one hour; Europe's change on the 30th.

Positioning and Technical Analysis

The unwinding of the 'carry trade', in its many guises, started again following February's much-needed corrective bounce. This ended with small 'spike highs' on many charts this week. During March equity indices and Yen crosses should trade lower and moves might pick up speed if banks write down more sub-prime and/or if other businesses start writing down asset-backed securities. We expect the US dollar to weaken further against most currencies (the South African rand an exception) with regular bouts of consolidation along the way. The only problem is that many did not expect this and have yet to sort themselves out. A stampede out of the greenback might ensue. Base and Precious Metals should remain well bid, likewise the Energy Group, but Grains, Oilseeds, and Softs could do with a bout of consolidation. Again the problem will be the speed of the US dollar's decline which we may have underestimated because predicted this so many years ago. We will not become complacent.

Mizuho Corporate Bank

Posted in: Economy,Forex