Weekly Market Commentary

Overview

A scary week as belatedly many are trying to face up to the grim reality that is the financial mess we are in. All, even us, because although we have seen this coming and taken appropriate steps, this is mere damage limitation and we will not get through things unscathed. The problems: no money, no cheap money; massive credit risk and the threat of default/bankruptcy; expensive raw materials and a crashing US dollar; allegedly well-run firms discovering all sorts of unexpected nasties in the wardrobe while top brass are too busy counting inflated pay packets. Need we go on. To the markets: the US dollar is at its weakest ever against most major currencies, setting a record $1.5465 to the Euro and CHF 1.0134, though it gained against some emerging market currencies, notably the South African rand at 8.0825. Not surprisingly many commodities raced to new record highs, Nymex Crude Oil to $105.97 and spot Gold $991.90. Interest rates are all over the shop, TBills and short-dated Index-Linked paper yielding next to nothing while credit spreads balloon and curves steepen to their highest in several years. Some emerging market bond yields are a lot higher, and Italian ten-year BTPs yield 65 basis points over Bunds. Three-month Euro Libor is 4.52% while on the dollars it is 2.93%. Ten-year benchmark Canadian government bond yields dropped to 3.50%, the lowest since the mid-1950's. All equity indices are down sharply and testing key support levels close to January's lows except Egypt's Hermes index with a new record high of 100,631.

Political and Economic Developments

The Reserve Bank of Australia raised their official rate by 25 basis points to 7.25% while the Bank of Canada slashed theirs by 50 to 3.50%. Britain (5.25%), the Eurozone (4.00%) and Indonesia (8.00%) left theirs unchanged. Most economic indicators were on the gloomy side this week, culminating in US February employment figures which saw the greatest number of jobs lost since March 2003. Far more worrying to us, and especially to the authorities are the increasing number and type of businesses that are being dragged into the mess, crumbling before our very eyes. Billions of dollars swallowed up into a black hole, vanishing in a puff of smoke, without a trace of smoke or mirrors left behind. Gone, all gone!

In Q4 2007 US household wealth shrank by $533B to $57,718B as share and house prices fell. Add to the mix expensive food, fuel, and an election year, and pretty soon you have a very poor citizen. No wonder mortgage foreclosures were up 5.8% to a record in that period and late payments are running at the highest level since 1985.

Underlying Themes

Ex-Bank of England Governor Lord George described the credit crunch as a 'harrowing experience' for finance businesses, regulators, central banks and governments. No mention of Joe Public, we see. He also noted that 'regulators seek to set minimum standards that reduce the risk of a bank failing, but they can't guarantee that banks can't fail - and they don't actually run the banks'. More plain speaking as per the Fed governor's remarks last month on small banks possibly failing; this ought to make investors think more carefully as to which institutions are most vulnerable. Meanwhile the Fed plans to add yet more liquidity to the system via Term Auction facilities of $50B a piece on the 10th and 24th March and will continue to conduct these if necessary for another six months at least. Three-month US TBills yield 1.19% and rumours swirl Fed Funds will be 1.75%.

What to watch for next week

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. Monday Japan January Machine Orders, February Money Supply and Economy Watchers' Survey, German January Trade Balance, US Wholesale Inventories, UK Industrial Production, February PPI and EU March Sentix Index. Tuesday UK January Leading and Coincident Indices, US Trade Balance, February RICS House Price Balance and March ZEW Surveys. Wednesday Minutes of the Bank of Japan's February meeting, final Q4 GDP, January Current Account and February CGPI, Bankruptcies and Consumer Confidence. Then UK January Trade Balance, Eurozone Industrial Production and UK Chancellor Darling's Budget Statement. Thursday Tokyo February Condominium Sales, US Import Prices and Retail Sales, January Business Inventories and both the Norges Bank and Swiss National Bank decide on rates (expected unchanged). Friday EZ15 and US February CPI, then March University of Michigan Confidence Survey.

Positioning and Technical Analysis

On Monday we shall look to see if key indices closed today below the following chart levels: Dow Industrials 12,000, Nasdaq 2,200, FTSE 100 5,700, and Stoxx50 3,100. This would complete massive topping patterns and lead to very significant (and possibly fast) declines. The US dollar will probably be subject to doses of correction especially against the Yen and Swiss franc the closer we get to 101.00 and 1.0000. Other than Base Metals, many commodities look slightly overstretched and would benefit from a bout of consolidation. Interest rates will be set by supply and demand, not central banks.

Mizuho Corporate Bank

Posted in: Economy,Finance and Investment,Forex