Overview
Geographical distinctions are being made, the wheat separated out from the chaff, as opposed to last year’s ‘risk on/risk off’ mode. G7 stock markets inched up to new highs and their best levels in many months, US indices travelling at a 45 degree angle since September. In stark contrast most emerging market ones are lower, the Hang Seng, Taiwan, South Korea and Singapore all off about 5% on the week. Brazil’s Bovespa is down for a fourth consecutive week to trade at levels last seen in August as the government lops $30B off this year’s budget, similarly Mumbai’s Sensex which is back down to June’s levels after suffering a sixth weekly decline as corruption rumours in the telecommunications industry swirl. Yields backed up even further, Eurozone sovereign debt back on the radar as Portuguese 10-year bonds hit a record 446 basis points over Bunds at an all-time high 7.76%.
FX market sidelined but interesting to note that as of October 2010 London’s share of the market increased to 37.2%, daily turnover up 25% over the year to $1.821 trillion. The rest of the pie is shared between the US with 17.2%, Japan 6.2% and Singapore snapping at its heels with 5.9%. Commodities continue with a bid tone, front month CBOT Wheat future at 893 cents per bushel double what it cost in June as China bids to spend $620 million saving the harvest after the worst drought in 60 years. Baltic Freight rates are close to rock bottom and more oil companies are looking to use tankers to store crude oil, Azerbaijan’s SOCAR Trading anchoring one off Singapore.
Political and Economic Developments
On the last day of the Lunar New Year holiday China raised its key rates once again by 25 basis points so that its one-year lending rate stands at 6.06%. Moody’s lowered the outlook for Jordan to ‘negative’ and warned on a possible downgrade for Arizona; Standard & Poors cut New Jersey’s rating on its unfunded pension shortfall. Japan Bank Lending dropped 1.9% in the year to January, a 14th consecutive monthly decline. Germany’s Trade Balance also shrank in December to €11.9B on lower exports and even lower imports, taking the Current Account to one of its bigger surpluses of €17.6B. The UK managed its biggest ever Trade Deficit of £9.24B in December, Non-EU a record -£5.81B, Industrial Production up a hefty 3.6% that month on weather-related electricity and gas production. The National Institute of Economic and Social Research estimates British GDP shrank 0.1% in January and December’s was revised down to –0.5% (from +0.5% previously).
Underlying Themes
Though some may not like the implications, the International Monetary Fund has rushed willingly and quickly to those needing help through the financial crisis. In a report this week its conduct in the years running up to the mess has been severely criticised by its Independent Evaluation Office. ‘The IMF’s ability to correctly identify the mounting risks was hindered by a high degree of groupthink, intellectual capture, a general mindset that a major financial crisis in large advanced economies was unlikely, and incomplete analytical approaches.’ More worryingly it says, ‘the IMF seemed to champion the US financial sector and the authorities’ policies, as its views typically paralleled those of the US Federal Reserve’. The report says ‘lively discussion’ with the UK’s FSA, the Bank of England and especially Gordon Brown and Ed Balls at the Treasury so intimidated IMF staff , ‘that these pressures reduced staff’s appetite to challenge UK authorities financial risk or regulatory issues’. At last some ‘mea culpa’!
What to watch for next week
Sunday parliamentary elections in Chad. Monday just Japan Q4 GDP, EZ16 December Industrial Production and the Banks of Japan and Sweden start two-day rate-setting meetings. Subject to lunar sightings many countries will be on holiday starting Tuesday celebrating the Prophet Muhammad’s Birthday. Also Tuesday Tokyo January Condominium Sales, German and Eurozone Q4 GDP, UK DCLG December House Prices, January CPI, EZ17 December Trade Balance and German February ZEW Survey. Later US December Net TIC Flows, Business Inventories, January Import Price Index, Retail Sales, February Empire State Manufacturing Survey and NAHB House Market Index. Wednesday Japan December Tertiary Industry Index, UK Unemployed and Average Earnings, January Claimant Count, Nationwide Consumer Confidence, the Bank of England’s Inflation Report and EU27 New Car Registrations. Then US January PPI, Industrial Production, Capacity Utilisation, Housing Starts, Building Permits and Minutes of the Fed’s FOMC meeting. Thursday EZ16 December Current Account, Construction Output, February Consumer Confidence, UK CBI Industrial Trends, US Philadelphia Fed Survey, January CPI and Leading Indicators. Friday German January PPI, UK Retail Sales, Uganda holds national elections and G20 finance ministers and central bankers meet in Paris. Monday 21st holidays in Canada and the US.
Positioning and Technical Analysis
Continue to monitor the trends that have emerged over year-end, those with impaired credit ratings finding it harder and costlier to raise cash. Eurozone sovereign debt problems persist and the searchlight will turn to US indebtedness, President Obama’s budget proposals, municipal and state gaping holes – not a pretty sight.
Have a nice weekend!
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