Weekly Market Commentary - May 16 08 - News & Analysis

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Weekly Market Commentary - May 16 08

Again despite corrective US dollar strength, which saw the Yen drop to 105.45 and Cable to $1.9361, Nymex Crude Oil set a new record high of $126.98 per barrel, taking Gasoline and Heating Oil to new records at $3.2370 and $3.7228 respectively. Note that in Euros a new record at €79.40 per barrel was set and Diesel at the pump cost £5.45 per gallon in Britain. Baltic Dry Freight Rates matched last year's record high, Capesize set a new record at 16,999, and even Dirty Tanker rates to the US Gulf have almost tripled since mid-April. Moves in money market futures were ferocious, Short Sterling dropping by 57 basis points this week alone and Euribor 46. Relative to absolute interest rates this is terrifying stuff, the biggest swings since late January (where prices moved up and then down), and hint that the credit crunch may be back (as US investment banks try to sort out their half-year end in May). Treasuries were dragged to some of their highest yields this year, but retreated late Thursday as we begin to ponder credit spreads. Equity indices rallied again, in a happy little world of their own, although it is still not entirely clear whether they have broken above key chart points. Brazil's Bovespa is at a new record of 72,188 while Egypt's most watched index collapsed from a record high last week, losing 15% of face value.

Political and Economic Developments

US food prices +0.9% in April, the biggest monthly jump since 1990. UK staples a lot higher too, fuel +18.7%, books +10.0%, utilities +8.3%, food +7.2% with a significant contribution from fresh foods. UK CPI is running at 3.00% and Bank of England governor King will have to write a letter to the chancellor explaining the error of his ways (and as he himself admits, probably several letters). Meanwhile layoffs from the credit crunch are seeing unemployment creep higher. In the US Continuing Weekly Jobless Claims are running at 3060K, the highest since February 2004, while UK Unemployment has risen in small steps for a third consecutive month. Spain's Unemployment has risen for three consecutive quarters to 9.6%, the second highest of the EU's 27 member states. Poland's is the highest at 11.5% (down from 20.6% in 2004).

Spanish Q1 GDP was +0.3% Q/Q, the slowest since 1993, and compares badly with +0.8% Q4 2007. German, French and EZ15 GDP not nearly as problematic, running between +2.2% and +2.6% Y/Y. The Eurozone accounts for 22% of world growth, just below that of the US, and a bigger proportion than BRIC countries (Brazil, Russia, India and China). Japan's Q1 GDP a pleasant surprise, +0.8% Q/Q and +3.3% Y/Y. No doubt it will be revised downwards as Q4's was: from +3.5% Y/Y to +2.6%. Estonia's Q1 GDP dropped 1.9% as the Baltic boom fizzles out. With annual inflation running at 12%, house prices down 15%, no wonder confidence has collapsed.

Underlying Themes

Foreclosure rates are up again, as always the vulnerable suffering first and ultimately most. RealtyTrac of the US saw April's rate up 4% from March and +65% from a year ago. Nationally running at 2%, but much higher in property hot spots, Nevada tops the league and California is the highest at 64,683 properties. Some confused or angry souls have even resorted to torching the house the day before they are evicted. Those renting, sometimes after losing their own home, are booted out again as the landlord's property is repossessed (to sell it tenant-free). Bang goes a whole lot more deposit and relocation money. Q1 UK repossessions totalled 27,530, +9.0% Q/Q and +17% Y/Y, the highest since the 1991 peak of 75,540. New court actions to start the process totalled 38,688 in the last three months. Debtors can be pursued for up to 12 years.

What to watch for next week

Monday 19th May holidays in Canada and some Asian countries as the Bank of Japan starts a two-day rate-setting meeting (expected unchanged at 0.50%). Tokyo and Nationwide April Department Store Sales, US Leading Indicators and UK May Rightmove House Prices. Tuesday Japan March Tertiary Industry Indicator, April Convenience Store Sales, Bank of Japan Monthly Report, German April Producer Prices, US PPI, May German and Eurozone ZEW Surveys. Wednesday parliamentary elections in Georgia, Germany's May IFO, UK April Public Sector Finances and Money Supply, Minutes of the Bank of England's May MPC meeting and the Fed's April FOMC. Iceland's Central Bank decides on rates Thursday which is a Corpus Christi holiday in several countries. Japan March All Industry Activity Index, April Trade Balance and Supermarket Sales, UK Retail Sales and May CBI Industrial Trends, EZ15 March Industrial New Orders and US House Price Index. Friday Minutes of the Bank of Japan's April meeting, May PMI's for various European countries, UK Q1 GDP, and US April Existing Home Sales. Monday 26th holidays in Bermuda, the UK and US.

Positioning and Technical Analysis

If we are correct and pressure on credit is building, watch money markets and spreads carefully. Treasuries will, as always, have the attraction of being a safe-haven and yield curves should flatten. FX moves will continue to be dominated by correction and consolidation and are probably best left to the professionals. Likewise many commodities with metals possibly having a small upward bias. Equity indices may continue to squeeze higher while they take advantage of the new version of the ‘carry trade' – cheap cash supplied by central banks.

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.

Written by Mizuho Corporate Bank

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