Equity indices bounced this week

Overview

Equity indices bounced this week, many from key support levels, to recover most if not all of the previous week’s sell-off. This is to be expected as we test and re-test important support and ponder the implications for other markets, business and politics. Bond yields backed up in tandem though benchmark 10YR Australian Treasuries dipped to 4.95% (lowest since May 2009) and Swiss Conf to a new record low at 1.43%. Nearly all Eurodollar interest rate futures rallied to new record highs as the prospect for rate rises is put back yet again – as has been the case for the last six quarters though pundits still find this hard to grasp. Meanwhile nearly all Euribor futures are priced at 99.00 or lower, so that the spread between these and dollar futures is up to 50 basis points. This may be an element in the Euro’s reappraisal, rallying to $1.2723, when consensus opinion this month is that it should weaken over the coming year to $1.1900, one brave soul targeting $0.9800. This week’s best performer was the Australian dollar ($0.8792) on better than expected job creation taking Unemployment down to 5.1%; the yen lost against all currencies. Commodities remain sidelined though Grains and Soybeans rallied to this year’s best levels, CBOT Wheat leading as Europe’s heat wave threatens this year’s crop. Most Baltic Freight rates are lowest in a year.

Political and Economic Developments

South Korea’s Central Bank raised it key rate by 25 basis points from a record low 2.00%. Australia, the Eurozone and UK sat on their hands at 4.50%, 1.00% and 0.50%.
China bought a record net 735B yen’s worth of JGB’s in May, but before rushing to the conclusion that they have decided to diversify out of US Treasuries and avoid Eurozone debt, it should be noted that in the main they bought short-dated paper. Germany’s May Current Account dropped to +€2.2B (from €18.3B in March), the lowest since August 2004, with the Trade Balance shrinking by €3.4B. Despite strong exports, growing imports and a deficit of €3.2B in investment income account for much of the shrinkage. The UK’s Visible Trade Balance widened to £8.06B in May, not far off 2007’s record of £8.28B, a weaker pound obviously having negligible effect. The French Trade Balance meanwhile hit -€5.5B, the worst after 2008’s record -€6.17B, Euro weakness not helping here either.
Americans are paying down debt: May Consumer Credit shrank by $9.1B after $14.9B in April, less than the record $23.4B of Nov09 but the nineteenth monthly repayment over two years, making this a much-needed trend.

Underlying Themes

The Committee of European Banking Supervisors will announce on the 23rd the results of the 91 Eurozone banks currently being ‘stress tested’. The media, investors and bankers themselves have been pondering at length the criteria being used and the reliability of data provided. The US is held up as a model of how to do things properly, early in 2009 telling us which banks needed recapitalising and by how much – matching then Fed borrowings exactly. Government bailouts would follow and, if short of cash, they will have recourse to the EU’s €500B support fund; the ECB is not involved. Mr. Trichet insists ‘transparency has its virtue..(and is) confidence building’, that the economy is and will grow (albeit unevenly), and that it is still too early to declare the crisis over. Many finance ministers are confident of a rosy outcome for their banks while ECB board member Juergen Stark does not see deflation in EZ16, says the IMF is underestimating growth in the zone,and that the worst of the crisis is over. Nothing like singing from the same hymn-sheet and do they really expect us to believe it’s all done and dusted? Confidence, once lost, is slow to recover while displaying all the skeletons might frighten the children.

What to watch for next week

Sunday the 11th Upper House Japanese parliamentary elections. Monday just Japan June Domestic CGPI and UK final Q1 GDP. Tuesday Japan June Consumer Confidence, UK RICS House Price Balance, BRC Retail Sales Monitor, CPI, May DCLG House Prices, US Trade Balance, June Monthly Budget Statement, NFIB Small Business Optimism, German and Eurozone July ZEW Surveys. Wednesday UK June Nationwide Consumer Confidence, Jobless Claims, May ILO Unemployment, Average Earnings, EZ16 Industrial Production, June CPI, US Import Price Index, Retail Sales, May Business Inventories and June 23rd FOMC Minutes. Thursday Tokyo June Condominium Sales, the Bank of Japan concludes a two-day meeting, EU27 June New Car Registrations, UK Q1 BoE Housing Equity Withdrawl, US June PPI, Industrial Production and Capacity Utilisation, July Empire State Manufacturing while a Senate hearing on the Fed’s board members takes place. Friday Japan May Tertiary Industry Index, EZ16 Trade Balance, US Net TIC Flows, June CPI and July University of Michigan Confidence Survey. Sunday 18th second round of presidential elections in Guinea and Monday the 19th a Marine Day holiday in Japan.

Positioning and Technical Analysis

Markets will probably swing sharply either side of current levels as we gear up for decisive breaks; thin July/early August conditions are likely to exacerbate moves. Only the very top quality financial products are worth holding and though yields may be peanuts by historical standards, add in potential deflation and they may buff up a bit.

Have a nice weekend!