Investment Markets Overview – w/e 12 August 2011

Within one week of “investors concerns” over the downgrading of US Treasuries to AA status, they piled into them, with yields touching historical lows this week. It suggests that investors are repudiating S&P’s decision on Uncle Sam, not to mention an expression of severe concern for both stocks and for the economy. Meanwhile, AAA France had the ignominy of seeing their CDS spreads rocket to 7 times those of the US on concerns about the French exposure to Italy and Greece

US economic data announced this week included the FOMC decision to leave interest rates on hold, at 0.25%, together with an extraordinary statement that it will be kept at this level for at least a further two years. The June trade deficit widened to -$53.1BN against the -$48BN expected and May’s -$50.8BN, whilst the advance retail sales figure for July came in as forecast, at 0.5%. There was a dire forecast, however, as per the provisional University of Michigan consumer confidence survey, which plummeted to a three decade low of 54.9 against the 62 expected and prior number at 63.7. The Dow fell by 1.5%, whilst the S&P 500 and the Nasdaq were lower by 1.7% and 0.96% respectively.

Euro-zone confidence also collapsed, as evidenced by the August sentix investor confidence index, which came in at -13.5 against the 3.4 consensus forecast and July’s 5.3. Industrial production for the region also disappointed, at 2.9% annualised versus the prior reading of 4.4%. UK industrial production for June also disappointed, at -0.3% year on year, whilst the trade deficit for June widened to -£8.87BN. The FTSE 100 gained 1.4%, whilst the French CAC and the German DAX fell by 1.98% and 3.8% respectively.

Out East, Japan’s consumer confidence reading for July met expectations at 37, an improvement on June’s 35.3, albeit that industrial production and capacity utilisation for June were below consensus. Elsewhere, unemployment in Australia rose to 5.1% in July from June’s 4.9%. The Nikkei ended lower by 3.6%, whilst the Hang Seng sank by a further 6.3%, bringing the past fortnight’s fall to 13%.

The $US index was little changed at 74.6, with gainers including the Yen, higher by 2.2%.. Losers included the South African Rand and the Brazilian real, lower by 3.6% and 2.2% respectively. Sovereign debt yields, with the exception of Japan and Greece, fell, as “investors” flocked to “safety.” UK gilt yields fell by 16bps to 2.53%, Japan’s JGB yield rose by 4bps at 1.04% and German dipped by 1bps to 2.33%. The Portuguese 10 year yield fell by 56bps to 10.11%, whilst Irish yields fell by 19bps to 9.62%. Spanish and Italian yields ended lower by 106bps and 108bps, at 4.97% and 5% respectively, aided by the ECB purchases, whilst the Greek 10 year yield rose by 34bps to 15.2%. The US Treasury 5 and 10 year yield collapsed by a staggering 25% and 12.5%, ending the week at 2.47% and 2.24%.

Within the commodities complex, the $crude oil price fell by 1.6%, ending the week at $85.3 a barrel, whilst in the precious metals space the price of $Gold surged higher by 5% to $1749oz whilst $Silver price rose by 1.9% at $39.07oz.

Next week sees the latest inflation numbers for the US, the UK and for the Euro-Zone, with the former also providing the latest on housing starts and home sales. The Euro-Zone are also due to release Q211 advance GDP and the June trade balance, whilst for the UK, we get to see July consumer confidence figures and retail sales for the same month. Japan will announce Q211 housing loans and provisional GDP numbers.

Within a week of the G7 “united” conference call, central bankers are racing to protect their economies from fiscal tightening and volatile currency swings, with the ECB’s intervention in bond markets, the Bank of England’s readiness to increase QE, if required, and the aforementioned Fed statement on low interest rates. Meanwhile, Greece’s financial regulator banned short selling this week, after the ASE stock index had already fallen by 80%, for a period of two months, on concerns that speculators were driving prices down. They were promptly followed by South Korea, France, Spain, Italy and Belgium, all supposed democracies that believe in free market forces. Or should that read, “free-market participants when prices go up?”

 “Underlying most arguments against the free market is a lack of belief in freedom itself”

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