Investment Markets Overview – w/e 16 September 2011

This week was all about confidence, or hope, as investors’ appeared to “buy in” to the ECB’s announcement that it, along with the Fed and other central banks, will lend dollars to strained euro-area banks, via the ECB, who are having problems accessing funds due to their still massive leverage to the so called “risk free sovereign debt.” Whilst this may address the banks liquidity problems in the short term, a symptom of the euro-zone’s debt crisis, the root cause, the solvency crisis of several EU states, remains unresolved. As such, quite what the American and other nation tax-payers are on the hook for is yet to unfold. Although this “initiative” is essentially a 3 month “swap line,” with the highest quality of collateral (essentially sovereign debt) it’s assuming that there will not be a market increase in the ongoing sovereign debt crisis.

US economic data announced this week included August CPI and retail sales, the former exceeding the 0.2% consensus, at 0.4%, albeit that it was lower than July’s 0.5%. Retail sales were flat, whilst Empire manufacturing contracted by 8.8 versus the -4 expected for September. The closely watched University of Michigan consumer confidence number for September was slightly above forecasts, adding to the positive sentiment emanating from politicians and bureaucrats on both sides of the Atlantic. Stocks enjoyed five consecutive days of gains, as the Dow and the S&P 500 rose by 4.7%,and 5.4% respectively, whilst the Nasdaq jumped by 6.2%.

Euro-zone CPI in August matched expectations, at 0.2% and 2.5% annualised, whilst the region’s new car registrations rose by 7.7% in August against July’s -2%. Unsurprisingly, home sales in Spain fell by 34.8% in the year to July. August Inflation for the UK, as measured by the CPI number, came in as forecast, at 0.6% and 4.5% annualised, whilst 3 month unemployment to July remained level, at 7.9%. Retail sales disappointed in August, at -0.1% against July’s 0.2%. The FTSE 100 ended higher by 2.9%, whilst the French CAC and the German DAX rose by 1.9% and 7.4% respectively.

Out East, the reserve bank of India, raised interest rates by 0.25% to 8.25%, the 12th rate hike since March 2010. Elsewhere, OZ business confidence index slumped to -8 in August from July’s reading of 2, whilst in Singapore, July retail sales exceeded expectations at 10.7% annualised as the Country’s unemployment rate remained unchanged during Q211. The Nikkei gained 1.5% whilst the Hang Seng fell by 2%.

The $US index declined by 0.8% to 76.6, with other losers including the Brazilian real and the South African rand, lower by 3.4% and 2.8% each. Gainers included the $Canadian, up by 1.9% and the Yen, which managed to rise by 1.1%. Sovereign debt yields between G-7 and the PIIGS diverged once again this week, albeit that the “risk on benefits” of the coordinated central bank activity reversed the respective trends. The UK gilt yield jumped by 22bps to 2.28%, Japan’s JGB yield ended higher by 1bps at 1.01% whilst the German 10 year rose by 9bps to 1.86%. Meanwhile the Portuguese 10 year yield added just 2bps to 10.89%, whilst Irish yields were 4bps lower, at 8.4%. Spanish and Italian yields jumped by 14bps and 10bps, at 5.28% and 5.5% respectively, with the star turn once again emanating out of Greece as the 2 year yield actually fell by 132bps to 51.7%, after touching a record 76.5% mid week. The US Treasury 5 and 10 year yield soared by 15.5% and 8.4%, ending the week at 0.93% and 2.08%.

Within the commodities complex, the $crude oil price gained 1%, ending the week at $87.9 a barrel, whilst in the precious metals space, the price of $Gold fell by 2.4% to $1815oz, whilst the $Silver price ended lower by 1.9% at $40.7oz.

Next week sees more on consumer confidence for the Euro-Zone and for the UK, with the latter also announcing the latest government finances, via the PSBR. Out East Japan releases August retail sales and we get to see the August unemployment rate for Hong Kong, whilst the US announces August housing starts and the July house price index. The main event, however, is the extended two day FOMC meeting.

A Federal Reserve paper which studies the 1930’s depression, a speciality subject for Benanke who allegedly has spent his whole adult life studying, has concluded that one of the main reasons for a fall in the availability of credit were bank failures, of which there were thousands. Now, that is an observation worthy of years of study! With the Fed now in cahoots to balloon the ECB balance sheet, whilst presiding over its very own bubble, we may have a central bank or two in major trouble this time around.

 “History repeats itself, first as tragedy, the second as farce.” 

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