Investment Markets Overview – w/e 23 September 2011

On Wednesday the Fed announced a new effort to drive down long-term interest rates (they are already at 40 year lows). Called “Operation Twist,” after a similar exercise (which failed) in 1961, the plan is to sell $400 billion in Treasuries coming due in the next few years and use the cash to buy Treasuries due between six to 30 years from now. The move is designed to nudge down long-term interest rates, and to make it even cheaper for corporations and consumers to borrow, hence spurring economic growth. Aside of the fact that very few solvent consumers actually want to borrow, in an economy that’s 70% dependent on consumption, they are denying the once class of society who have the ability to consume, savers, by robbing them of both spending power and their capital.

US economic data announced this week included August housing starts and existing home sales, where the former was below expectations, whilst the latter exceeded, at 7.7% versus July’s -3.5%. Leading indicators for August were higher than forecasts but below July’s and the FOMC left interest rates on hold, as expected, at 0.25%. As mentioned above, although “Operation Twist,” was announced, the rhetoric that accompanied the announcement spooked investors’, as Ben introduced the word, “significant,” in front of “risks to the economy.”   Stocks gave back all of last week’s gains plus some, as the Dow and the S&P 500 slid by 6.5% respectively, whilst the Nasdaq gave up 5.3%.

Euro-zone advance September consumer confidence fell by 18.9 against the -18 forecast and August’s -16.5, whilst the ZEW economic sentiment survey for September also disappointed. Elsewhere, French business confidence fell in September, as did the consumer version.UK consumer confidence for August, at 48, surprised on the upside, whilst the budget deficit widened to £15.9BN during the same month, from £14BN a year earlier. The FTSE 100 ended lower by 5.6%, whilst the French CAC and the German DAX fell by 7.3% and 6.8% respectively.

Out East, department store sales in Japan fell by 1.7% in August, whilst in Hong Kong, unemployment and inflation eased in August. Elsewhere, Singapore’s inflation unexpectedly jumped in August to its fastest pace since 2008, at 5.7% year on year, against July’s 5.4%. The Nikkei fell by 3.4% over a holiday shorted 3 day trading week whilst the Hang Seng crashed by 9.2%.

The $US index jumped by 2.5% to 78.5, with few other risers including the Yen, up by 0.3%. Losers included the South African Rand, down by 7.7% and the $Kiwi, which fell by 6.3%. Sovereign debt yields between G-7 and the PIIGS diverged again this week, with. the UK gilt yield lower by 12bps to 2.36%, Japan’s JGB yield down by 2bps at 0.98% whilst the German 10 year eased by 12bps to 1.745%. Meanwhile the Portuguese 10 year yield added 57bps to 11.47%, whilst Irish yields were 19bps higher, at 8.59%. Spanish yields declined by 9bps at 5.19% whilst Italian yields rose by 12bps to 5.62%.  The Greek 2 year yield soared by 1393bps to 65.7%, whilst the 10 year jumped by 240bps, ending the week at 22.6%. The US Treasury 5 and 10 year yield fell by 8.7% and 12.9% respectively, ending the week at 0.85% and 1.8%. For the year to date, the 5 and 10 year yield have collapsed by 58% and 45%. Now that’s Deflation for you.

Within the commodities complex, the $crude oil price fell by 9%, ending the week at $79.9 a barrel, whilst the precious metals space was slammed. The price of $Gold fell by 8.8% to $1651oz, with the North American goldmine index off by 13.2%, whilst the $Silver price crashed by 23.7% to $31oz.

Next week sees more on housing and for consumer confidence from the US   and from the UK. The US also announces August durable goods orders plus a further look at Q211 GDP, whilst the UK releases August consumer credit and mortgage approval data. The latest unemployment numbers will be seen for Japan and for the Euro-Zone, with the latter also releasing M3 money supply

For months now, G7 Finance Ministers, Central Bankers, the IMF, the World Bank and politicians of all stripes have assured us all that they were going to “do something” about global economic growth, without any action excepting the pouring of more paraffin on an already raging debt fire. They had another opportunity this week, as they convened in Washington with their G20 colleagues, for the annual meetings of the IMF and the World Bank. In exchange for more air miles and lavish expense claims, what was received was a pledge to,”take all necessary actions to preserve the stability of the banking systems and financial markets” and to make sure banks have the cash they need to pay their day-to-day expenses. Sound familiar?

 “Policymakers love free markets, as long as they go up.” 

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