Investment Markets Overview – w/e 28 October 2011

European Union leaders met for their 14th crisis summit within the past 21 months this week. That averages a crisis meeting every six weeks, so either the food is so good at the “top table,” to keep them returning, or the economic conditions are far worse than anyone is admitting. Whilst the ,”devil is in the detail,” will take a few more days to be fully released and analysed, the three prong “solution” announced , included a 50% “voluntary” write off on Greek debt by bondholders (mainly the banks,) estimated at $US100BN+; a shoring up of those same banks, better known as a recapitalisation; all achieved from a leveraged bailout fund of $US1.4Trillion (the EFSF) which it is hoped will be funded by the banks and other sovereign states. The “prize,” according to these esteemed leaders, is that Greek debt will fall to 120% of GDP by 2020, a level that still leaves the country insolvent, but at least now they will not be on their own.

Indices - ytd - 28 Oct 2011

Indices - ytd - 28 Oct 2011

US economic statistics announced this week included mixed data for housing, as the August S&P/CS 20 city home price index fell by 3.8% year on year against the -3.5% expected, whilst new home sales for September jumped by a better than forecast 5.75%, yet pending home sales for September fell by 4.6% versus the 0.4% consensus. The latest Durable goods orders came in at -0.8 whilst the main event for the week was the advance Q311 GDP number. It was as forecast, at 2.5% annualised, but with government spending set to fall, it leaves an unlikely pickup for personal spending, despite the valiant effort of late, given the slack in the labour market. The Dow added 3.6% whilst the S&P 500 and the NASDAQ rose by 3.8% each.

Euro-zone M3 money supply averaged 3.1% annualised over 3 months to September, whilst August industrial new orders, at 6.2% year on year, were ahead of expectations. Elsewhere, Spanish unemployment reached a 15-year high of 21.5%.,whilst the IFO and ZEW surveys for October confirm that the German economy is likely to slip into recession by the end of this year. For the UK, loans for house purchase were below forecasts for September, at 33,130 from August’s 35,069, the first decline since April, whilst a report by the Centre for Economic & Business Research suggests that financial services jobs in the City and Canary Wharf may fall this year to the same level seen in 1998. The FTSE 100 ended higher by 3.9%, whilst the French CAC and the German DAX jumped by 5.6% and 6.3% respectively.

Out East, September retail trade in Japan fell by 1.5% versus the -0.5% expected, but there was better news in respect of unemployment, which fell to 4.1% in September from the 4.3% recorded for August. Deflation, in the guise of October CPI for Japan, came in at -0.5% annualised and slightly worse than September’s -0.3%. Elsewhere, Thailand’s central bank lowered its growth forecasts as floods began overwhelming Bangkok. The Nikkei added 4.3% whilst the Hang Seng soared by 11%.

The $US index declined by 1.7% this week to 75.1, with few other losers. Gainers included the Brazilian real and the Mexican peso, higher by 6.2% and 5.2% respectively. Sovereign debt yields diverged again, but this week the G4 yields rose whilst, in the main, those of the PIIGS fell. The UK gilt yield rose by 8bps to 2.61%, Japan’s JGB yield ended higher by 3bps at 1.04% and the German 10 year increased by 7bps to 2.18%. Meanwhile, Portugal’s 10 year yield fell by 47bps to 11.48%, whilst Irish yields dropped by 15bps at 7.98%. Spanish yields rose by 4bps at 5.49% whilst Italian yields ended higher by 13bps at 6.01%.  The Greek 2 year yield eased by 5bps to 73.08%, and the 10 year declined by 75bps, ending the week at 22.35%. The US Treasury 5 and 10 year yield jumped by 6% and 4.7% respectively, ending the week at 1.12% and 2.3%.

Within the commodities complex, the $crude oil price jumped by 7%, ending the week at $93.6 a barrel, whilst in the precious metals space, the price of $Gold gained 6.2% to $1745oz and the $Silver price climbed by 12.8% to $35.4oz.

Next week sees the latest GDP numbers, house prices and consumer credit data for the UK, with the latest housing starts due out for Japan. Aside of the October vehicle sales for the US, we’ll also see the latest interest rate decisions and unemployment data for both it and for the Euro-Zone. At the end of the FOMC meeting, the Fed chairman, Ben Benanke, is due to give his first press conference since the June FOMC meeting and one day after that the G20 meet up in Cannes. Meanwhile, the US Congressional Budget Office will be seeking a response from the “super committee” in respect of the deficit cutting plans that they were tasked to complete, as part of the US debt ceiling decision of earlier this year.

One of the so called “lessons” of the 2008 bankruptcy of Lehman Brothers, according to former treasury assistant secretary to George W Bush, Professor Phillip Swagel, was to show the importance of indirect exposure in respect of credit. Fast forward to October 2011, when the current US treasury secretary, tiny Tim, together with his partner in crime, Helicopter Ben, testified to US lawmakers that the $147.5BN in direct loans to the PIIGS was modest and they saw no significant risk to US banks. What they omitted to comment on, presumably because the lawmakers were to dumb to ask, was the $493.4BN of indirect exposure, from the like of derivatives, guarantees, credit commitments and credit default swaps (BIS data.)

 “A Liar will not be believed, even when he speaks the truth” 

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