Investment Markets Overview – w/e 13 January 2012

The main event this week, aside of the breakdown of talks between private creditors of Greek debt, thereby jeopardising the impending bailout funds and moving bankruptcy ever closer for Greece, was, of course, the downgrading of credit ratings for nine euro-zone nations. Late Friday, credit rating agency S&P stripped France and Austria of their AAA status, slashed Spain to A and Italy to BBB+, whilst downgrading Portugal, Malta and Cyprus to junk status. France’s downgrade is particularly problematic, not just for Sarkosy’s election chances later this year or the increased borrowing costs France and the others now face, but for the much trumpeted “European Financial Stability Facility,” the AAA bailout fund of which France is the second largest guarantor. The four remaining triple-A rated EZ members, Germany, Finland, the Netherlands and Luxembourg may find it politically difficult to increase their guarantees.

US economic statistics announced this week included lower than forecast advance retail sales for December and a widening trade deficit for November of $47.8BN versus October’s $43.3BN. On the plus side were better than forecast provisional consumer confidence figures for January, whilst consumer credit data for November suggested a jump to $20.37BN against the expected $7BN and prior $6BN as a sign of confidence in a recovering economy. Of course the latter could be more of a, “needs must,” due to falling real wages and increased costs. The Dow rose by 0.5% whilst the S&P 500 and the NASDAQ were higher by 0.9% and 1.4% respectively.

A study commissioned by the ECB, who left interest rates at 1% this week, confirms that state-funded pension obligations in 19 of the EU nations were about 5 times higher than their combined gross debt, at Euro 30 Trillion. Meanwhile, Spanish home sales fell by 14.4% year on year in November, suggesting that prices are still too high. For the UK, the trade deficit for November widened to £8.6BN, whilst retail sales for December jumped by 2.2% against the expected 0.4%, according to the British Retail Consortium. The Bank of England, like its European counterpart, left interest rates on hold, at 0.5%, whilst the UK government approved the controversial plan to build a high-speed rail link between London and Birmingham, at a “projected” cost of £33BN, which will not be completed until 2026 and likely shave 45 minutes off the existing 1.5 hours journey time. The FTSE 100 ended lower by 0.2%, whilst the French CAC gained 1.9% and the German DAX rose by 1.4%.

Out East, China’s imports in December were 40% lower than in November, pushing the trade surplus for the month to $16.5BN against the $8.8BN forecast. December CPI for China came in at 4.1%, slightly higher that the consensus 4%, but lower than November’s 4.2%. Elsewhere, South Korea’s unemployment rate held at 3.1% in December, a three year low. The Nikkei gained 1.3% whilst the Hang Seng rose by 3.3%.

The $US index ended the week higher by 0.3%, at 81.5, with other risers including the $OZ and $KIWI, up by 0.9% and 1.8% respectively. Losers included the British pound and the Euro, off by 0.7%, and 0.3%. Sovereign debt yields fell across the board, with the UK gilt yield lower by 5bps to 1.97%, Japan’s JGB yield also lower by 3bps at 0.95% and the German 10 year lower by 9bps to 1.76%. Meanwhile, Portugal’s 10 year yield sank by 90bps to 11.91%, whilst Irish yields fell by 32bps at 7.65%. Spanish yields dropped by 48bps at 5.19% whilst Italian yields ended the week down by 48bps at 5.19%.  The Greek 2 year yield soared by a further 2692bps this week to 151.45%, (not a typo) whilst the 10 year eased by 52bps, ending the week at 31.02%. US Treasury 5 and 10 year yields fell by 8.6% and 5.5% respectively, ending the week at 0.78% and 1.85%.

Within the commodities complex, the $crude oil price fell by 2.9%, ending the week at $99 a barrel, whilst In the precious metals space, the price of $Gold rose by 1.5% at $1641oz and the $Silver price gained 3.6% to $29.75oz.

Next week is a holiday shortened trading week for the US, but .for it, the UK and for the Euro-Zone, we get to see the latest CPI data. December retail sales and consumer confidence readings are also due out for the UK and for Japan, with the former also announcing 3 month unemployment to November. December housing starts for the US will be released, whilst for the EU we will see new car registrations for December and the January ZEW economic sentiment survey.

With all eyes on Europe, economists and analysts talk up the prospects for the US economy, with the fractious “debt ceiling” debate of last summer all but forgotten. This may be about to change, as President Obama has to sign off the agreed $US1.2Trillion increase by the end of this month. It was hoped by the administration that the increase would see them through to the November 2012 elections, but as they have already burned $900BN in just 5 months, this seems unlikely. We are particularly interested to note that the “funded” debt of the US government has risen from $400BN in August 1971 to $15,236Trllion now, with $4,600BN of it, or 30%, presided over by the Obama administration.

 “Running into debt isn’t so bad. It’s running into creditors that hurt..” 

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