Investment Markets Overview – w/e 9 March 2012

The private sector Greek “debt swap” was completed, at the 11th hour, removing the final obstacle to its second bailout being released. It was only due to the Greek Government implementing the use of, “collective action clauses,” better known as enforced participation, which enabled the swap to be completed. Hailed as a “resounding success,” by a spokesman for Olli Rehn, the EU economic and monetary affairs commissioner, the reality is that not only does it not solve the structural problems of Greece and many other Euro-Zone members,  it will likely lead to a higher yield being demanded on all sovereign debt going forward, including that of Germany.

US economic statistics announced during this week included a better than forecast ISM Service reading for February and higher than expected consumer credit numbers for January, which came in at $17.8BN versus the $10.45BN consensus, albeit that most it was down to student loans (perhaps the only sector of the economy being offered unsecured credit.) The trade deficit widened in January to -$52.6BN against the -$49BN forecast but there was cheer from the February non farm payrolls number, which exceeded expectations, at 227,000, albeit that December’s 285,000 figure was revised down to 243,000 and a large percentage of the jobs growth appears to be of the part time variety. Still, a job is a job and the “official” unemployment rate remained at the prior 8.3%, although the duration of unemployment is now worryingly high, as can be seen from the chart below. The Dow fell by 0.4%, whilst the S&P 500 was unchanged and the NASDAQ rose by 0.4%.

Euro-Zone retail sales in January rose by 0.3% but was flat year on year, whilst Q411 GDP contracted by 0.3%, as forecast. The ECB left interest rates on hold, at 1%, whilst the Bank of England MPC left the UK’s at 0.5%. German factory orders contracted by 2.7% in January and by a hefty -4.9% year on year, whilst the December unemployment rate for Greece was at 21%, with a tragic 51% number of under 25s unemployed. UK house prices fell by 0.5% in February and by -1.9% year on year, according to the Halifax and new car registrations in February fell by 2.5% annualised. The FTSE 100 ended lower by 0.4%, as did the French CAC and the German DAX fell by 0.6%.

Out East, Japan’s Q411 GDP fell by 0.5% whilst provisional machine tool orders for February fell by 8.6% versus the 6.9% contraction seen for January, hindered by Yen strength (now being relieved) hurting Japanese exports. Elsewhere the Reserve Bank of Australia left interest rates on hold, at 4.25%, as Q411 GDP came in at 0.4%, half of the rate forecast. The Nikkei gained 1.6% whilst the Hang Seng ended low lower by 2.2%.

The $US index gained a further 0.8% at 80, with few other gainers including the Mexican peso, higher by 0.9%. Losers included the $OZ and the British pound, lower by 1.5% and 1% respectively. Sovereign debt yields were mixed once again, with the UK gilt yield higher by 2bps to 2.15%, Japan’s JGB yield was unchanged, at 0.98% whilst the German 10 year declined by 1bps to 1.79%. Meanwhile, Portugal’s 10 year yield slipped by 10bps to 13.35%, whilst Irish yields inched higher by 2bps at 6.83%. Spanish yields rose by 9bps at 4.98% whilst Italian yields ended the week down by 7bps at 4.82%.  The Greek 2 year yield soared by a further 1084bps to 217%, whilst the 10 year declined by 73bps at 32.6%. US Treasury 5 and 10 year yields rose, with the 5 year higher by 6.9% at 0.9% whilst the 10 year rose by 2.6%, ending the week at 2.04%.

Within the commodities complex, the $crude oil price rose by 0.6%, ending the week at $107.3 a barrel, whilst the precious metals had a volatile week, although at the end of it $Gold was essentially unchanged at $1713oz whilst $Silver gave up 2.4% to $34.13oz.

Next week’s economic data due for release includes trade balances for the UK and for the Euro-Zone, with the latter also reporting on February CPI and Q411 unemployment. The UK also updates on 3 month unemployment to January, whilst the US will release February CPI and advance retail sales, plus the FOMC meet up to discuss interest rates. It’s a light week for Japan but will include February consumer confidence data.

Returning to the exciting subject of sovereign debt, aside of the fact that a developed nation, Greece, has defaulted on its “promise to pay,” it appears that Europe needs to roll over more than $US 385BN during the first half of 2012, whilst America needs to raise a staggering $4 Trillion in the capital markets, $2.7 Trillion in treasury roll over and $1.3Trillion to cover this year’s deficit. Furthermore, it is interesting to note a comment, made by Republican Senator Jeff Sessions, that on a per-capita basis, US government debt is higher than that of Greece. In fact Greece is forth on the list behind Italy, Ireland and the US.

 “Government bonds are certificates of assured future confiscation.” 

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