Investment Markets Overview – w/e 20 April 2012

The “Credit Rating Agencies,” Moody’s, Standard & Poors and Fitch, names unknown to many until the financial crisis erupted, were back in the news this week. With an estimated 95% market share between them, the big three managed to miss the provision of warnings or downgrades on most of the major problem corporates’ in either the year 2000 tech bust or indeed in the lead up to the housing and 2007 bust. Following fierce criticism from bewildered creditors, the agencies have performed a far tougher stance since, particularly in respect of the growing sovereign debt situation, much to the annoyance of politicians of the countries downgraded. The establishment, slow to criticise until it has affected them, now want greater competition amongst the agencies which no doubt will include Arrow Global Ltd, a UK based company chaired by none other than George R Mathewson, the former Chief Exec/ Chairman of The Royal Bank of Scotland PLC from 2001 to 2006, ahead of RBS becoming the largest bank bailout in the World. Hmm.

US economic statistics announced this week included the April Empire manufacturing reading, which at 6.6 was way below the 18 expected and the March reading of 20.2. March housing starts also disappointed, coming in at -5.8% at 654,000 and although building permits were ahead of forecasts, the chart below shows how permits are just a shadow of their former number. Apple fell by a further 5% this week, now 10% off its 9th April high and will not be helped by it losing market share within the smart phone market, at least according to Verizon’s latest results. The Dow gained 1.4%, whilst the S&P 500 added 0.6% and the NASDAQ ended lower by 0.4%.

Euro-Zone economic data included March CPI, reported as slightly higher than consensus forecasts, at 1.3% and 2.7% annualised, whilst the April ZEW economic sentiment index rose to 13.1 against March’s 11. All eyes, however, were fixed on the Spanish and French debt auctions, which actually passed by better than many expected. Spain managed to sell Euro 2.5BN of 10 year paper at 5.74% versus the 5.4% cost required in January, whereas France had to pay 1.83% pa on 5 year debt against the 1.78% in March.

Staying with France, Presidential incumbent, Nicholas Sarkozy, faces off against the socialist rival, Francois Hollande, this weekend, in the first round of the Presidential elections. The opinion polls are suggesting a close run outcome, whist a socionomist would predict that the negative social mood amongst the French, as evidenced by the CAC stock index shown above, will see Sarkozy depart, unless there is a major rally between now and the May 6th second round.

UK CPI in March was in line with expectations, at 0.3% and 3.5% annualised, and no doubt assisted by average weekly earnings, which showed a fall to 1.1% in February versus the 1.3% witnessed in January. There was good news on the jobs front, as 3 month unemployment to February eased to 8.3% from the prior 8.4% reading. The FTSE 100 rose by 2.1%, whilst the French CAC was unchanged and the German DAX gained 2.5%.

Out East, Japan’s consumer confidence in March ticked higher than February’s reading, whilst the Reserve Bank of India surprised with a 0.5% cut in interest rates, to 7%, whilst signalling an increase in inflation. Meanwhile, confusion still reigns in respect of China’s slowdown and in particular, will it be temporary or of the hard-landing variety? A peek at China Cosco Holdings Co Ltd, which operates container ships and the Baltic Dry Index, a gauge of international freight costs, tells us much. The Nikkei fell by 0.8% whilst the Hang Seng ended higher by 1.5%

The $US index fell by 0.9% this week, at 79.2, with other losers including the $Kiwi and the Yen, off by 0.5% and 0.7%. Gainers included the British pound and the Swiss franc, higher by 1.7% and 1.2% respectively. Sovereign debt yields were volatile once more, with the UK gilt yield gaining 14bps to 2.17% , Japan’s JGB yield lower by 1bps to 0.93% whilst the German 10 year was down by 3bps at 1.71%. Meanwhile, Portugal’s 10 year yield fell by 82bps to 11.42%, whilst Irish yields rose by 3bps at 6.73%. Spanish yields dipped by 2bps at 5.94%, whilst Italian yields ended  higher by 14bps at 5.65%.The New Greek 10 year yield note jumped by 27bps to 20.9%. US Treasury 5 and 10 year yields fell, with the 5 year lower by 1% at 0.85% and the 10 year  by 1.4%, ending the week at 1.97%.

Within the commodities complex, the $crude oil price gained 1%, ending the week at $104 a barrel. The precious metals saw a divergence once more, with $Gold lower by 1%, at $1643oz, and $Silver higher by 0.5% to $31.7oz.

Next week sees the latest on home prices and advance Q112 GDP readings for the US and for the UK, with consumer confidence data due for the US, the UK and for the euro-zone. Advance PMI numbers for April will be released for the E-Z, with March durable goods orders announced for the US and March retail sales for Japan. Several countries out East report on inflation, including Singapore, Hong Kong, Australia and Japan.

Returning to the subject of credit, a euphemism for debt, the IMF and the World Bank meet up in Washington this weekend for their spring meeting. Attended by the Finance Minister’s and central bankers of the G20, the IMF head, ex French Finance Minister Christine Lagarde, will have her begging bowl at the ready, trying to drum up a further $400BN to bolster IMF resources, warning that “the euro-zone’s debt crisis presents the gravest risk to the global economic expansion.”

The solution, of course, is to ask for loans from the equally indebted other G7 members and, if at all possible without giving any increased IMF voting rights, cadge some more from the “nouveau riche emerging economies, in particular the BRICS.”

“You can’t have five wolves and one sheep voting on what to have for supper”

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