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It was a sea of red again last week as stock markets across the world finished down heavily on the week. The FTSE 100 finished down 3.26%, the CAC down 4.80% and the DAX down 2.35% on the week. US markets faired slightly better thanks to an attempted rally towards the close on Friday. The S&P 500 closed down 2.14%, the Dow down 1.67% and the Nasdaq 100 down just 1.28% on the week.
Irans testing of missiles caused a spike in crude oil prices, to make yet another record high above $147. Although the US and Israeli government have spoken about a diplomatic solution, speculators obviously are not convinced. Investors flocked to traditional safe havens such as Gold which closed near $960.
The catalyst for much of the selling last week is the unraveling doomsday scenario of a US Government bail out, of Fannie Mae and Freddie Mac. These government sponsored enterprises (GSEs) together own, or guarantee half the $12 Trillion of outstanding US home loans. Fed member, William Poole spooked markets by stating that the two firms are now technically insolvent. The ratings agencies are maintaining the AAA ratings on the stocks, but derivatives traders are scoffing at this; valuing their debt 5 points lower. Western banks also have a stake in this because they own some of the debt associated with the two companies. Whatever form the eventual bail out takes, it has the potential to make the UK Governments handling of Northern Rock, look a trifling affair in comparison.
The focus at the start of this bear market, was around the ability (or inability) of banks to raise capital, and maintain their capital adequacies. Unfortunately as the crisis has continued, the situation has only worsened. With large chunks of financial firms assets still tied to the housing market, we appear to have a self perpetuating negative cycle. As house prices collapse, banks such as Bradford and Bingley struggle to raise capital; as a consequence, they tighten their lending practices, which in turn puts further pressure on an already fragile housing market. This was evidenced by the collapse of US mortgage lender IndyMac Bancorp on Friday. Similar to Bradford and Bingley, IndyMac specialised in self cert type mortgages, which have a higher risk of default than traditional loans.
US pending home sales dropped 4.75% against the expected -2.8%. Year on year, US foreclosure activity is up 53 percent from June 2007. One in every 501 U.S. households lost their home to foreclosure, received a default notice, or was warned of a pending auction. California, the home of IndyMac has been one of the hardest hit US states with one foreclosure filing for every 192 households in June. The UK market is fairing little better. Last week, the latest Halifax house price index showed than houses were on average 8.6% down on last years levels. The acceleration of this decline is already well ahead of recent housing recessions.
The week ahead is full of top tier economic announcements. We start with UK PPI figures on Monday and CPI figures on Tuesday. Both these data sets will add fresh colour to the BOE inflation letter tentatively planned for the Tuesday. Tuesday also brings the UK RICS house price balance, and sees the start of a two day Bernanke testimony before congress. Thursdays US housing data will round off what is a very busy week on the economic news front.
Central bankers are currently stuck between a rock and hard place with regards to interest rates. The decline in the housing market and general economy might normally lead to rate cuts, but this is currently being resisted due to soaring inflation. Movements on the currency markets usually track interest rate decisions or expectations. The GBP/ USD exchange rate has been trading in a range between $2 and $1.94 over the last quarter (April to June), perhaps as a function of the gridlock in rates policy for the Fed and MPC. However, the potential for massive liabilities for the US government with potential bank bail outs could push the GBP/ USD outside of this range in the near future. A One Touch trade predicting that the GBP/ USD will touch $2.00 at least once during the next 16 days could return 28%.
The FTSE is currently indicating a flat opening, with traders are weighing in cheaper oil versus another round of the credit crisis. Some investors are awaiting the release of the UK Public borrowing numbers. Traders will be able to see if the government is trying to improve the economy by increasing spending.
Oil is trading below 132 dollars per barrel, however the cheap oil seems to be short lived. Crude oil got a push higher when Nigeria had its oil production disrupted due to pressure failure. We think that oil will finish the week on a high note, probably just north of the 135 dollar level. Gold went through another beating yesterday, after a combination of the strong dollar and a rally in the US equities. We believe this is just a correction, and gold will rebound as US strength will wane in the coming days.
Thanks primarily to the financial sector, stock markets around the world are building on the rally from the second half of last week. It is interesting to note that the stocks leading the rally are those that were beaten up the most as market’s plunged to their recent lows. In the UK, Barclays and RBS in particular are performing well today as sentiment reverses on the battered banking sector. After Bank of America’s earning’s came in better than expected, other US financials are pushing higher. Freddie Mac, Fannie Mae and Lehman Bothers have risen 74%, 89% and 46% respectively since the lows on the 15th of this month.
While this rebound was perhaps overdue, the case for further rallies of this magnitude is a little weaker. We will have more of a clue this evening with earnings announcements from American Express, Apple and Texas Instruments after the US closing bell.
The FTSE is currently indicating a sharply higher opening as traders are hoping that the minutes from the last BOE meeting will show that there will not be a rate hike in the near future. Interest rate hikes hurt equities, and if the minutes come out dovish we see the FTSE possibly adding more then 100 points today.
Commodities were again on the losing side of things, mainly due to the strength of the US dollar. All the attention will be focused on oil, especially towards the end of the day, when the US Department of Energy will be releasing its inventory numbers. There is a risk that US consumers have been really cutting back on oil purchases, and if the inventory number is higher then expected, a selloff in the price of oil will follow.
The FTSE stumbled out of the gate this morning and has been unable to recover throughout the day. The main catalyst in the UK market was UK retail sales coming in at below estimates. This is a further blow to the UK economy which is still reeling from implications of the shocking Vodafone numbers on Tuesday. At the centre of the storm, the US economy is also showing sides of further weakness, not recovery as many hoped at the beginning of this week. US initial jobless claims came in worse than expected and home sales were worse even than the dire projections from most economists. It is little wonder they are so bad with the average 30 year fixed mortgage in the US now at its highest level since 2002 despite the dramatic rate cuts from the fed earlier this year.
Oil is hovering around the $125 mark, but that will be little comfort to Ford who registered a $8.7bn loss as consumers shun their gas guzzling, SUV heavy catalogue of vehicles. The buying from last week is looking increasingly like a suckers rally as traders realise that the worst may not be behind us and may in fact may appear very soon in the future.
The FTSE is currently indicating a sharply lower opening, as traders are worried that the GDP numbers which are released this morning will come out on the weaker end. A weak number would deal another blow to the BOE which has been fighting a war on two fronts, Inflation and a sluggish economy. The good news is that a weaker GDP might force the hand of the BOE to cut interest rates at the next meeting, which would be a positive move for the FTSE.
Commodities managed to regain some ground after negative news regarding the US new claims data, which showed more then 400,000 new layoffs last week, putting the breaks to the recent strength of the US dollar. Gold which printed a low of under 920 dollars per ounce, is now trading north of the 925 dollar mark. We anticipate that the precious metal will regain more ground today, possibly finishing the day above 935 dollars. Oil which has been the biggest loser this week, managed to stabilize near the 125 dollar per barrel mark, and is currently trading north of 126 dollars. The economic data out of the US should dictate whether the price of oil is going to attempt another shot at 150, or try and break below 120.
BetOnMarkets
Economic calendar for week July 28th - August 1st 2008.
BetOnMarkets Weekly Briefing
Contents This Week:
Economic calendar for week July 28th - August 1st 2008.
Commentary: The week ahead.
Economic Calendar for week July 28th - August 1st 2008
PLEASE NOTE - All times GMT not BST. BST is +1 Hr.
Monday July 28th:
UK - Tentaive - Nationwide House Prices M/M.
GE - 06:00 - Consumer Confidence.
US - 16.00 - FOMC Member Mishkin Speaks.
Tuesday July 29th:
GE - Tentative - Prelim CPI M/M.
UK - 08:30 - Mortgage Approvals.
UK - 08:30 - Net Lending to Individuals M/M.
UK - 10:00 - CBI Distributive Trades Realised.
US - 13:00 - S&P/CaseSchiller HPI Composite-20.
US - 14:00 - Consumer Confidence Index.
Wednesday July 30th:
GE - 06:00 - German Retail Sales M/M.
EU - 09:00 - Consumer Confidence.
US - 12:15 - ADP Nonfarm Employment Change.
US - 14:35 - Crude Oil Inventories.
UK - 23:01 - GfK Consumer Confidence.
Thursday July 31st:
GE - 07:55 - Unemployment Change.
EU - 09:00 - CPI Flash Estimate Y/Y.
US - 12:30 - Advance GDP Q/Q.
US - 12:30 - Advance GDP Price Index Q/Q.
US - 12:30 - Employment Cost Index.
US - 13:45 - Unemployment Claims.
US - 13:45 - Chicago Business Barometer.
Friday August 1st:
EU - 08:00 - Manufacturing PMI.
UK - 08:30 - Manufacturing PMI.
US - 12:30 - Nonfarm Employment Change.
US - 12:30 - Unemployment Rate.
US - 12:30 - Average Hourly Earnings M/M.
US - 14:00 - ISM Manufacturing Index.
US - 14:00 - ISM Manufacturing Prices.
US - 14:00 - Construction Spending M/M.
EU - Europe wide
FR - France
UK - United Kingdom
US - United States
GE - Germany
The week ahead.
Markets endured a volatile week, finishing largely flat despite dramatic 2.5%+ falls on Thursday. In the UK, banking stocks managed to build on the shift in sentiment from last week, but US financials endured further bad news, with Wachovia bank posting a record loss. The beleaguered bank produced an eye watering loss of $8.9 billion for the quarter, slashed its dividend and announced thousands of job cuts. Fannie Mae and Freddie Mac reversed the gains from last week on fears of complications in the proposed bail out. There were mixed results from major US companies, with tech firms such as Amazon impressing and online DVD retailer Netflix continuing its good run of earnings reports. Apples disappointing figures caused some consternation early in the week, but the Ipod manufacturer wasnt beaten down for long. After opening the day down over $10, Apple recovered the opening losses and more, as sales of the new iphone look to be taking off.
Lower energy prices certainly helped ease the pressure on global markets last week. However, this easing has to be taken in the context of slowing demand from the US and China. Oil closed the week around $125, some $20 below its peak just few weeks ago. Natural gas has fallen even further than oil. Gas has dropped from above 13.50 to 9.737 in July alone, representing a huge 28% collapse. Other commodities have also fallen back in dramatic fashion with Corn and Wheat down at least 40% from their peak prices. Gold has dropped, but less than other commodities, falling 7% coming with $10 of $1000. These falls will be welcomed by governments and central bankers alike, but the real test for global economies, will be the lagging effect of spiraling wage demands.
At the centre of the storm, the US economy is also showing sides of further weakness, not recovery as many hoped at the beginning of this week. US initial jobless claims came in worse than expected and 95% of US metro areas experienced year on year increases in foreclosure activity. It is little wonder they are so bad with the average 30 year fixed mortgage in the US now at its highest level since 2002, despite the dramatic rate cuts from the fed earlier this year. Oil is hovering around the $125 mark, but that will be little comfort to Ford who registered an $8.7bn loss, as consumers shun their gas guzzling SUV heavy catalogue of vehicles. The buying from last week is looking increasingly like a suckers rally as traders realise that the worst may not be behind us, and may in fact may appear very soon in the future.
Next weeks first economic announcement of note is the US consumer Confidence Index. As has been the case with many announcements recently, it will be a question of how bad the figures are rather than how good. Wednesday brings US ADP Nonfarm Employment Change figures, followed by US GDP numbers on Thursday. The First Friday of the new month is always the heaviest with the arrival of US Non Farm Payroll figures.
With US Mortgage applications dropping 6.2% again recently, and profit warnings from Toyota and Ford, the US economy may not be out of the waters just yet. However, the Non Farm Payroll figure, or at least the reaction to them, has the potential to spring a surprise in either direction in the short term. Therefore a volatility trade may be the better option over the coming days. An Up or Down trade returns a profit if either of two levels are hit during the specified time period. An Up or Down trade on the Dow Jones (Wall Street) with the levels set as 11000 and 12000 could return 32% over the next 11 days.
As London swelters in the summer heat, the FTSE looks to have taken an early holiday this week on a tight ranging, low volume trading day. Most major indices are mixed to negative after a light weekend news flow. In the US two more banks were taken over by the FDIC, First National Bank of Nevada and First Heritage Bank, N.A., but this caused few ripples of excitement across global markets. It is a busy economic calendar this week, but much of the action happens in the latter half of the week with earnings from RBS and Barclays and US payroll figures on Friday. A modest rebound in commodities led by oil has put miners and energy stocks at the forefront, but momentum and volume is relatively weak across the board in either direction.
The FTSE is currently indicating a lower opening, as traders are awaiting the release of the UK lending data which will come out around 8.30am GMT. Analysts are expecting another month of contracting mortgage approvals and loan issues as financial institutions are tightening the lending qualification requirements after being burned by the current credit squeeze. Banks have been announcing write downs for 3 quarters totalling more then 250 billion dollars, and some suggest that this is not over just yet. Look for the FTSE financials to take it on the chin this morning if the lending numbers come out worse then expected.
Oil stood its ground yesterday, as traders are waiting to see if demand has returned with what is now called somewhat cheap oil prices. Crude has given up more then 20 dollars since it hit an all time high earlier this month, however oil prices are up more then 75% from its August 2007 prices. If on Wednesday we do not see the return of consumer demand it is very possible for oil prices to dip below 120 dollars per barrel. Gold which lost more then 50 dollars last week due to the strength of the US dollar, seems to be recovering as some experts are saying that the selloff was overdone. We expect for gold to keep creeping up possibly hitting 940 dollars per barrel before Fridays employment numbers out of the US.
07-11-2008, 04:24 AM
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