NEWS / Foreign Exchange

This week??™s buzzword has been ???sub-prime

Overview

This week??™s buzzword has been ???sub-prime??™: US mortgage lending to those with poor credit ratings. Surprise surprise! Latinos and blacks are three times more likely than whites to have high-cost loans. Professor Jim Campen of the University of Massachusetts says this is especially prevalent in Boston and that, ???this is news (now) because it??™s not just black people losing their homes; it??™s white investors on Wall Street losing their money??™. One way or another stock markets continue very jittery and the CBOE??™s VIX index has doubled from 10% to 20% (but is still way below the 1998 and 2001/2002 peaks at 55%). Nearly all equity indices have managed to cling to last week??™s lows, trading very much in the lower half of the range since February 26th, the start of the sharp sell-off. Since then Thailand has fared best losing just 1.5%, Mumbai worst at 10% down, Europe lost about 6% while in the US Dow Transports are down 8% and Dow Utilities are actually unchanged. The greenback lost ground, especially against the Swiss franc to CHF1.2030, the Euro $1.3340 and the Australian dollar $0.7975. Interestingly the above had little effect on commodity prices which were sidelined, except LME Copper which completed an interim base and rallied to $6577 per tonne, an eleven week high; Nickel set yet another record at $48,500. Yields are fractionally lower but mostly within the range of the last three weeks. Benchmark 10-year JGB??™s are bearing down on key support at 1.60%, Singapore ones at 2.90% are at their lowest since October 2005, likewise Thai five-year at 4.00%.

Political and Economic Developments

The Swiss National Bank and the Norges Bank both raised rates by 25 basis points to 2.25% and 4.00% respectively, as unanimously expected. US economic numbers can probably be best described as slightly worrying, although some may have been affected by unusual weather. February Retail Sales excluding autos dropped 0.1%, Q4??™s Current Account Balance in deficit to the tune of $195.8B, better than Q3??™s record -$229.4B but disappointing as oil prices are lower. February PPI excluding volatile food and energy +1.8% and CPI on this basis +2.7% Y/Y. Sentiment seems to have taken a turn for the worse with the March Empire State Survey at 1.9, well below the 10 plus norm of the last three years. Same for March Philly Fed at 0.2, towards the lowest levels since 2002. Michigan Confidence at 88.8 a mixed bag.

Underlying Themes

US Surgeon-general Lieut Gen Kevin Kiley, the army??™s top medical man, was forced to resign (and would you believe it he gets early retirement) over hospital conditions for wounded soldiers. The third high-level officer to be canned over the Walter Reed facility, exposed as a roach and rat-infested bureaucratic hell-hole which is overwhelmed by casualties from Afghanistan and Iraq. The US Veterans Affairs Department has ordered inspections in all its 1,400 hospitals and clinics which look after 5.8 million veterans. The British government has a similar problem with grubby wards and shoddy care at Selly Oak Hospital, Birmingham so what do they do? Order a formal inquiry that will start within the next two months.

What to watch for next week

Sunday the 18th March Parliamentary elections in Finland. Monday the Bank of Japan starts a two-day meeting where rates are expected to remain on hold at 0.50%, UK March Rightmove and US NAHB Housing Index, plus February Department Store Sales in Japan. Tuesday Japanese February Convenience Store Sales, German PPI, UK CPI, Money Supply and Public Finances, US Housing Starts; also EZ13 January Trade Balance and Construction Output. Wednesday 21st is the Spring Equinox and a Japanese holiday. The ECB??™s Trichet testifies at the EU Parliament in Brussels, Minutes of the Bank of England??™s March 8th meeting, CBI March Industrial Trends, Chancellor Brown??™s Budget Statement and the FOMC decides on rates (unanimously expected unchanged at 5.25%). March CPI for the different German states due from this day. Thursday early Japan??™s February Trade Balance, Supermarket Sales and Land Prices to 31st December. Then UK February Retail Sales, US Leading Indicators and Eurozone January Industrial New Orders. Friday Japan January All Industry Activity Index, ECB Current Account and US February Existing Home Sales. Sunday 25th European clocks go forward one hour to Summer Time.

Positioning and Technical Analysis

Stock markets will take centre stage again as many fret and probably freeze. We favour more work above recent lows but warn that in early/mid-April we are pencilling in another vicious slide. Interest rate markets will take their cue from these so we feel that they will hold above fairly pivotal levels for another week or two. Yen crosses should continue to consolidate below this year??™s highs with plenty of sudden swings along the way. Same idea for $/Yen, with sharp moves either side of 117.50 (probably between 115.50 and 119.50 most but not all of the time). US dollar weakness should spread slowly to other currencies yet commodities are unlikely to benefit from this just yet. The energy group is sidelined but some metals will probably rally a little further. Let??™s see if gold really is the safe-haven it??™s cracked up to be.