Overview

As expected most markets kept within small ranges with a subdued tone. The US dollar held at last week??™s levels, despite the Australian and New Zealand dollars pushing higher early on, and Canada gaining later. The biggest winner was the Brazilian real at 2.025 to the greenback, its strongest since March 2001. Most interest rates traded up from key support levels, German benchmark two-year Schatz to 4.01%, highest since July 2002 and taking three-month Libor up to 3.99%. Emerging market debt remains bid with Brazil seven-year yielding 5.62%, Russian five-year 5.59%, and Thai five-year just 4.00% (despite political problems). Tension between Britain and Iran pushed NYMEX Crude Oil to $68.00 per barrel, Gasoline leading the way at $2.14 per gallon. Grains remain well bid, partly as a function of US ethanol policy, which prompted Cuba??™s president Castro to claim 3 billion will die from hunger because of it (his conservative estimate). Equity indices were trapped within last week??™s range and below this year??™s highs, mostly in the middle of this quarter??™s range. Indonesia, Korea, Mexico and Poland are the ones that are currently closest to their all-time highs. The Dow Utilities Index scraped a new all-time high at 505.

Political and Economic Developments

Fed chairman Bernanke acknowledged ???the near term prospects for the housing market remain uncertain??™ while trying to pour oil troubled waters. US February New Home Sales at 848K were the lowest since June 2000 and more worryingly the stock of homes for sale is equivalent to 8.1 months, the highest rate since 1991. Taking into consideration that 40% of homes bought last year were second homes or investment properties, the risk of default and/or price cutting is high. Yet 55% of owners expect no change in prices, 7% a decline and the rest assume they will be higher over the coming year.
Final Q4 UK GDP came in at 0.7% Q/Q and +3.0% Y/Y. Very close to original estimates but the devil is in the detail. Real household disposable income dropped 0.7% in those three months and grew at a mere 1.3% for the whole of 2006. No wonder Britons ignore the Chancellor??™s back-slapping Budget performance and instead feel poorer. Higher taxes and higher inflation, unable to negotiate decent pay rises, mean families are saving less to spend the same. Tokyo March CPI, excluding food and energy, has dropped back into deflation at ??“0.3% Y/Y after +0.1% in January. In fact this figure has been negative each and every single month since 1999 bar one; and this is what the Bank of Japan calls the ???normalization process??™.

Underlying Themes

With the outlook for interest rates unclear, most would agree that central bankers??™ decisions are ???data dependant??™. How worrying then than the UK??™s Office for National Statistics, relocating from London to South Wales, has managed to lose one third of its staff. Nor does it say much for Wales for that matter, that so many skilled workers would rather retire early, resign or accept redundancy than move to Newport. National statistician Karen Dunnell said GDP growth might be ???significantly revised??™ when full analysis resumes.

What to watch for next week

Saturday March 31st is prophet Muhammad??™s birthday so holidays in many countries this weekend. The whole of next week is littered with holidays, Passover in Israel Monday and Tuesday, Maundy Thursday in Scandinavia and South America, plus Good Friday in a great many others. Also Easter Monday on the 9th April. Japan??™s Q1 Tankan kicks off the week numbers wise, then Manufacturing PMI??™s for the different EU countries, and US March Manufacturing ISM. Tuesday UK March Construction PMI, EZ13 February PPI, US February Pending Home Sales and March Vehicle Sales. Wednesday the Bank of England starts a two-day rate-setting meeting (mostly expected unchanged at 5.25%), European Services PMI??™s, Eurozone February Retail Sales and German Factory Orders. Then US February Factory Orders, March Challenger Job Cuts, ADP Employment Change and Non-Manufacturing ISM. Thursday just UK and German February Industrial Production. Friday Japan??™s February Leading and Coincident Indices, EZ13 February OECD Leading Indicators, US March Non-Farm Payrolls, Unemployment, Average Earnings plus February Wholesale Inventories and Consumer Credit.

Positioning and Technical Analysis

Being a Friday and the end of the month, end of Q1 and end of the Japanese financial year, we shall be scrutinising the charts on Monday to see which if any instruments have managed important closes though key chart levels. We expect activity to pick up, and for markets to become more volatile, from mid-April. We still feel that generalised US dollar weakness will be the key element, with other currencies moving one at a time to new highs and to historically very extreme points. In turn all assets priced in US dollars will have an underlying if only gentle bid tone. Interest rates are expected to hold at current levels for another week or two but again mid-month should break below pivotal levels frightening the unwary. If not next week some time next month stock markets and Yen crosses are expected to see another clearout, dropping sharply once again as they did in late February/early March. Then they should stabilise and trade broadly sideways for a month or two.