Overview

Another fraught week as many sovereign bonds are sold or relentlessly marked down. All ten-year Eurozone Treasury bond yields, excepting Denmark, Finland, Ireland and the Netherlands, hit new record spreads over German Bunds (itself a record low 1.677%): Austria 155 over, Belgium 275, France 167 so exactly double the yield of its big neighbour, and Italy 563 to yield 7.45%, also ‘managing’ to issue a one-year TBill at 6.087% Thursday. Five- year Hungarian benchmark sovereign debt over 8.00% its highest in two years and the forint at 315.35 its weakest ever; five-year India also well over 8.00%, almost the highest in a decade. Conversely ten-year Treasury yields in Australia, Britain, Canada, Germany, and New Zealand are close to record lows, in turn taking their spreads over Japanese Government Bonds to some of their narrowest ever, another area where Japan plc has lost its competitive edge as the dollar/yen exchange rate at 77.16 is at its lowest since the latest bout of intervention. Ten-year Swiss Conf at 0.816% a new record and well under the JGB’s 1.00%. The dollar gained against all currencies though not by much, the Czech koruna the biggest loser –3.75% to 18.980, almost this year’s highest. Equity indices down a little this week, roughly in the middle of the range of the last three or four weeks, Austria’s ATX –4.0% on worries about its Eastern Europe exposure and the Nikkei almost at this year’s low, dragged down by its banks and brokers.

Political and Economic Developments

Armistice Day today and much of the Eurozone in chaos, sovereign debt and banking woes claiming the scalps of Greek and Italian Prime Ministers. A-political ‘technocrats’ have been shoehorned in, ex-ECB vice-president Papademos for Greece until February’s possible elections, and former EU Commissioner Mario Monti in Italy, yet to be ratified by the vote on budget reforms (and assuming Mr. Berlusconi really will stand down). So much for democracy. With record EZ17 Unemployment (10.2%) the temptation to object and demonstrate is tempered only by the begging bowl. Note also that the ECB’s Italian board member Bini Smaghi has resigned early paving the way for a Frenchman, something President Sarkozy had insisted on when backing Mario Draghi to succeed Mr. Trichet. Merkozy rules!

Bank Indonesia cut its benchmark rate by 50 basis points to 6.00% after trimming another 25 mid-October as inflation eases to 4.42% and because of a deteriorating global economic outlook. Anecdotal evidence from Chinese cities sees slowing house price inflation and factory orders, so some are beginning to question Asia as ‘engine for growth’.

Underlying Themes

Protests in London Wednesday over this year’s big increases in university fees were contained and peaceful thanks to a formidable police presence fearful of a repeat of previous foul-ups. Student loans are a relatively new feature of the British educational system, unlike in the US where they have been the norm for much longer. In fact total educational debt at about $1 trillion is second only to that owed on mortgages and higher than all credit card balances. Spring 2010 graduates had on average $25,250 to repay some time over the next 20 years, but with poor job prospects President Obama is looking for ways to lighten the load. Even sadder are the number of college dropouts who are saddled with this type of debt.

What to watch for next week

This weekend Germany’s co-ruling Free Democrats hold an extraordinary congress to debate, among other things, Eurozone debt ahead of the Christian Democrats’ one the following two days in Leipzig. Monday just Japan fiscal Q2 GDP and Eurozone September Industrial Production. Tuesday Tokyo October Condominium Sales, UK CPI, US PPI and Retail Sales, German and EZ17 Q3 GDP and November ZEW Surveys, Eurozone September Trade Balance, US Business Inventories and November Empire State Survey. Wednesday UK September Average Earnings, October Unemployed, Bank of England Quarterly Inflation Report, EZ17 and US CPI, Industrial Production and Capacity Utilisation, September Long Term TIC Flows, November NAHB Housing Index and the Bank of Japan concludes a two-day rate-setting meeting. Thursday EZ17 September Construction Output, UK October Retail Sales, US Housing Starts and Building Permits plus November’s Philadelphia Fed Survey. Friday only German October PPI and US Leading Indicators. Sunday the 20th a Spanish general election.

Positioning and Technical Analysis

On and on the relentless grind as finances are forced to ‘shrink to fit’, otherwise known as de-leverage, and still so many haven’t understood that there will be massive and many casualties. Access to credit restricted, terms and conditions ramped up, ‘investments’ will disappoint or sour, and most will have to tighten their belts. Not necessarily a bad thing after living high on the hog for the best part of a decade. Mistrust of traditional deposit-taking institutions will mean hoarding by some and diversification into more unusual vehicles. The longer this continues, the bigger the problem. Think, think, think!

Have a nice weekend!

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