Week ending 24th February 2006      

It was a holiday shortened trading week for Wall St, but with plenty of data to absorb. The leading economic indicators index rose by 1.1% in January, up for a forth strait month but US inflation continued to run higher, as evidenced by the January CPI increase of 0.75 (4% year on year). Investor sentiment was further dampened by the latest durable goods orders, which fell by 10.2% in January, the biggest drop in 51/2 years, not to mention the minutes of last month’s FOMC meeting, which expressed concerns over the pace of economic growth and the likelihood of further interest rate hikes, due to inflation concerns. The share price of retailers’ were marked lower, despite generally better earnings results for Q405, whilst the share price of H&R Block, the largest US tax advisory service, fell by 10%, as the company confirmed that it had under estimated its own income tax rate, leaving it owing a further $32m and forcing it to restate its accounts for the second time in 6 months. No creative accounting there!
Of the main indices, the Dow lost 0.5% as the S&P 500 and the Nasdaq composite, both rose by 0.2%.

Turning to Europe, business confidence in the regions largest economy, Germany, rose to its highest level since 1991. Not so for the country’s economic growth, which ground to a halt during the final quarter of 2005, a bad combination when joined by an uptick in producer price inflation, which came in at its highest in 24 years. Elsewhere, UK banks’ announced higher profits, but the trend in higher bad debts continued. In Lloyds TSB case, it’s increased by 34%, or a near £1bn as consumers’ struggle to repay their debts. M&A activity buoyed the main markets however, with the UK FTSE 100 index just ahead by 0.2%, whilst the French CAC 40 gained 1.5% and the German Dax rose by 1.3%.

Out East, it appears that “Day Trading” has mushroomed in Japan, judged by the number of electronic brokerage accounts opened. It has soared from 297,000 in 1999 to 7.9m as at September 2005. Staying with Japan, its Central Bank inferred that it may start raising interest rates as soon as next month, which caused a sell off in Japanese bonds’. Higher rates should also be expected in Hong Kong, where inflation increased in January by the fastest pace in 7 years. There was little concern shown within the equity markets’, however, as both the Nikkei and the Hang Seng jumped by 2.5% over the week.

On the foreign exchange markets’, the $US was little changed, whilst the Japanese Yen rose by 1%, boosted by those interest rate comments. There was increased volatility however, within the emerging currency economies, as the 9%+ slide seen in the Icelandic Krona versus the Dollar, spilled over to places afar as South Africa to Brazil. Their respective currencies fell by 2% and 3% respectively. US Treasuries fell on the higher CPI data, with the 5 and 10 year yields ending the week at 4.63% and 4.57% respectively.

Within the commodities complex, the very recent easing of the $Oil and $Gold price was reversed as Saudi forces foiled a suicide attack on oil installations. Over the week the $Oil price gained 2.5% to $63 a barrel, whilst the $Gold price added 1.25% to $559oz.


Next week should see an interest hike at the ECB meeting and the latest housing data from the US. Likewise for the UK, where the latest Nationwide house price index is released.

Finally, at the “super return conference” in Frankfurt last week, Stephen Schwarzman, head of Blackstone, told a packed audience of buy-out executives that the “seeds of excess” were being sown, with such periods always ending badly. After years of low interest rates and with tons of money being thrown at both the private equity and debt markets, the warning signs are there when any dummy can get money.

“Our envy of others devours us most of all”

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