Week ending 12th May 2006      

Turning to finance, it was, on balance, a good week for economic news for the US, as the trade deficit narrowed by 5.6% to $62bn for March and April retail sales showed a rise to 6.6% year on year. Against this, consumer sentiment plunged in May to a 7 month low as the Fed raised interest rates by a 16th consecutive ¼% to 5%; and the discount rate to 6%. General Motors Corp received an unlikely buy recommendation which boosted its stock price, whilst online travel specialist, Expedia saw its stock price fall by 17% on an earnings collapse. Perhaps it was the latest interest hike that became the ‘tipping point’, but either way, two days of fairly dramatic falls for the major equity indices has broken the uptrend of late. Over the week the Dow fell by 1.7%, the S&P 500 was lower by 2.6% and the tech heavy Nasdaq composite declined by 4.2%.

The UK’s Prime Minister and W’s greatest collaborator, Tony Blair, now has just 26% of the British vote, according to recent polls, a feature that makes him the most unpopular Labour Prime Minister in modern times. Staying with the UK, the number of companies facing winding up petitions in England and Wales rose by a near 9% during Q12006. Elsewhere there was a negative turn for German economic data, as industrial production in March was lower by 2.4%, the largest decline since February 1999 and the countries exports fell in March by 3.2%. European telecoms were under pressure after disappointing results from Deutsche Telekom, whilst the mining, banking and oil sectors, all strong during the early part of the week, fell the hardest towards the week end. For the week, the FTSE 100 was lower by 3%, whilst the French CAC 40 and the German Dax indices fell by 2.6% and 3.2% respectively.

Out East, Japanese bank lending has seen its largest increase in over 9 years during April, as companies borrowed before the expected interest rate hike and land prices rose by 1.4% in 2005, the first increase in 15 years. The latest leading economic index for Japan came in at 60% for March, far lower than February’s 90.9%. Elsewhere, China’s retail sales are at 16% year on year, whilst Taiwan’s exports rose at their fastest pace in 4 months, according to data for April. Japan’s Nikkei Dow 225 fell by 3.2% over the week, with the Hang Seng easing by just 0.7%.

On the currency front, the $US index fell by a further 1.4% to 83.9, now lower by 4.6% year to date, despite the improved trade deficit number and higher interest rates. Gainers for the week included the £Sterling once more and the Swissie. Government bond yields marched higher once more, with the US treasury 5 and 10 year yields higher this week by 1.7% and 1.5% respectively at 5.07% and 5.19%.

Within the commodities complex, the copper price rose to a new record high of $8000 per metric tonne, aided by the 7 week old strike at the Grupo Mexico mine and by China’s pledge to build up a strategic reserve of critical minerals. $Oil gained 3% to $72 a barrel, despite the IEA’s cut in Global demand expectations for 2006 by 15%. After touching a 26 year high of $720oz, the $ Gold price ended the week at $711oz, or 4% higher.

Next week brings the latest inflation data for the US, Euro zone and the UK and more data for housing in the US and UK. Japan announces its latest trade balance.

So, it was a decidedly bearish week for financial assets, whilst gold, the metals, energy and commodities generally rose. Interestingly, the $US was not helped by higher interest rates and bonds were not helped by sinking stock prices. This could be an interesting week indeed.

“You can observe a lot of just watching”

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