Week ending 9th February 2007      

Sub prime mortgage problems weighed on financial stocks this week as HSBC, the 3rd largest bank in the World, and New Century both announced that bad debt provisions would be far higher than predicted. It was a light week for economic data, which included the January ISM service sector rising to 59% after the prior month’s 56.7% and that consumer credit had increased by $6bn during December, after November’s $13.7bn surge. Over the week, the Dow reached a record 12700 level before ending the week lower by 0.6%%. The S&P 500 was lower by 0.7%, as was the Nasdaq Composite index.

Within Euro-land, the ECB and the Bank of England’s MPC left interest rates on hold at their respective policy meetings. Euro-Zone retail sales in December rose by 0.3% versus the expected 1.1%, whereas UK January retail sales jumped by 5%. The UK’s trade deficit rose in December, as did French industrial production whilst German CPI eased in January. For the week the UK’s FTSE 100 gained 1.1% the French CAC 40 0.3% with the German Dax higher by 0.4%.

Out East, Japanese bank lending failed to accelerate in January despite higher money supply and broad liquidity during the month, prompting further indecision for the Bank of Japan’s announcement on interest rates later this month,. In the land of OZ mortgage arrears are at a 10 year high and an easing of private borrowing in December, albeit from a sky high 14.7% annualised rate, is slowing down retail sales. The Nikkei eased by 0.2% on the week, whilst the Hang Seng gained 0.6%,

The $US index was little changed over the week, but the Yen declined by 1.1%..US Treasury 5 and 10 year Bond yields eased over the week to 4.78% and 4.79% respectively, whilst the risk premium on emerging market bonds closed at a record low, as evidenced by the JP Morgan EMBI+ index, now at 1.65% above US Treasuries.

Within the commodities complex, the $ crude oil price added a further 1.5% to $59.9 a barrel, whilst the $gold price jumped by 3.2% ending the week at $668oz.

Next week sees the latest trade data out of the US, Japan and the Euro-Zone, with inflation numbers announced for the US and the UK. Q406 GDP is announced for Japan and the EU with the main event being US retail sales for January and Benanke’s report on the US economy and Fed policy being closely scrutinised

Returning to the “Sub prime mortgage problems” mentioned above, many of the smaller sub-prime lending institutions in the US have filed for bankruptcy protection whilst many others have either tightened their lending criteria substantially or decided to get out of the business. This year there is $US 800 BN of adjustable rate mortgages (ARMs) which will have their interest rate reset, with most at a far higher level. 1 in 4 US mortgage borrowers have ARMs and 1 in 10 of these are classified as sub-prime. The problems are set to become far worse.

“The biggest problem is what to do about matters you can do nothing about”

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