It was all quiet on the financial
front, even allowing for further interest rate hikes from the likes of
the ECB and New Zealand (NZ now at 8%), until Thursday that is, when all
hell broke loose in the form of soaring Bond Yields and plummeting
stocks.
There was good news for the US economy, in the form of an improving
trade deficit in April, which narrowed by 6%, and the May ISM service
index, which expanded by more than forecast. Against this were lower
consumer credit demand for April and higher unit labour costs in Q107.
Investor sentiment was further diminished as Goldman Sachs became the
latest Wall St Investment Bank to reverse its call for a rate cut by the
Fed in 2007. Despite a move higher by leading bell weathers such as
Apple, Amazon and Google, interest rate sensitive sectors such as
financials, real estate and utilities suffered, leading to the worst
weekly performance for stocks since March. The Dow fell by 1.8% and the
S&P 500 by 1.9%. The Nasdaq was lower by 1.5%.
.
Turning to Europe, as expected the ECB increased interest rates by ¼% to
4%, the highest level in 6 years whilst the Bank of England’s MPC left
rates on hold at 5.5%. Euro-Zone PPI for April came in at a higher than
expected 2.4% annualised, whilst retail sales for the same month fell.
For the UK May industrial production fell whilst a 1 bedroom apartment
in London’s fashionable Belgravia district has gone on sale at £3m. The
region’s major bourses performed worse than their Wall St counterpart as
the FTSE 100 gave up 2.6%, the French CAC 40 was lower by 4.6%. and the
German Dax, fell by a heavy 5%.
Out East, Chinese inflation, as measured by May CPI, accelerated to 3.5%
whilst home sales in Hong Kong jumped by 63% in May versus a year ago,
according to the city’s land registry. Capital spending by Japan’s
largest companies grew by 13.6% during Q107 from the same period in
2006. The Shanghai index fell by 8% on Monday and suffered a further 7%
loss on Tuesday before rallying over the rest of the week. The Nikkei
fell by 1%, whilst the Hang Seng eased by 0.5%.
Despite the recent announcements of a removal of the Dollar peg by the
like of the UAE and Hong Kong’s de-facto Central Bank, the $US index
added 0.4% over the week, ending it at 82.66. Sovereign debt yields
continued their march higher of late, with German 10 years higher by 11
basis points (bps) to 4.57% and Japanese 10 year JGB yields up by 13 bps
to 1.89% there highest since 2002 and 2000 respectively. Yields on the 5
and 10 year US Treasury Bond market soared by 2.7% and 3.3%, ending the
week at 5.05% and 5.1% and both over the psychologically important 5%
barrier.
Within the commodities complex, the $crude oil price eased by 0.4% to
$64.8 a barrel, whilst the $Gold price ended the week at $649oz, down by
3.9%.
Next week sees the important May CPI data for the US, the Euro-Zone and
the UK, with the latest trade data also due out for the EU and the UK.
US retail sales for May are also due, as are Q107 mortgage
delinquencies.Q107 GDP figures are due out from Japan, together with May
consumer confidence numbers and April industrial production.
.
Returning to those bond yields, recent reports show that foreign Central
Banks are reducing their holdings of US debt paper, albeit from
historically high levels. Whilst one would presume that any sales will
be completed in an ordinary manner, so as not to unsettle the market to
much, the problem is that private individuals and corporates alike own
far more of the debts then do their CB masters, so the danger becomes
one of panic to get out first.
“Your worse day of golf is still better than a
day at work”
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