| Weekly Market Overview | ||
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Week ending 29th June 2007 Before Bear Stearns attempted bail out of one of its two troubled CDO Hedge Funds (mentioned here last week),Merrill Lynch endeavoured to auction off $800m of the fund’s underlying paper, which consists of both sub-prime and grade” A” quality. When “bids” for the “A” rated paper fell below 85% of its face value, and rapidly collapsed towards the 30% level, the auction was called off. There is an estimated $US750BN of this CDO “toxic waste” on which “investors’” now realise has been mythically valued. |
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 Indices - Year to Date (29th June 2007) |
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| As expected, the FOMC
left the US federal funds rate on hold at 5.25%, stating that whilst it
sees economic growth “moderating” it remains with slight concerns over
inflation. May US durable goods orders fell by 2.5%, worse than expected
and Q!07 forecast GDP came in slightly higher than consensus
expectations at 0.7%.June consumer confidence fell as did May MBA
mortgage approvals, which is hardly surprising given that home prices
continue to fall and that May new and existing home sales fell. The Dow
rose by 0.4% whilst the S&P 500 remained level over the week. The Nasdaq
managed to gain by 0.6%. . Euro-Zone consumer confidence also dipped in June despite both French and German unemployment falling to there lowest levels in 12 and 25 years respectively. The region’s money supply, as measured by M3, increased to 10.7% annualised in May, whilst June CPI remained the same as April at 1.9%. Really? Turning to the UK, Tony Blair handed over power to the unelected Gordon Brown as UK house prices gained 1.1% in June (according to the Nationwide), supported by May M4 money supply at 13.9% annualised. We are interested to note, however, that as net lending on dwellings contracted in May by £0.5BN, consumer credit rose by £0.8BN, suggesting a tightening in mortgage lending standards forcing the use of higher cost credit card usage. The UK FTSE 100 gained 0.6%, whilst the French CAC 40 and the German Dax were higher by 0.5% and 0.7% respectively. Out East, Japan’s Industrial Production fell by 0.4% in May versus -0.2% in April whilst June CPI for the greater Tokyo area was at -0.2% in April and at 0% Nationwide suggesting that the country’s long fight with deflation is still yet to end. Meanwhile May industrial production for Singapore exceeded expectations, as output from pharmaceuticals and transport engineering companies jumped. As the 10th anniversary of Hong Kong’s change of Sovereignty approaches, the Hang Seng market capitalisation has almost trebled to $US2 Trillion. Although full democracy and cheap real estate remain as elusive as ever, the make up of the stock market has changed dramatically, with mainland companies now representing 50% of the index versus just 13% ten years ago. The Nikkei eased by 0.3%, whilst the Hang Seng lost 1%. On the currency front, the $US index fell by 0.5% over the week, ending it at 81.9. Government Bond yields eased after the recent spikes, with the German and Japanese 10 year falling to 4.57% and 1.87%.US Treasury Bond 5 & 10 year yields fell by 1.7% and 2% respectively, ending the week at 4.94% and 5.03%. Within the commodities complex, the $crude oil price topped the $70 a barrel level rising by 2.2% over the week to $70.7, whilst the $Gold price eased by 0.9% to $651oz Next week sees interest rate decisions by the ECB and the Bank of England MPC, both of who should be concerned about the growth in money supply. Euro-Zone May PPI and retail sales data is also due, whilst in Japan the Q207 Tankan survey is released. May pending home sales are due out in the US, as are the latest unemployment and earnings data. Returning to the “CDO problem,” Bear Stearns’s internally funded bail out allegedly cost 25% of its capital, a massive risk. It gets worse, however, as the $750BN of “dubious paper” is held by banks’ that have a total capitalisation of only $850BN.
“It is hard to make anything foolproof, because fools are so ingenious”
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