Week ending 26th October 2007   

US economic data continued to concern, as September existing home sales fell by 8% month on month and California home foreclosures set a new record high, as the state’s medium home price declined by $50,000 in September. September Durable Goods Orders fell by 1.7% versus the +1.5% expected. Merrill Lynch is the latest Bank to show the effects of the recent “Credit Turmoil” as it announced a $2.3 BN loss for the 3rd Quarter and has written off almost $8BN of sub-prime paper and other forms of debt. Microsoft produced an excellent set of Q3 results and even Countrywide Financial, the Nations largest mortgage lender (stock price lower by 65% over the past 6 months) seemed to please the market as it stated an expectation to return to profit next year, after reputing a $1.2BN Q3 loss. The Dow gained 2.1% whilst the S&P 500 rose by 2.3%, both outdone by the Nasdaq , which jumped by 2.9%.

The Euro-Zone new industrial orders were lower than expected in August and consumer confidence is falling in the region’s largest economy, Germany, according to a research organisation. Despite this European stocks were buoyed by a range of robust earnings reports, particularly from the telecoms sector. UK Q307 GDP advance numbers were announced at 3.3% versus the 3.1% projected. The FTSE 100 index rose by 2%, whilst the French CAC and the German Dax were higher by 1% and 0.8% respectively.

Out East, Japan’s September CPI came in at -0.2% year on year, versus the -0.1% rate expected, but analysts’ expect deflation to end by November (after falling for the past 8 consecutive months). Meanwhile China’s economic growth is on target for an annual rate of 11.5% for this year, the fastest pace since 1993, according to an FT article, whilst according to real estate agency, Midland Holdings Ltd, prices of luxury apartments in Hong Kong have almost doubled in the past 4 years. The Nikkei fell by 1.8% over the week, whilst the Hang Seng gained 3.2%, exceeding the 30,000 level at a new all time high.

It was another volatile week on the currency front, with the $US index falling by 0.5% to 77, an all time low. The high Gold reserve currencies of S.Africa, OZ and Canada jumped by 5.4%, 3.6% and 1.7% respectively. 10 year German Bund yields declined to 4.19%, whilst Japanese 10 year JGB yields rose by 1.5bps to 1.615%. For the US, 5 and 10 Treasury yields fell by 0.2% and 0.3% respectively, ending the week at 4.04% and 4.39%.

The commodities complex was buoyed by increased political tension over Iran and by the Turkish/Kurd skirmish. The $crude oil price jumped by 5.7% to $92 a barrel, whilst the. $Gold price rose by 2.5%, to $785oz and Platinum rose to a record $1454oz.

Next week sees the latest S&P/case Schiller US home price index released, October consumer confidence data and the September US personal income and spending figures. UK September money supply and the latest consumer credit numbers are due out, whilst the Euro-Zone October CPI and consumer confidence data is announced. The Bank of Japan decide on any change to their target interest rate, as do the US FOMC.

The $US index has now been below the 80 level since September 9th, a level that it has never been below in its post 1973 history. “Coincidentally” a reverse in “policy thinking” has emerged within the US economic community and even at the IMF in that a Dollar fall should be welcomed as it will fix the rafter of problems that beset the US economy, In the decades prior to the current “$US problem” the IMF did not see other currency meltdowns as "healthy" at all. They usually prescribed rather strong medicine, including large hikes in interest rates and huge cuts in government deficit spending, to address the problem. The FOMC may well cut again next week, but for how much longer can they deny market forces?

“It is easy to dodge our responsibilities, but we cannot dodge the consequences of dodging our responsibilities”

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