Week ending 30th November 2007   

US consumer confidence fell by more than expected in November, as did October durable goods orders. Both new and existing home sales fell in October, together with Q307 personal consumption. In Florida, the Local Government Investment Pool, a public sector equivalent of a money market fund, saw an outflow of 1/3rd of its assets, doing what’s known as a “Northern Rock”, as investors discovered that instead of safe, liquid, short term debt, the pool actually held sub-prime mortgage paper and CDOs. The Dow gained 3% over the week and the S&P 500 2.8%, whilst the Nasdaq rose by 2.5%.

European “covered bonds”, a $US 2.8Trillion market of debt backed by mortgages and loans to public institutions, ground to a halt last week as buyers bulked at the spread over Government debt, now at a 5 year high. The “Zones” consumer confidence in November also fell by more than analysts expected, despite the increased money supply in October to 12.3%. UK house prices fell in November, according to the Nationwide and October lending on dwellings collapsed by 25% from the prior month, as mortgage approvals fell. The FTSE 100 index rose by 2.7% over the week, as did the French CAC whilst the German Dax gained 3.4%.

Out East, Mr Kevin Rudd became the new Australian Prime Minister as the Labour party ousted the Liberal/National coalition and the outgoing PM, John Howard, looks to be only the second Prime Minister since 1929 to have lost his seat at a Federal election. Elsewhere Thailand’s exports in October rose by 27.9%, the fastest pace in 3 years, whilst Japan registered its first monthly inflation in 10 months as October CPI came in at a miniscule 0.1% The Nikkei jumped by 4.9 %, with the Hang Seng soared by 7.9 %.

On the currency front the $US index gained 1.5% to 76.18, whilst the Yen declined by 3.4% and the Swiss franc by 3.1%.German Bund yields rose by 12bps to 4.12%, whilst Japanese 10 year JGB yields gained 5bps to 1.47%. For the US, 5 and 10 Treasury yields were lower by 2.2% and 1% respectively, ending the week at 3.42% and 3.97%.

Within the commodities complex, the $crude oil price plummeted by 9.7% to $88.7 a barrel, just as the chorus of the $100 mark peaked, whilst the $Gold price fell by 4.3%, to $789oz.

Next week sees the latest unemployment data for the US and the Euro-Zone, with October consumer credit and November vehicles sales also due out for the US. The UK and EU Central Banks decide on any interest rate change, whilst Japan’s Q307 GDP is released.

It was only 6 weeks ago that the US Treasury Secretary, Henry Paulson, met personally with chief executives of the three largest US banks, and said that he's pleased with the MLEC plan, designed to ensure that the sub-prime debt paper held by the banks were never valued in an open market and "that it will have real benefits to the marketplace".  Now that the MLEC initiative appears doomed to failure, he has announced his next plan, which is to negotiate with American banks to freeze the interest rates charged on sub-prime mortgages. Like his No 2 counterpart at the Federal Reserve, Secretary Paulson appears to have little understanding on just how debt deflations work.

“Equal opportunity means everyone will have a fair chance at being incompetent”

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