Week ending 11th July 2008   

US economic data included a fairly predictable fall in May pending home sales, which slid by 4.7% versus the expected 3%. There was better news, however, from the May trade balance, as the expected deficit of $62.5BN translated into a deficit of $59.8BN and from the provisional consumer confidence reading for July from the University of Michigan survey, which surprised on the upside. By far the main event, though, was the heightened speculation (or realisation) that Fannie Mae and Freddie Mac, the two GSEs who own $5.2 Trillion of debt paper, representing nearly half of the $12 Trillion in home mortgages, were short of capital. Fannie & Freddie’s respective share price were lower by 45% on the week and by 90% from their all time highs. The Dow fell by 1.7% over the week, with the S&P 500 and the Nasdaq ending lower by 1.9% and 0.3% respectively.

Euro-Zone final Q108 GDP came in at 0.7% or 2.1% annualised, which was lower than earlier predictions, whilst exports from Germany, Europe’s largest economy, fell by 3.2% in May from a month earlier, the worst decline in four years. UK mortgage rates surged to the highest in 8 months, with a fixed two year deal at 6.63% in June, the highest since February 2000.The Bank of England’s MPC left interest rates on hold, at 5% as June consumer fell. The FTSE 100 index lost 2.8%, with the French CAC and German DAX lower by 3.9% and 1.9% respectively.

Out East, there is a similar pattern as OZ consumer confidence hit a 16 year low, as home approvals fell by the most in eight years, whereas New Zealand house sales have collapsed by 42% over the past year. Wholesale prices in Japan rose to a 27 year high in June, at 5.6% annualised whilst inflation in Malaysia hit 6% in June, according to the countries central bank. The Nikkei fell by 1.5% whilst the Hang Seng gained 3.6%.

On the currency front, the $US index declined by 1% to 71.94, as the Euro and Swiss Franc rose by 1.3% and 1.1%. German 10-year bund yields dipped by 5 bps to 4.44%, whilst Japanese 10-year “JGB” yields fell by 5 bps to 1.59%. The US 5 year Treasury yield rose by 0.1% to 3.28% whilst the 10 year declined by 0.8% to 3.94%.

Within the Commodities Complex the crude oil price rose by a 1/4% to $145.7 a barrel and the price of Gold gained 2.9%, ending the week at $960oz.

Next week sees the latest “official” inflation numbers for the US, the UK and the wider Euro-Zone, with the US also releasing the latest retail sales data and June housing starts. The Bank of Japan meet as the nationwide department store sales provide further evidence as to the state of the consumer.

World stocks are now officially in a Bear Market, defined as a 20% fall. That in itself is not a particularly useful statistic, so perhaps it may help in reviewing a history of US bear markets, as collated by Thomas Lee of JP Morgan. There have been 30 bear markets since 1900 with 4 of them ending after the 20% fall, with 11 experiencing a further 10% drop. Another 9 of them continued for a further year, with 5 of them collapsing by a further 30% or more. Take your pick as to which type we are in. We decided back in 2000.

“Wall Street people learn nothing and forget everything”

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