Last year it seemed that Japan’s sun was finally rising again. The Yen, seen throughout the world as a safe haven for investors, was one of the most stable and best performing currencies. The optimism with the election of the new government, and in November, Bank of Japan’s 10 trillion yen financial stimulus took the Yen to a 14-year high of 84.82 to the dollar. The political shift signified a positive picture for currency markets because new Finance Minister Hiroshida Fujii was a strong advocate for letting markets decide. This fuelled a rally for the Yen.

WILL POLITICAL CLOUDS DIM THE YEN?
Beginning of 2010, the Japanese government accepted an ailing Fujii’s resignation. Fujii, maintained the principle that government would not intervene to curb the yen’s strength and there need be no fear of export protection. His resignation prompted a jolt in the forex markets and the Yen stopped its rally sending the dollar/yen exchange rate to 92.4.

The appointment of Naoto Kan as new Finance Minister got the response of another drop against the dollar to 93.6. Kan (with less hawkish views than Fujii) vocally and controversially expressed his preference for a weaker Yen as well as intervention. His aim with a weak Yen is to make domestic exports more competitive in the world market. A rebuke by Prime Minister Hatoyama for this statement made Kan back-track his call. However, the currency dropped against the dollar to a four-month low of 93.78. Here is much for us to figure out. We can see undercurrents of a dispute among government officials over currency policy. Then definitely, the export sector is a lot more problematic. And clearly, as of now the government policy itself is unclear!

DEFLATION TALK

Major exporters including Honda Motors complained about the high level of the Yen as they faced poor domestic demand recovery and deflation (prices fell by 2.5% by the end of 2009). In Q4 2009, GDP grew the highest in two years. But not enough for interest rates to rise substantially above 0% or to stimulate consumer spending, which makes about 60 percent of the economy. Well, at least Japan doesn’t have the problem of heavily indebted private households like USA or UK.

Did I speak to soon? Japan’s public debt is projected by the IMF to touch 225% of GDP this year, and 250% in 2014. This is the highest among industrialized nations. In the near future, the new government’s two proposed spending plans and the Y10 trillion stimulus will undermine reigning in public debt. Government may also resort to becoming net seller of JGBs. I see the unsustainable levels as not only an immediate problem. It will expand out to a sovereign debt crisis this year, and add to the risk of a global debt crisis.

SAFETY FIRST

Most of Japan’s problems are in the long term. And pointing toward a possible ‘double-dip recession.’ Despite weak fundamentals, three points convince me of the future. The Japanese people’s savings. Continuing production and exports. And a still cheap and competitive currency.

Coming back to the Yen. Though no longer the lowest-yielding major currency, the Yen continues its safe status on risk-averse investors’ portfolios. This is despite its volatility. The currency is more interesting to see over time. In the chart below, what is prominent is the crucial level of “85” against the dollar. Even about a decade ago the Yen stopped about the 85 mark, similar to Nov 2009.

INTERVENTION YES OR NO ?

The chart is quite interesting. As the world changes all the time one cannot predict the future by looking at prior developments.
No doubt that 85 in USD/JPY means a lot now. Increasing risk reduction the coming months will lead to capital inflow into Japan. Naoto Kan’s comments make me believe there will now be more support for official intervention (last seen in 2004) in determining Yen exchange rates if the currency is set too high. According to Kan this deciding level would be appropriate when at 90 to the dollar. This is a significant political statement.

Naoto Kan will simply be tested, is he around or not with the intervention weapon. I think yes, and the Japanese Ministry of Finance has heavy ammunition. First, they have an unlimited amount of Yen to sell, it’s simply to start the printing machine. Second, they would love to have inflation so they have problems monetary expansion (the excess liquidity will most likely stay in the financial system but Bank of Japan can absorb it through money market instruments – sterilized intervention).
If Naoto Kan takes the fight he will win, so around 85 in USD/JPY it will be time to consider the long-term risk position in JPY.

The market activity will, as usual, be lower after the weekend until New Year but during the last days of this decade we have the chance to enjoy a few important numbers.

Here is what I am looking for the coming days:
From Japan, before 28th Dec the Dec business
conditions for small businesses is released. It’s almost a preliminary number, that alone makes it interesting though the survey itself is also worth to notice. Last month it was 43,0. Please note that the big business worsened in the period October to December due to MOF. Downside risk for Japan.

On Monday from Japan the Nov preliminary industrial production and the retail sales is published, interesting numbers from the second largest economy in the world.

In my view US offers one really important number the coming week. On Tuesday, the Dec consumer confidence will give us a hint about the very much watched US consumers. The average of economists go for 52,8, up from 49,5 last month. Most likely, but a higher number than 53,0 is needed to boost stock markets further.

Towards end of the week (maybe Saturday included) 2 UK organizations announces the house price developments in Dec. Nationwide first and then Halifax, a small increase in December is expected.

One could almost feel tempted to say, that China never sleeps so they announce the interesting NBS Manufacturing PMI 1st January, 55,2 last month with an increase expected again.

As mentioned will next week only offer low activity but stocks will follow the fundamental data (better than expected = rising markets and vice versa).

The currency market will be dominated by “end of year” adjustments without any clear trend. Next year the Dollar will move lower anyway.

Peter

Just to mention the positive Japanese stocks this morning. The banking sector went up as it seems likely that the tougher capital rules will be delayed. The Japanese banks will probably get 10 years to adopt the new rules. Short term, it of course helps the profitability in the banking sector and give some relief (also the reason for the delay I assume). One of the reasons to tighten the rules was to protect the investor, but to give a 10 years deadline is equal to cancel them. Within the next 10 we will have had another crisis again, but fewer banks than today would then need to care about the new rules. So, no reason to fill up your stock accounts with Japanese banks……

The Dec PMI’s from Europe this morning should keep us occupied for a moment while waiting on US. The market expects the readings to be a touch higher (PMI Manufacturing at 51,4 and service at 53,1). I could see the numbers slightly lower. If they are around the expected I do not see it as positive enough to help stocks today, so I go for a minus until US opens.

US will offer several really interesting data. The last days inflation has gained attention, fair enough, as especially food inflation is jumping (watch India and China). Right now I am not scared about inflation on a global perspective (more on that particularly in the New Year), but the market talks, so I am more alert. The headline inflation in November is expected to be +0,4%, that will be in focus with a clear upside risk due to food, a risk for stocks.

Fundamentally I regard housing starts as the true number to watch, the market expects 575k in November compared to 529k last month. It’s very important to see if the US housing is finding more stability. If so, I might need to adjust my skeptical picture of the world…..A good number will help stocks and vice versa.

Bernanke’s words tonight we will all listen very carefully to, but he will tell us that the world has improved a bit again. He might also hint a rate hike one day, but what else can he do – they are at zero. It’s priced in the market but could give a short term reaction. No doubt that the statement is interesting because this is the main focus in the market this week.

The Dollar has already reacted too much on this. But if we look at the trading volume, then it is low in a December trading that reminds me of the good old days where nobody touched a position if they could avoid it. EUR/USD will trade towards 1,4750 again the coming days.

Peter

The Greenback continues to be fundamental weak in several ways. This was also highlighted earlier in the week where USD had some upside momentum but EUR/USD never came lower than 1,4825. If this is the current “strong” level for the greenback, then there is a good basis for a move towards 1,5500. Especially the US housing data this week showed stronger than expected October data. The headlines are more impressive than reality due to the downwards revisions of erlier data, though still an improvement that surprise me a bit. It should have helped USD but confirms the negative momentum right now.

Very important is the rising activity among  hedge funds and other position takers. They now go short USD after the FOMC meeting signaled no rate hike in US within any foreseeable time. For some time I mentioned that the 1,4850 level seemed neutral, with low activity and fewer positions. This means that the move to the actual 1,5100 level by no way is large and the way higher is free. The carry trades (short USD against higher yielding currencies or gold) are growing and these positions have tight stop-losses, but I don’t think it will danger the current downturn for the Dollar.
No data the coming days, so it will be go by the flow.
USD/JPY is very close to 86,00 that I have been dreaming about for some time. No reason to fear intervention right know. Expect some comments from Europe, though without power.

The victory for The Democratic Party of Japan (DPJ) and their party leader Mr. Yukio Hatoyama is not a surprise. Though, after almost 50 years LDP government leadership of the second largest economy in the world, I certainly think the political change in Japan is a Hot Topic. This is a short view on what we can expect of political changes and what to watch out for as an investor and in corporate treasuries.

DPJ will surely try to outlive two headlines from their election campaign. One is to change the export dependent economy into a domestic demand economy. Second is to loosen the tight bands between the government and the large corporations. Let’s take the policy changes first.

1.      Children families will receive a monthly payment of Yen 26.000 ($275) per child.

2.      High road tolls will be scraped, a surcharge on gasoline will disappear and other car related taxes will be cut.

3.      Corporate tax for smaller firms will be lowered from 18% to 11%.

4.      DPJ will work for a higher minimum wage, up from the current Yen 700 to Yen 800 and later raised to Yen 1000.

5.      The new government wants to cut the 1990 gas emissions by 25% in 2020 and by 60% in 2050.

6.      Regarding public spending DPJ will cut what they call “waste” referring to al sort of non productive infrastructure projects the prior government used to spend money on.

Point 1 and 2 is fully aimed at low income families. This income group does in all countries tend to spend 100% of their disposal income, also in Japan. No doubt that it will increase consumption, many economists says it increases GDP with 0,6% in the fiscal year starting in April 2010.

To be honest, this has nothing with a reform to do nor a structural change of the big and long lasting issues there are to solve in Japan. This can not inspire any stock market anywhere. The next question is how to finance it ?

To cut useless projects within infrastructure makes sense, but it will just sponsor the new spending slightly. DPJ has no answer on this, and there is even the risk that markets gets tired of government spending packages – this risk should by the way not be understated.

Cutting taxes for the small enterprises only, when the corporate tax for large corporations is 40%, is a way to show distance to the large companies, as was DPJ’s second big campaign headline.

To raise minimum wages is a fight that many governments have lost. I would say that it is hard to increase salaries so much in a low growth environment. Though, it emphasizes DPJ’s wish to move towards more domestic demand.

Some environmentalists would probably question why DPJ favour more gasoline consuming traffic combined with high targets for emission cuts – doubtless a fair question.

Market implications

 DPJ’s Secretary-General Katsuya Okada (possible finance minister) has said that trying to move exchange rates artificially is undesirable in the long run. It means they will leave FX rates to the market unless the Yen exchange rate clearly is much to under- or overvalued. This is a direct consequence of moving away from the almost unlimited support to the export industry. Should USD trade below 90,00, then it won’t harm the new government.

Private investors once more will absorb the even higher public debt, but as mentioned before, more debt suddenly might be out of fashion. One important fact has changed over time. In the early 1990s Japans saving ratio was around 20, next year it is estimated to be 1,4, meaning less private savings to finance the public debt.

In the stock market I pay attention to segments that profit from the higher disposal income in families with children. These stock segments are low cost durable goods producers, low cost restaurant chains (they are also placed at the highways where the tolls are removed), nursing stuff to kids. Trucking companies will also benefit from highway tolls disappearing.

On the risk are clearly companies involved in infrastructure constructing, but there could also come new restrictions for consumer lenders and a higher tobacco tax might be in the cards.

Changes always create new opportunities like mentioned above. Honestly are the opportunities few and I think the biggest reason is, that after so many years of political miss management in Japan plus a global recession, then did LDP loose because of the deep pain – DPJ didn’t win by suggesting new ideas.

To be honest, the China piece required the deepest thinking, so you get some extra. When a stock market drops 20% within 2½ weeks, and furthermore in an economy that lives on a public boost and excess liquidity the thinking needs to be accurate. The drop was over a period long enough to be traded, and not just a couple of days with panic. This makes the set-back more remarkable.

The boost and the bubble

The equity market got a boost from the very famous anti recession package. It’s ok that this supported the stock market, but the bubble like rise since March is caused by the sharp lending increase from all banks to the corporate and private sector. I have earlier mentioned that 20% of the lending went into the stock market on the mainland and in Hong Kong.

It is now widespread knowledge and seen as a fact, also understood by China’s State Council. There have been official comments indicating that this will have an end and all banks have suddenly announced a pull back in lending for the rest of this year. No surprise that the market gets more nervous when this cash generator disappears.

Fundamentally it just means less inflow of risk capital in the second half of this year. What we all are watching is if the speculative capital from the spring will move out of the market again. There are no signs yet, but it makes the moves more choppy.

Commercial properties will get a boost

Since end of last year bankruptcies among Chinese real estate developers have been expected. Most have actually survived after they sold out at fire sale prices. After a panic sale or forced sale markets normally sees the lows as a bottom and is ready to buy at higher levels. In addition the general rebound in China naturally also comforts the commercial property market.

There are clear signs of higher risk appetite towards commercial real estate in Hong Kong and China mainland.

On 29^th July Hong Kong Stock exchange had the fist property developer IPO in a year, the company BBMG Corporation. The issue was oversubscribed by a stunning 235 times at HK$ 6,38 – the first trading price was HK$ 10,20. It belongs to the story that BBMG is not a 100% property developer as they run different production brands as well. Never the less it has supported the sector in general pushing P/E above 10 again and signals more investor appetite for commercial property. The next large IPO is likely to be Evergrande in October and more will follow.

The Chinese government is doing everything possible to fuel the boost. Chinese insurance companies are hungering for investment alternatives as they are limited to a few asset classes like stocks and a small bond market. Early 2009 the Chinese insurance law was revised to include fixed investments like properties. Before a total of only 20 billion Yuan was allowed to be invested in properties. After the new rules get introduced the amount could exceed 300 billion Yuan.

The latest unconfirmed news from end of August are that fund houses and brokerages should be allowed to offer exchange traded real estate investment trusts (REITs). This needs to be confirmed by the China Securities Regulatory Commission.

Yes, it smells of a boost and fast profits, and make my alarm bells ringing. This is an opportunity that needs to be explored, but the investor needs to be very careful.

I can find a number of people who claims that commercial properties already are priced too high. That alone is a risk, but one thing is sure, a lot of unfinished projects and properties without occupation will be sold in different packages.

My conclusion is that it should be explored but the quality is very essential. If it is unsatisfactory, then stay away as the bubble will clear the air one day again..

Production overcapacity is a problem

The Chinese industrial production looks fine and is developing better than the numbers from the old economies. There has been a real turnaround from the slump last year.

That the growth rate never went down in negative territory partly justify the rebound in equities since last autumn. So what is the problem ?

The leaders of the Communist Party have a very good micro and macro economic understanding. The problem is further down in the hierarchy as the main part of enterprises is state owned. The management of corporations across China is heavily influenced by the Communist Party heads of the local provinces. Some of these heads and the corporate managers do not always take economic sinful investment decisions, but compete with the neighbour about being the biggest. The result is overcapacity, apparently so big that China’s State Council chaired by Premier Wen Jiabao intervenes.

Overcapacity in the steel business I mentioned for some weeks ago issue but now is cement, plate glass, coal chemical and wind power equipment added to the list. High-tech and service sectors are said to receive more support.

This is very interesting information as it means a lot for stock pricing in the different sectors. The way to curb sectors with overcapacity is to sharpen the conditions for new approvals but also to tighten credit for the existing business.

I expect the mentioned sectors to underperform compared to other stocks, but it also tells us, that the overcapacity is serious. The wind power sector is worth to notice, where investors throughout the world are upbeat on the sector, does China report about overcapacity.

1st half year results comfort investors

During the last week of August the 1^st half year results from several leading listed companies ticked in. Good and bad, but in general good enough to comfort local investors.

As the only airline company in the world Air China surprised on the upside due to growing demand. China Life and China’s top homebuilder released positive news as well. Below the blue chip size a range of good results was posted as well.

Car producers surprised on the downside where DONGFENG Motor Group didn’t deliver the expected income growth and SAIC Motor was weak as well, a bit surprising and should be noted.

Like in other stock indices are the banks quite heavy. The half year results are ok, but more difficult to judge due to the enormous lending growth. I am not so impressed of the banking results.

During the 20% drop in August foreign investors left the stock market but locals, and in particular private investors, bought around the bottom. It signals local comfort, though from private investors and not from the large accounts with borrowed funds behind.

Regarding the A stock index is the 3050 important, where a close above will be seen as good support. Very important is 2900 as it is watched by all participants in the market.

The August drop was steep but basically just down to more sustainable levels with a domestic average P/E value at 25 instead of 30 at the high. Some sectors are under growth pressure and the speculative money is a risk we need to watch.

The Chinese stock story suddenly has turned somewhat more complicated and I have earlier warned about uncomfortable high levels. Despite the downside risks have increased I can not recommend to leave China stocks yet, but I follow it very closely.

EUR/USD

It is long time ago since I have seen EUR/USD trading in such tight range as it has for some time. When we have these situations some players tend to sell volatility too late, it also happens these days.

Some investors have bought “Double-no-touch” options with barriers at 1,3900 and 1,4500. It means that EUR/USD has to trade within the defined range until maturity. Betting that something will stay within a range is equal to sell volatility. The EUR/USD volatility has gone down for a long time so from a volatility perspective some are selling at the lows. It feels like the typical trades that some are done when the range is about to break. The trades can be so big that the position taker can and will protect the option, but I doubt this is the case.

I have been right on the EUR/USD development for some time, but partly because I am wrong on the stock market. In particular in Europe and US are currency traders happy to trade EUR/USD following the developments in stock markets, taking EUR/USD higher. In Far East the trading pattern has already changed to follow macro economic outlook, though after important economic numbers the tendency also is visible in European and US trading sessions.

When the focus shifts towards fundamentals, my opinion is that the uncontrolled debt situation in US will be a major concern. Another interesting fact is, that very many I speak with are not prepared for a lower greenback nor really believe in EUR/USD levels above 1,5000 again.

The only true argument for a growing USD appetite is the 10 year government bond yield spread that basically should support the Dollar. It’s just not in the cards yet, focus will be on the debt.

I go for 1,5000 this autumn.

EUR/GBP & GBP/USD

The Bank of England governor Mr. Mervyn King always has a surprise ace to play. Sterling has lately been sold off for a couple of reasons. It has turned out that the quantitative easing hasn’t shown any effect at all after 6 months. No surprise, you can just ask Bank of Japan about their experience form 1990s. The Bank of England has sent out £ 140 billion in the system but during the same time the commercial banks deposits at Bank of England went up from £ 31 bio to £ 152 bio.

The news alone was disappointing for some investors being long Sterling but Mr. King’s reaction fuelled the GBP sell off. He seriously considers the Swedish model with negative interest rates, where commercial banks are punished with -0,25 % in interest rate if they deposit money in the central bank.

To be long Sterling is more expensive so it is fair that GBP corrected lower, but it also highlight that the problems in UK are tougher to fix than hoped.

It also gives food for new thoughts as I was predicting an even stronger Sterling like towards 0,8000 in EUR/GBP terms. Concerning UK I had expected some signs where I could hang my hopeful hat on, but it’s hard to find. UK might be the first economy to prove that the recovery is longer and slower that we like.

Should EUR/GBP trade around 0,9000 again, though depending on the market situation, I still fancy Sterling for a fundamental move towards 0,8000 in EUR/GBP.

EUR/JPY & USD/JPY

The new Japanese government is covered in the Hot Topic on page 10, where I conclude that the coming government is very unlikely to intervene if Yen goes stronger. As the Japanese bond yields constantly are climbing higher, Japanese investors are more likely to keep their investments in Japan or even move them back from US. Before end of November the new governments FX policy will be tested seriously when USD/JPY trades lower on that background.

The fundamental economic data can in no way give any support for Yen, but investors in Far East and Japan see risks on the rise. Therefore they are going back to the safe heaven currency JPY. The capital based flows I currently regard as more important than moves based on fundamentals.

I go for 86,00 in USD/JPY.

The uptrend in global equity markets is still intact and some factors will be supportive in September. The very important gold digger mood among private investors, who believe in the V-shape recovery means a lot for the uptrend. This combined with plenty of funds to invest and professional money managers being behind going long stocks all in all creates a natural demand.

I am also behind the curve, as the frequent reader knows, I didn’t believe in the V-shape recovery, and still don’t. The consequence is, that I am forced to recommend to enter the market when it goes up despite I am uncomfortable with the levels.

Other market participants are in the same situation, so if signs of a turnaround in the equity markets become evident, then a massive crowing out will result in steep sell offs. It’s not sure it will happen, but the risks for such a situation are rising in my view, but the market will find comfort during September.

Industrial production and US housing supports

The positive tones are also founded in real numbers I admit.

One of the reasons why we saw the steep drops in GDP was because corporations took their stock of produced goods much lower. Most likely was it below what is needed to supply the new lower consumer demand. The logic consequence is that production of goods will go up a new normalised level the coming months.

In June there was a small improvement to “only” a drop of 17% in the industrial production within the Euro Zone on a year-on-year basis. The “improvement” was seen as a real improvement but the year-on-year development needs to move against zero, otherwise the production is in an ongoing negative spiral. It feels positive but it is also a technical rebound.

What truly has turned around for a period is the US housing market. The most significant turn is in existing home sales. It belongs to the story that inventories are still high at 9,4 months of demand, but off the high at 11 months supply. Prices paid have increased a little but just a few percentage points. As I wrote earlier in August is the housing market important in my view. No doubt that the good impulse from the housing markets will continue for some months. A closer look will disclose that a growing number of house owners in US are defaulting, but it is not in focus right now. I note it, and keep the information on my risk monitor, but on the side right now.

Elections in Japan and Germany won’t help

Two large economies elect a new parliament within a month. Very interestingly, also the two countries with the biggest structural reform need. This global crisis should be the catapult for totally new politics one should think, but reality is more to continue as always. Concerning Japan I recommend to read the Hot Topic covering the new Japanese government and politics.

In Germany a coalition between the Conservatives and the Liberals is the likely outcome with Ms. Merkel in the lead again. I am almost tempted to say that nothing will happen the next 4 years, and even Germany has also a large deficit to fight with as an additional problem.

It’s hard to see that the elections will give any new impulse to the equity markets.

Unemployment is a monster

The German election most likely blocks for further large reduction of jobs, but the rumours are that it happens after the election. I think the speculations are closer to reality than many can imagine.

It is in line with the ongoing global growing unemployment. I recognise that the first July labour market data from different countries have been slightly better than expected, though I judge it as a summer blip. Not only is unemployment still rising but wages are under pressure and the working hours for the people in job are lower. Unemployment is a monster problem with no improvement in sight combined with the same taxpayers that suddenly have to service a much higher public debt. It results in a fundamental pressure on the consumer purchasing power and the debt might lead to higher taxes.

How to play the equity market ?

With the view I have is investing a true challenge. I do not expect any impulse from corporate investments either, as the corporate sector has a production overcapacity.

The global companies manage the product adjustment fastest and most efficient. That was also the reason why I recommended global stocks as the first entry together with Chinese stocks.

S&P 500 managed to close just above 1.030 triggering the second entry round in global blue chip stocks. Together with the first entry at 925 it gives an average of 977,50. The stop loss level is 900 and next entry point is 1.110. On my list of global blue chip stocks I have a couple of oil companies as well. These I consider to remove as the high oil price is not justified by real demand.

Nikkei broke 10.500 last week which was the entry with the first 1/3 of expected total investment in Japan. The stop loss is 9.000 and next entry point is 11.700.

As you can imagine am I not at all comfortable with the entries, but respect the higher markets we currently have – but for how long ?

What should the investor use of Hu’s speech ?
Like any other country with a stimulus plan the aim is to maximise the domestic growth outcome and not to save or help other countries. China just has one strategic advantage compared to many other countries. The fixed asset investments are true investments with a future pay-off because China develops rural areas where new growth will arise, and not just repairing existing infrastructure as western developed countries can do. This way China builds new infrastructure in areas with lower labour costs than in the coastal areas where almost the whole export production is placed today. Another problem that is partly solved is the unemployment among domestic emigrant workers. 20 million out of 120 million lost their jobs within the last 12 – 18 months. Some of them find jobs in all the infrastructure projects.
We have already seen the effect on some commodities like base metals that has gone up. I think the demand will consist for some time, so mining stocks are still worth to consider, and the related bulk shipping companies will be supported as well. But please don’t expect the whole world to be saved by the Chinese stimulus, and some of the commodity purchase is pure speculation as mentioned in the last update. Just companies outside China with well organised export to the very specific sectors that are supported by the stimulus package will benefit. These are Japanese building companies and producers of machinery plus some German, and then the Chinese mainland and Hong Kong based companies of course.
President Hu gave a few more hints. The Communist Party wants to continue the boost of grain production and increase farmers’ income. This is interesting as the agricultural sector is big and we are talking about new demand. Chinese companies producing equipment for the agricultural sector with a B listed stock are long term investments. Producers of products like fertiliser with listed B stocks are difficult to find. I would look for non-Chinese companies with production in China or serious export to China. If the peasant’s household income jumps, then their demand for durable goods increases. Several producers of household goods and retailers with decent results have listed B stocks to invest in.
The stock market
Like in any other country with cheap and excess liquidity some of the funds find their way into the stock market. It is also the case in China (mainland and Hong Kong) but no official number will ever be released on this subject. Go for 20 % of the more than 7 trillion Yuan of credit growth during the first 6 months, that is a decent guess.
It’s hard to argue that the Chinese stock market is overvalued as it is still only trading at 50 % from the peak, but you probably feel my scepticism about the speed of the turnaround. There are too many signs of leverage instead of real earnings behind the rise since November last year. I admit to have been too slow to advice about coming back into the market. The first 33 % of the expected investment in Chinese stocks I recommended to buy at a break of 180 in Shanghai B, the second 33 % trance must happen when 225 breaks. To be honest, I don’t feel comfortable about it, but if the market goes up you need to be in it. Just keep an eye on all the risks factors, they are growing and not getting smaller.

I agree with the upbeat market participants, that unemployment is the last number to peak, and also are different expectation indices showing clear improvements. But does it justify the V shape recovery that is priced in the equity market right now? I apologise, it would be most pleasant to say buy! Reality is as usual tougher.

Demand, unemployment and production capacity

Let’s start with the good one first. Demand is there, but it has changed. No secret that in the so-called rich countries demand has changed from “nice to have” to “need to have”. This has created the consumption drop together with a consumption stop due to debt among private households. In general do consumers still purchase, but when, then cheaper and low technology products. As an example, in the old economies are mobile phones still sold, but with fewer functions. The sold cars are smaller and many consumers buy small used cars all of a sudden. In low income countries without significant private household debt, the demand for goods is somewhat more stable, but these consumers have always bought less advanced products. The advanced high technology and work intensive products from the old economies (very particular Western Europe) are not in demand, but the less advanced products from low cost areas are still in demand.

Global unemployment is still rising and will continue to go up for some time. Right now everybody expect the peak to emerge Q1 or Q2 next year. Maybe, but what happens afterwards? The V shape believers simply argue that the world recovers again including the jobs, and it is certainly priced in at the current share prices. It won’t be that easy, and further negative implications need to be resolved. Across Europe are people willing to reduce their salaries, this indicates that assets should be cheaper as a compensation. In Europe, corporations to a large extend use to share jobs now to avoid more layoffs. In US the average weekly working hours are at a 40 year low. Both facts actually tells us that the unemployment should be higher. Just to get weekly working hours and the shared jobs back to normal will take time. Thereafter hiring will start, but much later than Q1 or Q2 next year…..

Many company news are concerning production cuts as a natural consequence of the above arguments (or, facts in my world). Just to take one example might be too simple, but statistics about the car industry is very accurate and a good global demand / capacity indicator. One could wonder why global political leaders are so eager to fight to keep all car production plants (yes, it is many jobs). The global car production capacity is 90 million units per year but the current demand is 60 million units. Of course the overcapacity has to be reduced, and other sectors will be in the same process for some time as well.

What now ?

Demand is there and the world won’t disappear, but the V shape recovery priced in the equity markets came too fast. In my view, the market sentiment has already changed towards negative, while we mentally still think that the market is on the way up. The frequent readers know that I for a long time have fancied Far East, and I still do, but so do a growing number of market participants. It correlates well with the under performance of European stocks during the last 2 months. Despite the emerging regional differences in the assessment of the markets, the global macro economic trends will dominate. For the above reasons I argue for a 10% downwards correction for equity markets in general. The coming reporting season from US companies might give relief one or two trading days, but it won’t beat the global macro economy.

I have spend some time researching the rising Chinese commodity import as it has been discussed during the last 2 months. Naturally very interesting in respect of the commodity prices, but the conclusions affect all asset classes in China, including equities.
Many have heard that imports of physical commodities are so huge that they can’t be transported away from the ports. Some of the stories are true, but as always regarding China, we will never find the final answer. Based on different information sources, then around 1/3 of all commodities imported to China are bought and kept for speculative reasons.
The speculative commodity buying continues.

The higher demand for commodities is partly explained by the spending on infrastructure and urban development. But it almost seems evident that Chinese corporations have bought, and are buying commodities, for speculative purposes as well. It most likely started because the forward prices were much higher than the spot price by end of Q1 (the likely reason was rising investments in commodity ETF’s by private individuals). One could argue, well done, because the companies simply used the steepness of the commodity forward curve. So the companies bought spot and sold forward. The curve flattened, meaning the speculation gave money. But why continue to buy commodities? The answer is, as a pure speculation in higher prices.
Corporations around the world suffer from much tighter credit conditions, so how can Chinese companies generate liquidity enough to be long and warehouse physical commodities? Simply by bank financing, as Chinese banks actually finance physical commodity positions against the same commodities as collateral.
In respect of lending and credit markets, is the difference between the old economies and China how the lending is allocated. The old economies suffer from the same Japanese problems like in the 1990’s, where the banks could access unlimited liquidity at de facto zero interest. In China the Communist Party every year decides how large the lending increase should be, and then the banks have to deliver the lending growth. For the whole 2009 RMB 5 billion was planed, but the end-of-June figures show that so far in 2009 the lending already reached RMB 7 billion.
Be aware of the new asset bubble.

Partly the credit expansion has benefitted different areas, but now we circle back to the commodity syndrome. Since January, everybody has reported about the corporate SME segment suffering from credit constrains, against large and state owned enterprises getting overloaded with credit supply. Corporations are now participating in the grey credit market as active lenders, apparently at pretty high interest rates.
The worst is, that these hot and cheap credit money have found their way from bank lending to corporations and further into the stock market in China mainland and Hong Kong (the Hang Seng move from 15.000 to 19.000 in April and May). This is risky business and should under normal circumstances lead to a collapse, or minimum a very dramatic sell off in equity markets.
The people in the Communist Party are fully aware of what is happening, and I think that they are willing to run the risk of a new asset bubble in the name of creating a wealth feeling.
Despite of the bull market for Chinese stocks I argue for a 10 % correction in Chinese stocks due to the above reasons, and then a new evaluation is needed.

EUR/USD still very much tracks the equity market but equities have lost upside momentum and EUR/USD hasn’t. It points towards less correlation between equities and EUR/USD for the coming period.

The growing risk appetite in Far East creates EUR inflow and should be observed, so keep a close eye on EUR/JPY and investor news from Japan.

I expect fundamentals to gain importance in the currency market, particularly regarding the greenback. Many market participants talk about the US recovery at it is a fact (or at least just around the corner). As a result a faster US recovery than in the Euro Zone, is priced in the Dollar. This week the market got a couple of nasty negative surprises. The May US consumer confidence at 49,3 was way below forecasts, and the worse than expected non farm payroll Thursday are clear signs that the market prices a too fast US recovery in.

The situation in Europe is really bad, and one day it will hurt EUR, but the missing fast recovery in US will be in the limelight during July. Not that EUR/USD will explode, but a fair and sustainable break of 1,4250 is the first step. The range will still be 1,4000 / 1,4500 though mainly in the upper end. Talk about 1,5000 will re-emerge, and European politicians will be forced away from their sunny deck chairs to intervene verbally.

Important numbers the coming week are German May manufacturing orders (exp. -0,2% m/m) and the very important Consumer Confidence from University of Michigan on Friday (exp.71,5) – I am bearish…….

Target: 1,4500.

EUR/GBP (0,8570) – GBP/USD (1,6350): Sterling remains very interesting. Overall I judge that UK is through the worst decline, but I am by no mean taking about any V shape recovery. The private housing market shows signs of stabilisation as the (only) good thing, though very important. Commercial properties needs another hit (or two) and the banking industry is ruined – i.e. no chance of any fast recovery.

Important is to follow if the UK economy will stabilise, so the Bank of England comments on Thursday are worth to spend some time on. These guys have been so bearish that even their own government got angry, but Bank of England has just been honest and realistic. I feel for a further GBP positive sentiment so I move the EUR/GBP range from 0,8500 / 0,9000 to 0,8250 / 0,8750.

Targets: EUR/GBP range 0,8250 – 0,8750 GBP/USD range 1,6050 – 1,6550 .

EUR/JPY (134,40) – USD/JPY (96,00): Japan is getting more interesting, but JPY is trapped between the investor related flow from Japan into the Euro Zone and the downwards pressure in USD/JPY. The bearish momentum in USD/JPY will grow, but not really towards 90,00. On Wednesday I am alert when the May Machine Orders (exp. +2,4%) and the May trade balance numbers are released – important information.

Targets: EUR/JPY range 133,00 / 138,00 USD/JPY target 93,00

]]> http://getmarketsright.com/financial-markets/currency-markets-%e2%80%93-04th-july-a-july-sentiment-change-is-under-way-for-the-greenback-285.htm/feed 0 http://getmarketsright.com/financial-markets/equities-%e2%80%93-i-am-very-close-to-a-partly-surrender-277.htm http://getmarketsright.com/financial-markets/equities-%e2%80%93-i-am-very-close-to-a-partly-surrender-277.htm#comments Fri, 19 Jun 2009 19:43:46 +0000 Peter http://getmarketsright.com/?p=277 Nikkei 225 (9.290) Topix (880) Dax (4.957) FTSE 100 (4.483) Dow Jones (8.504) S&P 500 (910) Nasdaq Comp (1.733) No doubt that I am very sceptical about the current rebound in the global equity market, or at least the speed of it, but right now we play the “all happy” game. I continue to believe in the W shape recovery, where the global markets currently are in the first V. I acknowledge that the low of the second V won’t reach the lows we had in the markets earlier this year (or last autumn in the BRIC countries). I also agree that the world didn’t end in a black hole. We might have seen the worst in Far East, seeing some…]]> Nikkei 225 (9.290) Topix (880) Dax (4.957) FTSE 100 (4.483) Dow Jones (8.504) S&P 500 (910) Nasdaq Comp (1.733)

No doubt that I am very sceptical about the current rebound in the global equity market, or at least the speed of it, but right now we play the “all happy” game. I continue to believe in the W shape recovery, where the global markets currently are in the first V. I acknowledge that the low of the second V won’t reach the lows we had in the markets earlier this year (or last autumn in the BRIC countries).

I also agree that the world didn’t end in a black hole. We might have seen the worst in Far East, seeing some signs of stabilisation in US but the outlook for Europe cannot cheer anybody.

The market was too short equities in February/March and the global banking sector leads to significant volatility, but the whole market rebounds so I am soon forced to enter partly (I regard it as a stop entry). Private investors have serious poured money into mutual equity funds who again are forced to buy. Several professionals I speak are still more side lined (like myself) than we suddenly are comfortable with. This gives an unusual market situation, as normally are professionals more ahead.

Are the consumers alive ?

The consumer is still alive but consumption has changed back from “nice to have” to “need to have”, and everything that requires financing is much more difficult. Consumers in countries with high saving ratios (or at least low household debts) are doing fairly well. A nice example is the German private consumption that has been almost flat the last 6 six (within index 100 – 105 for the whole period). It means that households in Germany, China, several countries in Far East and Africa are buying more or less as usual, but basic stuff and non expensive household appliance.

I have observed that business done on internet is growing and companies active on the internet are performing quite well. It’s all sectors involved from advertising, direct sales, software tools for internet based business. It would be tempting to argue that the global slowdown has moved customers to the cost effective internet shopping. Surely its right, but be careful, it could also be a behavioural trend among consumers that just takes off and is growing. I think that this is the case, and simply see internet stocks being a strategic holding for the next 10 years. This segment I suggest to manage in a separate portfolio of it’s own along with other geographical linked portfolios.

Allocation strategy

If S&P 500 has a Friday close above 925 I need to entry the stock market. On the next pages I list the expected future allocation, the currency mix of the first allocation. I primarily go for Chinese stocks (please read the China part) and global blue chips to balance each other (high risk against value stocks). I list the segments and the exchanges they trade on, but I am afraid of giving exact company names due to the heavy regulated environment the financial market is working under. The details can be mentioned in bilateral conversations.

The first allocation will be 1/3 of the final intended investment amount in Chinese stocks and ½ half the intended in global blue chips. Second round will include the internet portfolio, Far East (ex. China) and US.

The benchmark for the global blue chips is “The World Index” from MSCI.

The segments I choose:

Beverages: A well known producer of soft drinks. The company is listed on New York Stock Exchange.

Chemicals: All chemical companies are giving weak outlooks, but if the world starts to move then chemicals will be in demand. I choose a world leading German based one which is listed on Xetra in Frankfurt.

Food producers: I take 2 companies in the portfolio. Both are extremely good in sales globally and are very well positioned in countries like India to benefit from growing incomes among the lower middle class. The companies are listed on Virt-x in Switzerland and on London Stock Exchange (I take the UK listed to get the GBP risk).

Household goods: One US based company with the same sales profile as the 2 companies in the “food producer” segment, the company will also benefit from the same positive development among low income groups. The company is listed on New York Stock Exchange.

Personal goods: Basically same arguments as above, just the stuff is for more personal use. The company is listed on New York Stock Exchange.

Industrial engineering: If the world moves upwards, then it happens in Far East first and most significant. This Japanese company is positioned in all over Far East to participate in that potential development. The company is listed on Tokyo Stock Exchange.

Mobile telecommunication: If we like it or not – it’s here to stay and will grow. It’s always more interesting to participate in a growth market where China and Far East will outperform the world, so I choose a large Chinese and a Japanese one. The first company is listed in Hong Kong and the second on Tokyo Stock Exchange.

Oil: The oil price already has moved upwards on expected future demand but in a balanced simply and demand environment the oil price should be $85-90 (Hot Topics from last year). The conclusion is that we need oil in the portfolio and preferably companies with own reserves. I add 2 companies to the portfolio, the first is listed on New York Stock Exchange and the other one on London Stock Exchange.

Fast food: It works in good and bad times as long as the well known company can expand into new areas, which seems to be the case – even during extreme bad times. The company is listed on New York Stock Exchange.

The number of companies is right now 12.

Average P/E is 13.

Benchmark for the global blue chips is “The World Index” from MSCI.

Let’s take the last one first. We are many who have raised the US debt concern several times and it will be a long term burden for the greenback. Though the latest USD sell offs on that account seems more speculative than fundamental. On the other side of the Atlantic, in Europe, are we trying to save everything with state debt (lending plus serious large off balance sheet positions) so the debt concern will mid term swing back hitting the Euro.

The capital flows are more fundamental, as what I have seen origin from Japanese investors to a large extend. We don’t like to hear it here in Europe, but Japanese investors have growing risk appetite. They enter the risk currencies again, like NZD, AUD, some Scandies and then the Euro….. It looks like the USD is suffering, relative yes, but it’s more the EUR that is bought. That’s why I look at these flows because it feels fundamental.

The debt concern regarding US will become a true bearish factor in about 6 months. Like earlier, I continue to argue, that the preconditions the US administration uses to calculate the expected debt are way too optimistic (please read weekly’s from Q1) – it will be much worse than expected.

The short tem sentiment for USD is bearish with 1,4500 in sight, though I expect it to be a short term top with a move back to 1,4000. When I suggested the long position around 1,3300 for about 2 months ago (it was very unfortunate stopped out just below 1,3000), I suggested a turnaround at 1,4000. With the current sentiment I would of course not look for a short EUR/USD recommendation right now.

Next week I look at the US unemployment data on Friday as the very important number (exp. 9,2% and -530k). Other economic data needs to be good to help the Dollar, slightly weak numbers will hurt USD.

Target: 1,4500 followed by move to 1,4000.

EUR/GBP (0,8770) – GBP/USD (1,6100): Fair that the beaten Sterling recovers as we have signs of global stability, but since early March all financial markets have been dominated by uncritical bargain hunting. GBP has profited from this attitude because it was sold so much down. I respect the sentiment but I wouldn’t be all too bullish on Sterling.

The UK government complains about Bank of England is too pessimistic, but realistic in my view. Funny to follow that debate, but I lean more to BoE as we the economy is in unknown territory. I agree that the housing market show signs of improvement but many private households are in hopeless debt situations. The commercial property market will drop even more, so more problems are ahead.

Just a few less important economic data next week. In respect of the GBP bargain hunters, Sterling will be supported.

Targets: EUR/GBP range 0,8500 – 0,9000 GBP/USD range 1,5800 – 1,6300

Below you will find my weekly view on the very challenging financial markets.

Read more about all the interesting happenings in the financial markets in the 4 entries here below. I hope you find it interesting to read my private view about the consequences for the stock markets, currencies, China and what to expect from the central banks.

I apologise for not having updated with comments the last 3 weeks but I had 1½ weeks holiday on 2 very nice hotel. Very unfortunate did the wifi not work. Then Easter arrivved……

The 4 entries from today are:

Currency markets – Back in the risk aversion / appetite game again

Equities – A new recovery shape has been invented – the W shape recovery.

China – The Ox is strong

Central bank rates – What can they do? Print more money…..

Currency markets – Back in the risk aversion / appetite game again.

EUR/USD (1,3180): This time the FX comments are a bit shorter as it is mainly a correlation play with risk aversion / equities right now.

During my holiday the long entry idea at 1,3300 was reached and is still alive as the stop loss is at 1,3000. The range after was 1,3100 to 1,3600. I had expected EUR/USD to trade much closer to 1,4000 after Easter based on the buoyant stock market. Clearly didn’t materialise so far and EUR/USD looks toppish below 1,3600 right now. I keep the idea, but I still believe in renewed focus on problems in some CCE countries.

One interesting figure I noticed during my holiday comes from the shipping industry. The outstanding hedges executed by South Korean ship building companies amounts to USD 10 – 30 billion. All shipping companies would like to cancel the contracts with the ship yards, though difficult. How large a portion of the hedges that needs to be unwound is hard to say. For those with South Korean Won risk it’s very interesting to follow but even in EUR/USD terms it is interesting.

Target: Long from 1,3300 with stop loss 1,3000 and target 1,4000 (possible turnaround level).

  
EUR/GBP (0,8800) – GBP/USD (1,4975): The change in risk aversion towards higher risk appetite for everything of course supported Sterling seriously. It’s worth to note that the housing market have detected some small improvement signs the last 2 weeks, though no trend turnaround.

I don’t have so much to say right now as it is very much equity and general risk appetite related. It’s more interesting to read the equity part. Sterling will be supported for another week so I adjust the GBP/USD range higher but keep the EUR/GBP target as midterm target.

Targets: EUR/GBP  0,9500     GBP/USD range 1,4750 – 1,5250 .

EUR/JPY (131,05) – USD/JPY (99,40): The EUR/JPY range holds quite well and it looks to do so for another week.

As mentioned many times earlier should JPY drop like a stone based on the fundamentals, but it has not started yet despite the higher USD/JPY level. The move and current support is more based on the greenback that is firmer.

I keep an eye on long EUR/JPY positions in Far East. Later this month they could be closed out.

Like under Sterling, the equity markets and risk appetite are the impulses for Yen. Fundamentals are less important.

I keep the targets for the moment.

Targets: EUR/JPY range 128,00 – 133,00  USD/JPY 93,00 

Equities – A new recovery shape has been invented – the W shape recovery.

Nikkei 225 (8.743)  Topix (835)  Dax (4.542)  FTSE 100 (3.989) Dow Jones (7.920)  S&P 500 (835) Nasdaq Comp (1.626)  

The current uptrend in global equity markets is so persistent that I am very close to revise my view on this asset class. So far, I have for a very long time (since early 2007 or longer) argued to stay away from stocks. If the current upside momentum continues for just another week or two I will adjust my view to be 25% long of the total expected allocation to equities.

The downturn will reassume, the question is just when. With all the stimulus packages a W shape recovery is about to be created – what is a W shape recovery? Personally I have never heard about it before, but I think it is a simple way to explain what will happen.

The left downwards line in the W is the crash the world has explored since late 2007. The far right upwards line in the W is of course the healthy and real upswing that will return one day – hopefully. In between we have the difficult stuff. The first line up in the W might be where we are now. If it’s steep, the second downturn will be very steep and the low in the second part of the W will be lower than in the first part. Official stimulus packages are made for borrowed money meaning the governments move future consumption (public and private) to current consumption. Too enthusiastic public spending (stimulus package is the new official buzz word) will lead to a prolonged up- and downturn in the middle of the W shape recovery. Higher public spending now leads to higher probability of a lower bottom in the second part of the W (debt repayment or some governments simply might run out of money…..).

There is a chance that the second bottom in the W will be higher than after the first down line. This argues for going long as mentioned in the start. Right now there is a global consensus about better times next year. After a negative GDP growth of 5-10% this year is +1% next nothing to cheer about, but investors do, and I need to respect this. Some argue that the negative growth rates are less steep, which is correct but we still haven’t got any feeling about where the bottom is. One thing I take as positive is a few good signs from the housing markets in US and UK. In the areas with very large price reductions some buyers are emerging, but it also indicates for rest of the world how low housing prices needs to go before a two way market is working again.

Realisticly seen is the current positive consensus more based on expectations than anything else. All the PMI’s and ISM’s plus other expectation surveys have turned around late but reality looks really nasty. Credit is tight but we can live with that, industrial production has dropped but partly due to destocking. Other negative impulses are a true threat, corporate investments (particular in the industry) are dropping like a stone this year and unemployment is on the rise. Fed’s Fischer says that US unemployment will be above 10% next year and weekly working hours are on a multi year low. Same picture in Europe, but there is risk of an explosion in continental Europe. The number of employees who have been saved from getting fired by lowering their working hours to a de facto part time job is massive. I see a big risk of these jobs disappearing, but it is hard to say if it will be by end of Q2 or Q4.

The hope is caring the current uptrend because investors still live in the V thinking. I expect the hope to be strong enough to represent 1/3 chance that the second bottom in the W is higher than the first one. This is against 2/3 risk of a lower second bottom in the W. 1/3 chance for a higher future bottom might be enough to argue for entering the stock market with 25% again. For a long time bear it’s not so easy, but within the next 1 or 2 weeks I should make my mind up, well aware that it is a W shape recovery……..

Targets: Nikkei 225 6.683  Topix 697  DAX 3.075  FTSE 100 3.456  Dow Jones 6185  S&P 500 656 Nasdaq Comp 1191

China – The Ox is strong

Hang Seng (15.670)  Shanghai B (168,00)  USD/CNY (6,8320)

For the next 12 months we won’t see the lows from last autumn and I need to revise my thinking about Chinese stocks.

I have always argued that the turnaround should come in China and other countries in that area. But I admit that I didn’t expect the turnaround to happen so fast and I will claim that it is not sustainable. The counter reaction might come next year.

No doubt that domestic China has seen some improvement. The number of passengers on domestic Chinese flights lately have shown y/y growth rates of more than 10%. Different consumer segments also have shown good signs. But in reality are we talking about small indications.

The rest for sure is partly influenced by the government. The government officials talk the market up. The car sales numbers are helped by government buying of new cars that should have been bought later in the year. Rumours that the slightly positive housing market sales partly is caused by state run banks that are forced to increase their lending (fake mortgages might be in the game…..).

The Q1 GDP numbers that will be released Thursday are long awaited. The expectations have been around +6,3% within a range of 6% – 6,8%. Based on comments Wednesday the number will be around 6,0% in the very low end of expectations. The market will look at the q/q development and I think it could give a positive impulse to the stock market Thursday. What is very important to note, is that whatever the number will be, then it is inflated – it should have been lower……The government have done everything to keep the growth running. State owned companies have been persuaded not to fire people, companies are importing raw materials with the sincere hope they will be used later etc.

If the Communist Party finds it necessary with an additional stimulus package, I take it as a clear sign that the situation is worse than expected. It seems likely that the package is under way.

Earlier this week Financial Times had a very interesting article about the Chinese housing market. Mr. Cao Jianhai, professor at a leading government think tank, argued that property prices will drop another 50% during the next 2 years.

All these alarming signals are not having any impact on the market right now, but fit well into the W shape recovery.

While I consider the strategy about Chinese stocks I remove the targets.

Below you will find my weekly view on the very challenging financial markets.

Read more about all the interesting happenings in the financial markets in the 5 entries here below. I hope you find it interesting to read my private view about the consequences for the stock markets, currencies, China and what to expect from the central banks.

The 5 entries from today are:

Currency markets – Finally reacting on different factors

Equities – Another bull go, backed by the US tax payer – PPIP it’s called this time….

China – Reorganizing the car industry

Hot Topic – EUR/USD – Did Fed start a new EUR/USD trend ?

Central bank rates – They did, quantitative easing from Fed…….

Currency markets – Finally reacting on different factors

EUR/USD (1,3550): This weeks “Hot Topic” is EUR/USD but the conclusion is here.

Short term the US housing data Monday to Wednesday might help the greenback and even the personal income (exp. -0,1%) and personal spending (exp. +0,2) could support. Funny enough, I have the feeling that if the PPIP news are well received it’s also dollar supportive. It explains the entry level at 1,3300 if I should take a position. As it is too early with the big investor depression about the huge US debt, the position will not be the fundamental one. Therefore I would choose a stop loss at 1,3000 and very likely an exit at 1,4000, maybe even a turnaround at that level.

The reason is, that when reality comes back to the market, then the Euro negative factors will dominate for a period. These are the CEE problems, Euro Zone growth deteriorating and the collapse of the Euro. The sell off will be 10%, starting just after Easter.

Target: Entry level 1,3300 with stop loss 1,3000 and target 1,4000 (possible turnaround level).

  
EUR/GBP (0,9360) – GBP/USD (1,4470): Last weeks unemployment data once more confirmed that the deterioration of the UK economy continues with no end in sight. Basically the target in EUR/GBP at 0,9500 was reached but I have the feeling, at that level are many sluggish news priced in. We will reach 0,9500 again but currently is Sterling lifted by the positive sentiment in stock markets. When 0,9500 is reached again it will be the median for some time.

One important figure is released on Thursday, the February retail sales (exp. -0,2%). I think it could be better than expected and also supportive for GBP.

GBP/USD will be supported by the downwards pressure on Dollar meaning the range will be moved upwards to trade around 1,4500.

Targets: EUR/GBP  0,9500     GBP/USD range 1,4250 – 1,4750 .

EUR/JPY (131,60) – USD/JPY (97,15): The Fed move last week hit my target of 100 to 102 in USD/JPY before the financial year end at 31^st March – it won’t happen now. I expect that some year end realisation of foreign assets (from a Japanese perspective) will be executed within the next week. It leads to a cap in USD/JPY combined with the general bearish USD sentiment.

Friday is the data day in Japan with the Tokyo March CPI (exp. +0,3%) and the February retail trade (exp.    -0,6%). Particularly the retail trade will be more than interesting, I would go for an even lower number.

EUR/JPY is supported by higher risk appetite. As some in Far East say, some of the riskier currencies are favoured like the Euro. That view will probably please Mr. Trichet, but it shows how investors are seeking towards the large currencies of the different regions, like Yen in Far East. With EUR/USD trading higher but USD/JPY lower, then EUR/JPY will trade around 130,50.

Targets: EUR/JPY range 128,00 – 133,00  USD/JPY 93,00 

Equities – Another bull go, backed by the US tax payer – PPIP it’s called this time….

Nikkei 225 (8.216)  Topix (792)  Dax (4.719)  FTSE 100 (3.974) Dow Jones (7.555)  S&P 500 (792) Nasdaq Comp (1.509)  

It almost feels like history, but I need to touch base on the surprise announcement from Fed last week about buying T-bonds. If you had asked me even 1 minute before the announcement, I wouldn’t have believed it to happen. Mr. Bernanke is truly living the “helicopter speech” (if you need a copy I can provide it).

The bond market intervention from Fed only helped US equities for a few trading hours, so why spend time on the plan? The plan is of serious magnitude and has 3 short to long term implications. The 10 year T-bond rates dropped 50 basis points within minutes. This should be a very strong impulse to buy stocks but this basically faded out very fast. A good sign that the bull sentiment was about to end for this time.

Long term, the intervention plan is serious interesting for the stock market. Fed says, that they want to stabilise the housing market. I trust them, and they know that the US economy won’t find foothold before private households feels confident about the future and their own wealth situation. I fully agree with the observation and it’s a clear signal about how worried Fed is, which the equity investor should take as a warning signal.

The hidden agenda is really important. Fed simply wants to create inflation to help the highly indebted private households. Deflation is bad for assets (a true risk right now), what some call natural inflation around 2% we like but higher inflation is unpleasant for assets – this should worry equity investors. The old Fed Chief Mr. Greenspan was correctly criticised for “the big experiment”, but this time the game is highly toxic……

Talking about toxic, then the new bull hit in the market is called PPIP (Public Private Investment Program) presented by US Treasury Secretary Timothy. A burden will disappear from US banks, that’s correct, but they also need to take the loss if the toxic assets haven’t been valued at the sales price. Private investors are intended to join PPIP, but investors should only join if it’s a good deal – if it’s a good deal for investors, why should the banks sell the assets? The US Government will try to sponsor both sides so the deal is acceptable for banks and private investors participating. The bulk of toxic assets is mortgage bonds, basically debt issued by the normal tax payer. As mentioned above must the deal somehow be sponsored by the US Government, backed by US tax payers. So the US tax payers sponsor financial market participants to trade their own debt – did somebody mention the ponzi scheme……it’s toxic.

I fully accept that the market use all positive signals to buy stocks, and that leading indices are trading above important support levels now. DAX stayed above 4000 on Friday, Monday Nikkei just went straight up through 8000 and Dow Jones will stay fine above 7000. This alone will create short term support. In addition we have the financial year end coming in Japan, where it seems, that there have been a serious interest in buying stocks higher from official or semi official names.

An even stronger force is the mutual interest among investors and market participants in higher equity prices. It sounds strange, but should not be underestimated. Many would prefer to live with higher P/E ratios just as long the stock markets trades upwards as well. The hope must of course be that corporate profits turn around from the current downward trend. This I consider a lot.

I might be about to make a serious mistake by not acknowledge the current bull market, but I just see the underlying fundamentals as continuing lower.

Global unemployment continues to rise, and maybe even accelerates. This might go on for another 12 months or so. Parallel the global downturn in the private housing market is spreading and accelerating (including China but with Switzerland as the only exception). Despite the many stimulus programmes it’s a natural reaction if consumers simply scale down, and continue to reduce spending.

BASF AG, the world’s biggest chemical producer, has halted construction at two facilities in China. The company simply is in line with all other companies reducing Capex. The significant reduction in company investments adds to the lower global demand, and it will take time to speed up again.

About BASF AG, the following comment came from their Chairman Mr. Jürgen Hambrecht saying that, “demand for chemicals will not rebound this year. It may recover next year, or at the end of next year.” I note the comment because chemicals are used everywhere around the globe. He might be too pessimistic but it could also be that the view turns out to be optimistic, as we haven’t seen the bottom yet.

The price action during the last 2 weeks shows that the market is closer to a level where investors are comfortable to be long, but for the above reasons I stay with the view that it is too early to enter the market.

Good arguments for going long equities are more than welcome, as I consider the current market a lot.

Targets: Nikkei 225 6.683  Topix 697  DAX 3.075  FTSE 100 3.456  Dow Jones 6185  S&P 500 656 Nasdaq Comp 1191

China – Reorganizing the car industry

Hang Seng (13.447)  Shanghai B (152,00)  USD/CNY (6,8330)

This week the market will chew on the old data once more and focus on different rumours about old or coming numbers.

The domestic sentiment is still positive and will trade higher. Hang Seng is very bid due to the large component of real estate and banks, so up as well, following the world.

A currently battled sector might be worth to have a look at.

If you believe that car producers will belong in the future equity portfolio (it will in mine portfolio), then the Chinese government has decided how the Chinese controlled car industry will be shaped in the future. The interesting plan was published 20th March.

According to a State Council statement it plans to reduce the number of automakers before end 2011. The spilt will be to two or three groups with an annual production volume and sales of 2 million vehicles each. The next level is expected to be four or five companies at 1 million each. Today 14 carmakers produces 90% of the domestic sales, the number of companies is planned to be 10 in 2011.

The 4 surviving major groups are indentified:

FAW

Dongfeng Motor Corp

Shanghai Automotive Industry Corp.

Chang’an Auto

These companies have been encouraged to pursue mergers and acquisitions. How and in what direction, the statement didn’t mention.

A bit interesting about SAIC, China’s largest automaker by sales, as this group is thought to be in the second wave of mergers. The company merged with Nanjing Auto in 2007.

Please note that the above information is not a trade recommendation, but is seen as important information when building the equity portfolio…..

Maybe a word about the February Chinese auto that jumped 25% y/y. No doubt that the reduction in taxes on cars with small engines had an effect but the February 2007 number was very low due to Lunar New Year. The rumours also say that the government and public departments bought many cars in February, though unconfirmed as usual.

I keep the target, but know that I am under pressure like with the rest of my views..

Targets: Hang Seng 11.000     Shanghai B 110

Hot Topic – EUR/USD – Did Fed start a new EUR/USD trend ?

EUR/USD (1,2975): Last week I was waiting for the next hurricane, but it was a big surprise for me that Fed should be behind it. I have long argued that the market long term will judge the US debt very negative sending the greenback lower. Last week we got a feeling for it as the dollar index had the steepest weekly drop in 24 years. My problem is that it was a surprise and conflicts with my short term view on EUR/USD.

A Fed purchase of T-bonds as quantitative easing was the next step in Mr. Bernankes “helicopter speech”, where the global financial community showed “thumps down” by selling the greenback. The lower yield on US assets of course also drags down the Dollar. For those who might not recall the whole speech, I will just mention the 4^th and final step. It is that Fed buys foreign bonds like for example German bunds. As Fed only has very limited currency reserves they would need to sell their own currency to buy EUR. I had difficulties to imagine that Fed would announce to buy T-bonds at the current interest rate level, but the 4^th step is beyond my wildest imagination.

With the current general relief in several markets and the higher risk appetite the CEE concerns are down played right now. It also means that the downwards pressure on EUR from this concern has faded out. The prior recommended downwards play through FX options wont materialise right now, and the option premium is very unfortunately lost. Due to the Fed surprise, the EUR/USD sentiment has changed to “buy on dips”, but due to the surprise I have difficulties to fine tune it. I would say, that a dip is 1,3300, but as I trying to get a feeling again, it can be that the market is more bid than I expect – i.e. other participants are bid at higher levels than 1,3300.

The CEE related problems will return, when reality returns to the market. But other underlying forces are out there working as well. Should Fed one day decide to use the 4^th step as mentioned above, then EUR/USD will go straight up in 2,0000. It would as a side effect cause the explosion of the common Euro Zone currency within less than a month – it will work as an external chock that can’t be absorbed.

But the Euro will suffer from other internal factors that currently seem to be forgotten because the financial markets are in the happy mood. Friday, the German CDU politician Mr. Otto Bernhardt really gave us some colour with his wonderful comments. I think he gave some statements that he might did regret afterwards. Based on his position as Member of the Parliament and CDU’s speaker of fiscal policy, I would judge that he has some insight in internal reports and the work on EU level.

Mr. Bernhardt said that, ECB holds a rescue fund that can be activated within 24 hours to bail out Euro-in members, ECB later denied it (the help would come in form of loans Mr. Bernhardt said). He also believes that it is more likely that the rescue fund will be utilised than not. I that context he mentioned Ireland and Greece as the most possible to borrow from the fund (i.e. go bankrupt) – later denied by the whole European community. Mr. Bernhardt later tried to adjust his comments, by underlining that a Euro-in country can’t go bust because the Euro would collapse. That point is fair enough, but the detailed information he gave didn’t come from pure fantasy.

Monday China suggested to use a globally common reserve currency, the SDR. It’s another sign that they would like to diversify but it would be easier if the world agreed on that (many countries let their currency reserves reflect their respective trade weighted indices, so the idea might not fit all countries). Anyway the SDR basket is 44% USD, 11% JPY, 11% GBP and 44% EUR, meaning a significant need for Euro’s if the Chinese plan came together.

The risk is not a global agreement but that China starts to reduce USD holdings and to increase EUR holdings, they have advised to do so for about 1½ years ago.

As a counterweight we have European growth dropping like a stone. Just today I saw one changing the 2009 German GDP growth forecast to possibly -7% (yes, minus seven….). Then it doesn’t help that the German GDP will grow with 0,2% in 2010 – it’s below the statistical error…….

Ok, so what is the conclusion on all this and the according strategy?

Short term the US housing data Monday to Wednesday might help the greenback and even the personal income (exp. -0,1%) and personal spending (exp. +0,2) could support. Funny enough, I have the feeling that if the PPIP news are well received it’s also dollar supportive. It explains the entry level at 1,3300 if I should take a position. As it is too early with the big investor depression about the huge US debt, the position will not be the fundamental one. Therefore I would choose a stop loss at 1,3000 and very likely an exit at 1,4000, maybe even a turnaround at that level.

The reason is, that when reality comes back to the market then the Euro negative factors will dominate for a period. These are the CEE problems, Euro Zone growth deteriorating and the collapse of the Euro. The sell off will be 10%, starting just after Easter.

Target: Entry level 1,3300 with stop loss 1,3000 and target 1,4000 (possible turnaround level).

Central bank rates – They did, quantitative easing from Fed…….

US Federal Reserve Bank: Quantitative easing……

Bank of England: Now at 1,00% with a good chance that they cut again. 

European Central Bank: Next cut is in April to 1,00% from the current 1,50%.

Bank of Japan: 0,10% – that was it.

Below you will find my weekly view on the very challenging financial markets.

Read more about all the interesting happenings in the financial markets in the 4 entries here below. I hope you find it interesting to read my private view about the consequences for the stock markets, currencies, China and what to expect from the central banks.

The 4 entries from today are:

Currency markets – Feels like waiting for the next hurricane.

Equities – The bulls are having a party

China – Still joining the bull party

Central bank rates – One cut more from ECB in April and we are there.

Currency markets – Feels like waiting for the next hurricane.

EUR/USD (1,2975): Trading around 1,3000 is slightly above the current range and also a sign that my bearish view on stock markets suffers short term. It is still all about equities so it’s hard to come up with anything new regarding FX compared to the comments from the last weeks. I will keep the FX views fairly short for the same reason.

I have the long term view that the greenback will be hurt from the growing US debt and investor uncertainty. Short term, on the other hand Europe has the well known and serious credit exposure in CEE. The markets act as had the risks disappeared – sorry but they haven’t. Like in the prior weeks I go for a possible downwards move in EUR/USD linked to CEE, but use FX options as the right fundamental move is higher.

In that respect, I have just a small note on the new federal economic plan made by the new US government. When people want to sell something to you, then always read what is printed in small. The budgets are based on the assumption that the US economy only will shrink with 1,2% this year and that the average growth the following 4 years will be 4%. I don’t believe in that condition, and the risk is that investors start to have the same unpleasant thinking. The Chinese officials probably also noticed what was printed in small (please see the China comments).

Given the currently more positive equity market than expected I adjust the range from 1,2450 / 1,2950 to 1,2650 /  1,3150. Though, I don’t expect that a new trend has started.  

Target: Range 1,2650 – 1,3150.

  
EUR/GBP (0,9250) – GBP/USD (1,4050): I simply stay with the bearish view on Sterling. Many bad news are priced in as usual, though there is still downside room for GBP. It was remarkable that GBP only very temporary got support from the equity rally during last week. It confirms how offered Sterling is. The unemployment figures on Wednesday are important (exp. 6,5%).

Targets: EUR/GBP  0,9500     GBP/USD range 1,3750 – 1,4250 .

EUR/JPY (127,40) – USD/JPY (98,20): Moving closer towards year end also means sideways to higher USD/JPY in my world, as it would be suitable for accounting reasons. No good news out of Japan which should argue for a fundamental sell off in JPY but I don’t think that trend has started yet. The Bank of Japan report on Wednesday certainly is worth to watch. They can’t tell any good stories, but more about how bad they think it is (they can give the report a bias, but that was mainly a problem during the prior governors period of service).

Targets: EUR/JPY range 125,00 – 130,00  USD/JPY 100,00 followed by 102.

Equities – The bulls are having a party

Nikkei 225 (7.949)  Topix (760)  Dax (3.988)  FTSE 100 (3.864) Dow Jones (7.217)  S&P 500 (753) Nasdaq Comp (1.404)  

Do doubt that the current environment is positive – is it a trend turnaround or a bear market rally? The rational answer is, that it is a bear market rally because there is still no rational reason for rising stock markets. The major problem with my opinion is that the market many times isn’t particularly rational. In addition I acknowledge that this rebound has been more forceful and more substantial than prior.

I actually spend the weekend reading some bull articles and research to test my bearish view. For the frequent reader it won’t be a surprise that I keep my worried and bearish view on the world.

I respect the desire among many to buy (more) stocks, and fully acknowledge that a majority of ongoing positive investors will turn the market around. So it is a very good reason to take the up move last week very serious. Anything could have triggered the move but it can be that banks have been sold too much down. Just, one should read the message very carefully when Bank of America said they expected to be profitable before provisions and write offs. In the next sentence they mention that they hope it also will be the case for the real bottom line, but they were not sure. This is not a buy signal for me, because the investor is simply betting the credit related losses will be lower than priced in the market. In a world where well educated people discus if the recession is the worst since 1930 or 1980. I remain sceptical about these reasons to become cheerful and just go long stocks.

One of my serious concerns is that the global unemployment just goes up and up, and the jobs don’t come back within near future. The real estate market is going lower around the globe – any country (including China) sees lower prices for commercial and private properties. If you observe how many corporations per day, that announces postponed or cancelled investments, then it’s a good reason to rethink any stock purchase plan. Is it all priced in? It’s hard to believe.

One good thing in my opinion is that many corporate balance sheets are in fairly ok shape. I look at sub investment grade corporate bonds, as the debt quality is better than how it is priced……

Tactical I watch the flowing this week:

Japan: As mentioned last week, it will be difficult to imagine Nikkei below 7.000 this month due to year end position closing and window dressing. Please note the government report released Monday. A quote from the monthly report that says everything “the economy is worsening rapidly while in a severe situation”…….During the week, I watch another monthly report, the one from Bank of Japan on Wednesday.

Europe: UK stocks will still swing with the financials, but on Wednesday the unemployment data are more than interesting (exp. 6,5%). I think the fundamental concern will return to the market. In Germany, the reality arising from the discussions about Hypo Real Estate and Opel, the GM company, will also gain focus once more.

US: Financials surely did their part, the next question simply is, if the spill over on other sectors is strong enough to get them going. As written above, am I doubtful, but there is a lag of truly interesting economic data this week. So it’s still bullish to sideways for the week. 

Targets: Nikkei 225 6.683  Topix 697  DAX 3.075  FTSE 100 3.456  Dow Jones 6185  S&P 500 656 Nasdaq Comp 1191

China – Still joining the bull party

Hang Seng (13.031)  Shanghai B (144,00)  USD/CNY (6,8340)

The economic numbers from China are mixed. Domestic car sales went up but import and export dropped further in February. What is more mixed are the different economists views on the economic data.  It seems that each economist uses the arguments that fits to the personal view, and these are in all directions. It also shows how devoted the market is.

We will need more data to get a clear idea about the next move in domestic equities. The global positive sentiment should spill over on the Chinese stock market during the week keeping the bulls happy.

Some interesting information always come out. Friday, People’s Bank of China and also China’s Premier Wen Jiabao gave some comments. They show a very interesting concern about the future value of China’s US bond holding, both in respect of the real value, the US fiscal discipline but also concerning the Dollar. Again they gave the warning about deflation (it must on top of their minds so often it’s said), but the official China apparently also has an opinion about gold – they think it raise towards the all time high again.

The credit market in China is under clear observance after the significant numbers in January and February. I argue, that a major part has been allocated to relative safe lending like the big government supported public projects and the smaller companies have difficulties getting funding. Several well known loan guarantee companies are in difficulties. The companies have been involved in different financing of the small and medium sized companies (SME). The finance companies are de facto providing SME’s with working capital but the source is drying out. At the same time is the grey lending market under pressure as mentioned in prior comments (after all the grey market counts for around 25% of the total Chinese credit market).

It has two effects, run on official bank lending but also squeezing the liquidity for the SME’s that can’t access bank lending. The official credit growth is not as big as expected but is more moved around in the Chinese box system.

As usual, I remain skeptical about the current positive sentiment and keep the targets.

Targets: Hang Seng 11.000     Shanghai B 110

Central bank rates – One cut more from ECB in April and we are there.

US Federal Reserve Bank: Now Fed is at 0 – 0,25%. Next step is intervention in Treasuries. Fuelling money supply……

Bank of England: Now at 1,00% with a good chance that they cut again. 

European Central Bank: Next cut is in April to 1,00% from the current 1,50%.

Bank of Japan: 0,10% – that was it.

Below you will find my weekly view on the very challenging financial markets.

The week has been extremly busy and then I caused some technical problems – all in all it gave some days delay with I apologise for. Probably also causing some text problems this week, not always so easy J

Read more about all the interesting happenings in the financial markets in the 4 entries here below. I hope you find it interesting to read my private view about the consequences for the stock markets, currencies, China and what to expect from the central banks.

The 4 entries from today are:

Currency markets – The Greenback is the key again

Equities – Realistic risk conversations would help the market.

China – Wen thinks its ok, or does he?

Central bank rates – they give it another try at ECB……

Currency markets – Escaping everything.

Non major currencies

This week I start with a thought in general regarding a couple of non major currencies. The very significant

drop in some currencies like Swedish Crowns or Polish Zlothy now leads to growing sign of goods arbitrage.

It now pays of for private household to spend time and transportation costs to shop in these countries. If you

remember back when the ERM blew up in the 90’s and the Italian Lira dropped like a stone, we had the same

picture with private households importing everything from Italy.

Currencies like SEK and PLN might be able to drop another 10%, but it starts to seem excessive. Should it

be excessive, then the only two short term ways to compensate will be high inflation or a counter reaction in

the market. The high inflation within short term is hard to imagine – don’t worry, long term it will come.

EUR/USD (1,2750): Given the very large swings in other asset classes the very tight range in EUR/USD is

pretty amazing. The problem is of course where to escape to. Had the Chinese Yuan been free floating, then

we all had flocked into Yuan. It would much faster smoothen out the global trade frictions with a quicker

relief in USA and Europe. That one doesn’t work and with non Japanese investors leaving Japanese stocks,

the Euro and the greenback are the only 2 opportunities left.

The Dollar index reached a new high last week but EUR/USD stayed within the range. It shows some

firmness for Euro as well and for sure confirms one thing. Had EUR been offered, then EUR/USD would

have been much lower due to the current USD strength.

Lately the USD strength has been discussed. Partly it is caused by the same picture like last autumn as hedge

funds needs Dollars to repay investors in the ongoing asset reduction process. Also the USD funding need

from banks is growing, resulting in demand for the greenback as well.

Long term I still see the American enormous debt supply as a very negative factor for Dollars. As mentioned

last week, the CEE crisis is a risk for Euro mid term. These days it’s fairly quiet regarding the crisis in CEE,

but it is my concern that it will return very forceful. As suggested last week, this includes the risk for a short

term sell off in EUR/USD. The best way to participate is through options with short maturity, as bear

position is against the coming fundamental trend in EUR/USD (we have ideas on stock).

I only watch one number this week, the US retail sales on Thursday (exp. -0,5%). I could easily be slightly

better than expected.

I keep the range.

Target: Range 1,2450 – 1,2950.

 
EUR/GBP (0,9210) – GBP/USD (1,3750): Reached the 0,9000 target in EUR/GBP again and the very low

end of the range for GBP/USD.

It’s nothing new when I say, that everything in UK just looks sluggish and it is very impressive that all

economic numbers still comes out worse than expected. It confirms the ongoing “more soft than expected”

situation.

Some talk among fixed income people that UK will limit the gilt offerings. It’s to force investors to buy EUR

papers instead in the attempt to do everything to force Sterling lower. Living the famous “helicopter speech”

from Mr. Bernanke in full (more explanation if you wish ).

I keep the second target at 0,9500 in EUR/GBP and lower the GBP/USD range in to 1,3500 – 1,4000.

Targets: EUR/GBP 0,9000 followed by 0,9500 GBP/USD range 1,3750 – 1,4250 .

EUR/JPY (124,75) – USD/JPY (99,60): EUR/JPY in the very upper end of the range and USD/JPY moving

towards the first target at 100,00.

As mentioned above are non Japanese investors leaving Japanese stocks since some time. The JPY sell off is

more than justified by the fundamental data as they are nothing less than horrible. And, by the way, there is

no improvement in sight. I argue that he capital flows are behind the move (i.e. it’s not a new long term

fundamental based trend that has started) and warmly welcomed by the Japanese government plus

corporations.

I still go for USD/JPY levels above 100,00 at the Japanese financial year end this month (window dressing).

The EUR/JPY range is moved from 1,2000 – 1,2500 to 1,2375 – 1,2875. I keep the USD/JPY target.

Targets: EUR/JPY range 120,00 – 125,00 USD/JPY 100,00 followed by 102.

Equities – The storm reaches new highs but the ship has less and less water under the keel.

Nikkei 225 (7.376) Topix (722) Dax (3.923) FTSE 100 (3.697) Dow Jones (6.926) S&P 500 (720)

Nasdaq Comp (1.358)

Despite some relief these days, the big picture is still “serious storm”.

The target in S&P 500 at 656 was nearly reached at an intraday low of 666 Monday this week. The sell off

during the last 2 weeks might have been too fast, but I take it as a clear sign of a sentiment change among

some investors. Occasionally I have mentioned, that buying stocks since January would be a bet on an early

ending of the global economic crisis.

It’s getting clear for many people that 2009 unfortunately wont bring any turnaround or any clear signs in

that direction. What gave some comfort, despite the stormy weather, was the expectation about corporate

earnings falling, but not dropping out of the bed. Like when a ship still has water under the keel so it is able

to manoeuvre. Now corporate earnings deteriorate and it’s difficult to give guidance, like there is less and

less water under the keel before the ship strands. The risk of companies stranding is increasing, so it’s not

just a question of investors not getting any return on their investment short term. It’s a growing and real risk

that listed companies will go bankrupt.

It seems understandable what happens, as the market once more reprices the value of assets given the lower

earning expectations and the prolonged macro economic uncertainty. It is unpleasant, but as long as we can

explain what happens, it’s not that bad.

The recent sell off bring more newly convinced bears in the headlines calling for S&P 500 in 525. Normally

it’s a good sign of the steepness of the fall is fading out (by not a turnaround yet).

The market will find some support in Japan this month as I expect Nikkei to be very well supported at or just

below 7000 due to financial year end window dressing. Public like funds will act as buyers. In addition the

Japanese government can buy stock holdings from Japanese banks, but the banks would then have to book

the loss.

A public French pension fund last week announced that they will invest EUR 900 Mio in Japanese stocks

during 2009. It can’t save the market, but it is a sign of very fundamental long term investors planning to

return to the stock market during this year. Important information to notice.

I keep the targets.

Targets: Nikkei 225 6.683 Topix 697 DAX 3.075 FTSE 100 3.456 Dow Jones 6185 S&P 500 656

Nasdaq Comp 1191

China – Expectations beats reality

Hang Seng (11.931) Shanghai B (140,00) USD/CNY (6,8350)

Last week the yearly National People’s Congress (NPC) took place. Broadly covered by many news

agencies, but I of course highlight what I think is interesting for the market. Primarily the comments made in

connection with the NPC.

To be very honest, the congress didn’t bring much new apart from macro economic pep talk. That the

Communist Party didn’t had much new to offer probably was the biggest surprise for many domestic

investors.

Just one thing should be noted. The Director for the National Development and Reform Commission Mr.

Zhang Ping announced that the large 4 trillion Yuan stimulus package will be adjusted. Infrastructure

investments will be cut by 300 billion Yuan. Technology projects get an additional 210 billion Yuan, the

rural area public work projects receive 120 billion Yuan more and social welfare programs another 110

billion Yuan.

The biggest market happening was the apparent comment from Li Deshui, the former statistics bureau chief,

that moved the market last Wednesday. He was quoted for talking about a new stimulus package so the

global stock market went straight up. Li Deshui later said he was misquoted.

The leaders of the Communist Party have for some time referred to the lending growth in January. In

connection with the congress it was mentioned that new loans in February are expected to be between 800

billion to 1 trillion Yuan compared to 1,6 trillion Yuan in January. Clearly a lower growth and almost half of

the planned 5 trillion Yuan loan growth has already been utilized.

Well timed some leaders from the industry again argue for an Yuan depreciation and the Chinese Premier

Wen Jiabao talked about promoting export (using more rebates?). It will please the new G20 friends.

Based on the unofficial part of the news world, the economic reality looks less bright for China. Last week I

mentioned if Wen is worried, and I think he is. The real unemployment rate is much higher than the official

one, he admits that deflation is a threat and the trade balance figures for February will be disappointing. Talk

about that export and import has dropped with more than 20% last month.

The Communist Party is talking as like the downturn bottomed out in Q4 last year, and it could be, I admit.

The market seems very devoted about this (investors and economists). No news that I belong to the skeptical

group, as I don’t believe it’s possible with such a fast turnaround when the world is deteriorating.

During the week we will learn more when, in particular, the trade figures are released.

I keep the targets.

Targets: Hang Seng 11.000 Shanghai B 110

Central bank rates – ECB cuts again in April

US Federal Reserve Bank: Now Fed is at 0 – 0,25%. Next step is intervention in Treasuries. Fuelling money supply……

Bank of England: Another cut last week, now at 0,50% with a good chance that they cut again. These guys are desperate… 

European Central Bank: We got the expected cut and next cut is when spring comes in April – down to 1,00% from the current 1,50%.

Bank of Japan: 0,10% – that was it.

Below you will find my weekly view on the very challenging financial markets.

Read more about all the interesting happenings in the financial markets in the 4 entries here below. I hope you find it interesting to read my private view about the consequences for the stock markets, currencies, China and what to expect from the central banks.

The 4 entries from today are:

Currency markets – The Greenback is the key again

Equities – Realistic risk conversations would help the market.

China – Wen thinks its ok, or does he?

Central bank rates – they give it another try at ECB……

Currency markets – The Greenback is the key again

EUR/USD (1,2600): Today (Monday) the Dollar index reached it’s 3 years high. It corresponds extreme well with the trading pattern during the large equity sell off in October/November last year. Partly flight to quality and some hot money from China find their way to the greenback, but as the stock markets are setting new lows, investors are also forced to exit hedge funds. Hedge funds primarily are USD based so they need USD cash to pay out.

As mentioned the last couple of weeks, one would expect the Central- and Eastern European crisis to hit the Euro. That is still a risk (or opportunity) and this risk might even grow during the next 2 weeks. Though, had the Euro been trading in an offered environment, then EUR/USD would have dropped to 1,1500 by  now.

The CEE crisis will grow further, that’s why I see an increasing downside risk in EUR/USD, but it more feels like a “knee-jerk” reaction if it comes. It will all be about to find an option structure that could fit the expectations (we have them in stock). If I believed in new lower levels for good I would recommend to go short in a cash position.

ECB’s 50 basis point rate cut on Thursday is priced in the market, but could lead to some EUR selling from Far East, but not significant in the short term.

The Beige Book from US on Wednesday I watch, I keep an eye on the US ADP employment change on Wednesday (exp. -620k) as a hint about the figure of the week on Friday. The US February labour market data will be serious exciting (exp. 7,9% / -625k). Regarding the nonfarm payrolls we have a $2 bet among the colleagues every month. Last month I put my $2 at -700k, I do the same this time…..

I lower the range to 124,50 – 129,50 for the week.

Target: Range 1,2450 – 1,2950.

  
EUR/GBP (0,8955) – GBP/USD (1,4050): I simply continue to see serious and very big problems for UK. It is difficult to say the economic depression is priced in because we don’t how deep it will be. As a consequence it might be that the FX market reacts on economic numbers or maybe not. Finally I see EUR/GBP towards 0,9500 and GBP/USD trading towards the downside of the target range. All based on the fundamental economic contractive development.

I keep the targets.

Targets: EUR/GBP 0,9000 followed by 0,9500     GBP/USD range 1,3750 – 1,4250 .

EUR/JPY (122,40) – USD/JPY (97,60): To be honest I missed the current uptrend particularly in USD/JPY. I thought the ongoing bearish stock market would be enough to support Yen until coming closer to the Japanese financial year end. On the contrary do investors simply leave Japanese investments, also in line with the hedge fund activity described under the EUR/USD comments.

The extreme sluggish economic data from Japan basically argues for a much lower JPY, but from what I see is it more capital movements than new short JPY positions.

It seems to continue for some time so 100 in USD/JPY is the new target most likely followed by 102. EUR/JPY will trade in a range around 122,50.

Targets: EUR/JPY range 120,00 – 125,00  USD/JPY 100,00 followed by 102.

Equities – Realistic risk conversations would help the market.

Nikkei 225 (7.280)  Topix (735)  Dax (3.719)  FTSE 100 (3.665) Dow Jones (7.063)  S&P 500 (735) Nasdaq Comp (1.378)  

How to start the equity comments this week…..The DAX target at 3.906 was reached. It’s just to follow up on the targets and not to flag that I was lucky to be right. The new target is by the way 3.075.

Back in October/November last year when I calculated the next and lower target for S & P to be at 656, the world was different despite the steep sell off at that time as well. At that time I used the total expected earning for S & P 500 for 2009, a fair P/E value and then subtracted some uncertainty. With the expectation that the target should be reached in May/June this year (can still be the case) and it would then be time to consider when to go long.

But I am worried. The development since the start of this year has given us horror news every week. At the same time we have politicians bailing different sectors and/or companies out every week across the globe plus poring new stimulus packages into the black economic hole. Parallel the global economy is getting more unstable. The same politicians are conducting crisis management and general policy as would the economies return to earlier absolute levels – still talking about the recovery starting sometime during H2 2009.

It’s most likely a good idea with stimulus packages, it is also very vice to assure that payment systems functions and that the depositors money are safe (basic banking). But we need to be honest, because the stimulus packages will not create the turnaround but only smoothen out the downturn.

This type of crisis management is deeply worrying because politicians back it with comments about keeping everything as it was. We all know about the biggest ever credit bobble leading to overconsumption and an asset bubble.

When we get the disastrous data like output numbers dropping with 40%, then I also agree that they will rebound, but to what? If the new absolute level is 15% lower than earlier, then it’s still a significant worse new level than the world was used to. We can unfortunately not expect the future production capacity (and income) to run at the same speed as in the bubble times.

Sort of the same picture when we talk about asset prices. When I by coincident meet wealthy people they normally ask if I also agree that stocks soon will go up. Basically fine in line with many forecasts in the financial industry, where last week gave us a good example. A prestigious house lowered their end of year S & P 500 forecast from 1100 to 940, and at the same time mentioned that it indicated a 22% gain for rest of this year – now it’s 28% away (34% p. a.). The continued upbeat forecast is mainly based on a 50% higher total S & P earnings in 2010 compared to 2009 – is it realistic? It is hard to imagine, but in line with many other forecasts.

It is very though to get a sensible discussion about what to expect because the wishful thinking about returning to prior levels is unrealistic in my view. If we are mentally blogged we by far don’t get a prober risk management discussion. I fear that the talk about saving and backing everything, blogs for rational thinking about what needs to be saved and how to protect the rest as much as possible. It would also spur the financial industry to advice about how to survive the financial turmoil instead of blindly recommend a general turnaround.

It might sound ironic, but when it’s time to move away from cash, then is investing in strong companies the answer to preserve the money long term, maybe even in a bearish market – not yet and it is another story J

I have not included any tactical comments for the week as we need to get the big picture sorted out first. Naturally do all the above comments go well in line with my targets, but I have not made long term conclusions based on the above thinking yet.

It might be that this is the final meltdown to 656 in S & P 500, and this was it. Even if one is right on the trend it’s always very difficult to judge when the market enter the final stage of the big move. Several typical indicators are missing if this should be the final sell off. First, the horror news are getting more frequent and bigger proving that the famous light in the tunnel is coming very fast towards us – it still looks like that escape is the best solution. This is fine in line with the feeling that there is no foothold in any economy anywhere (in China maybe, but I belong to the sceptical camp). Then we have the equity strategists, ongoing talking about higher stock markets (they surely can’t invest for their own money), we still need to have them forecast flat or lower markets. Finally the good old one, my mother in law and the taxi driver are still not telling me that stock markets will drop further.

If all these important groups of usually good (reverse) indicators were more clear, then 656 in S & P 500 might have looked attractive as entry point in selected strong companies. Right now I am doubtful.

As said above am I deeply worried about the growing bailouts and stimulus packages combined with talk about returning to the old economic world, instead of discussing how the new world will be and how to move on when we have landed.

It will hurt currencies from weak economies and stock markets further in the coming months because investors face even bigger uncertainty, partly due to the missing realistic risk discussion.

One piece of economic data is the number of all numbers this week, US labour market data on Friday. We all know it will be bad, but how bad? Good question but depending on the movements this week, the market can move steeply in both directions after the release.

I keep the targets plus the new one for DAX.

Targets: Nikkei 225 6.683  Topix 697  DAX 3.075  FTSE 100 3.456  Dow Jones 6185  S&P 500 656 Nasdaq Comp 1191

China – Wen thinks its ok, or does he?

Hang Seng (13.437)  Shanghai B (148,50)  USD/CNY (6,8340)

Chinese stocks went lower last week. I say it makes sense because equities only went up each time a new part of the stimulus plan was released. The bulls will say that the China mainland economy has seen the worst, and therefore one of course needs to be long China mainland stocks. To be honest it’s not an easy call, but you know my standing. I see the recovery in the stock market as premature and too early, but there is a lot of information to elaborate.

During this weekend the Chinese Premier Wen Jiabao was on the first ever on-line chat with the public. His comments have been covered by several media reports but the headlines are like this. He speaks openly about the unemployment among migrant workers, and the problems finding jobs for the college graduates finishing their studies this year i.e. it must be a problem they can’t hide anymore. He also mentions that the global crisis is spreading, also within China, where he sees the export dependent eastern part of China as most hit. He talked about a long crisis.

On the upside he said that the government was willing to support more if needed. He referred to the increased consumption and bank lending in January as a sign that the stimulus packages have started to help. Furthermore he noted that the power generation and consumption is higher this February compared to 2008. It’s a number the Chinese government focuses a lot at, but could there be a Lunar New Year effect?   

Due to one report Wen also said that he is worried about the stock market. Not in what direction, but on the downside I suppose. In my view it’s a signal that the government will support if it drops too low.

Why this openness one could ask? It could be another small step towards more openness in general, or it can be because the problems from the economic downturn are so big that the Communist Party needs to communicate with the public about it. It’s China so you never know, but I am a bit to the last one.

Announced initiatives, but somehow less public, that are worth to keep an eye on. Ten industrial sectors have so far received help in different ways. The next on the agenda is the logistic sector, where the government will try to encourage more growth but also reorganize the industry into bigger players. The government will also allocate more investments in the non-ferrous metals industry. It will partly be done through direct investments in companies, but also by setting up a national reserve system for non-ferrous metals. A last point that will please G20, is to increase the export rebate……

From the unofficial information channels comes the most alarming news as usual. It’s about the commercial property market. Hong Kong is easier to evaluate because some companies are listed. Some property companies in China mainland are also listed, but there the financial information from the companies might not have the same quality as we are used to outside China. The empty office space in large metropolitan areas is simply just growing. At the same time are very large developers and projects coming very much closer to the credit renewal season – probably within the next 12 months. We are talking about very big financing needs and partly are western money involved. Lower rental income than planned for the projects and with the western pockets empty it will be a tough task…….Despite that property prices has come down in China, one still needs to sit on the hands to wait and see what happens.

I keep the targets.

Targets: Hang Seng 11.000     Shanghai B 110

Below you will find my weekly view on the very challenging financial markets.

Read more about all the interesting happenings in the financial markets in the 4 entries here below. I hope you find it interesting to read my private view about the consequences for the stock markets, currencies, China and what to expect from the central banks.

The 4 entries from today are:

Currency markets – Event risks are rising

Equities – It feels heavy……

China – So far the Ox turned out to be a bull.

Central bank rates – The next in line is ECB

Equities – It feels heavy…….

Nikkei 225 (7.750)  Topix (770)  Dax (4.381)  FTSE 100 (4.190) Dow Jones (7.850)  S&P 500 (827) Nasdaq Comp (1.535)  

Also this week US markets will be leading, but with some regional twists.

First a quick comment on the G7 meeting from the weekend. I hope they enjoyed the nice Italian food because that must have been the best outcome. In good times, G7 had very difficult to agree about anything so it’s an illusion to believe they find each other in tough times. The statement confirms that there are no common goals or mutual interest in coordinated economic action. Each country goes back to continue with what they are doing. The statement from the next G20 meeting will be very colourful but very limited in terms of what markets will expect of good news.

US:

Dow Jones is leading the way for US stocks again so I expect S & P and Nasdaq to follow despite some appetite for large tech stocks.

The General Motors plan that they have to present Tuesday will attract attention. I think it will highlight the problems for the automotive industry in particular and the manufacturing sector in general. In that context we should expect the US car part suppliers to ask for USD 25 billion in support as well.

Last week we had 2 important reactions in the US stock market. The much stronger than expected January retail sales which didn’t cause any buying at all – that would have had been the case 1 week earlier. Every body knows that it was a very short lived winter sales hype behind the upbeat number. Investors are getting very serious concerned about the macro economy. The second happening was the news from Thursday about the help package for house owners. I wonder if this came as a reaction on Dow Jones touching the November lows or was it just a coincidence ? I watched the market rebound 3% 1 hour before the bell – very sad for a bear, probably speculative, but also a sign that it’s important to get the housing market stabilised before the economic downturn can find a bottom. 

More about the help package for house owners should come out during the week, which might give support to the equity market, but short lived. The US housing market will also be of interest with NAHB on Tuesday (exp. and housing starts on Wednesday (exp. 530.000).

Germany:

I addition to the impulses from US, the possible government intervention in the case Hypo Real Estate confirms the severe situation. The growing focus on the serious economic problems for Eastern and Central Europe will weight as well.  All this topped with some earning reports. Daimler AG on Tuesday, Merck KGaA on Wednesday and MAN AG Thursday. 1 or 2 could surprise and support the market.

Japan:

This morning we got the long awaited Q4 numbers, unfortunately worse than expected. Wisely the Japanese government tried to front run the bad news by announcing an even bigger stimulus package during the weekend. The market reaction shows that investors want to see real economic growth or as minimum a feeling of foothold – not in sight yet. Best support, window dressing ahead of year end next month.

Targets: Nikkei 225 6.683  Topix 697  DAX 3.906  FTSE 100 3.456  Dow Jones 6185  S&P 500 656 Nasdaq Comp 1191

China – So far the Ox turned out to be a bull.

Hang Seng (13.437)  Shanghai B (148,50)  USD/CNY (6,8340)

Chinese mainland stock markets continues up with domestic investors (A indices) as the key driver. No doubt that a part of the force is the fact that investors only can invest in real estate, stocks and place money on deposit.

Very understandable that stocks looks as the preferred alternative as long as the stimulus packages are rolled out. An example from last week was the ship builders that got a national protection, sending shares significant up within the same day. The usual question is, if this is sustainable?

It continues to be a matter of faith, where I continue to be skeptical. The reaction on economic data (particularly the Jan trade data) last week proves this situation. The absolute numbers were down, partly due to the Lunar New Year taking place in January instead of normally in February. Some economic models suggest an adjusted rise in exports, but does this day count game make sense when we know, for sure, that there is spare production capacity? If production had been running at its maximum, then holidays would have lead to a drop in output. Everybody knows when the Lunar New Year is, so with spare production capacity producers easily could have increased production in early January to meet demand during the month. The conclusions from different analysts depend on what direction they in general argue for.

The January credit growth data that I wrote about last week, continues to surprise. Even higher than first announced, so my reservation towards the cheerful analyst might be wrong. But very interesting has the Chinese central bank asked to get more details about how the commercial bank lending is allocated. PBoC has also heard the rumours about the lending not going to the sectors that are desired.

Over the weekend a couple of interesting things came up. According to a newspaper article, the company DDMA Market Research & Consulting released a survey showing that 60% of consumers in 5 big Chinese cities have reduced or plans to reduce spending. Unfortunately, the survey didn’t give the respondents the possibility to tick off “increased spending” just “not reduce spending” as the most expansive. Though the conclusion should be, that consumption risks entering the contractive zone – very much against expectations in the stock market.

A very important comment from Yi Gang, Vice Governor of the People’s Bank of China, where he in a speech Saturday hinted another possible interest rate cut. He also said that “China’s main task in the short term will be to fight against deflation”. Two immediate thoughts when I saw that one was, that if this is the case for China it could easily be the same for the rest of the world. Secondly, deflation is poison for assets…….

Last, a more Hong Kong and Hang Seng related comment from Hong Kong’s finance chief, Financial Secretary John Tsang who also spoke Saturday. He said that Hong Kong probably had negative growth in Q4 2008 and that the economy will deteriorate further in 2009. Very realistic he also said, that he was not sure when the global financial downturn will come to an end. Unemployment will continue to rise, particularly when college students graduate around mid 2009. He thinks this will be the peak.

I remain a bear in general and therefore cautious even regarding China and keep the targets.   

Targets: Hang Seng 11.000     Shanghai B 110

Currency markets – Getting more interesting again.

EUR/USD (1,3040): EUR/USD stayed fine within the range last week and I suggest another week with range trading in EUR/USD, though slightly upwards adjusted. Regardless of range trading this week, then the currency market is getting more interesting.

Capital flows still dominate the swings, but with big fundamental happenings like the US unemployment data last Friday and growing concern about the Euro’s survival new trends will start (when the markets decides which is the biggest risk – mid term it’s still the upside in EUR/USD that I bet on).

The survival of the Euro I will save for a “Hot Topic” comment when time is right. In the meantime, in this weeks edition of The Economist a good article about the future of the Euro is published. They conclude that there is no alternative to the common unit – currently they are right, but I am not sure that the “man in the street” in some Euro countries will agree much longer.

2 data highlights this week are the US Jan retail sales on Thursday (exp. -0,4%) and the Euro Zone GDP for 4^th quarter (exp. -1,8% q/q). Further I follow the testimony from Mr. Bernanke Tuesday and also the US 10 year Treasury auction – actually pretty important.

I adjust the range from 1,2650 / 1,3250 to 1,2750 / 1,3350. 

Target: Range 1,2750 – 1,3250.

  
EUR/GBP (0,8760) – GBP/USD (1,4910): I am still totally wrong on GBP, which at least fits with the false view on equities last week as well.

No doubt that Sterling profits from growing risk appetite. As mentioned in the comments on the stock market are the markets in a current bull mood that also supports GBP.

Not much on economic data this week, so the Sterling swings will more be a function of capital flows i.e. mainly changes in risk appetite and stock markets.

I still go for the upside in EUR/GBP but need to lower the current target to 0,9000. GBP/USD I expect to trade around the current 1,4900 level.

Targets: EUR/GBP 0,9000 followed by 0,9500     GBP/USD range 1,3750 – 1,4250 .

EUR/JPY (119,40) – USD/JPY (91,40): Enough reasons to sell JPY during the last 5 – 6 trading days, so the good question is what the key driver is.

The Japanese equity market didn’t really perform like rest of the world and European based plus some Mid East investors actually sold JPY. Looks like a portfolio shift. Then we had the usual growing risk appetite leading to a JPY sell off.

The fundamentals were truly bad, confirmed Monday morning by the Machinery orders for December. In addition to all this a larger purchase from a single account went through Friday/Monday, but a one off.

The fundamentals will send JPY lower at a certain time, but not yet. I still argue that capital flows are the JPY driver right now. Being bearish equities makes me argue for a renewed test of the downside in EUR/JPY and USD/JPY.

Targets: EUR/JPY range 114,00 – 120,00  USD/JPY 88,00. Expect intervention.

Equities – A story about P/E ratios.

Nikkei 225 (7.969)  Topix (779)  Dax (4.635)  FTSE 100 (4.284) Dow Jones (8.281)  S&P 500 (869) Nasdaq Comp (1.592)  

In early October 2007 the S & P 500 was trading at 17,0/17,5. About one month later in mid November the level was at 16,5/17,0, a bit lower after the October high in the stock market. Despite clear signs of a slower US economy, investors also in November 2007 believed in “the sky is the limit”. I surely remember it, as I was bearish on the world already then (what a surprise) and was about to think that I had made a mistake of the century by not owing any stocks.  

Last week the small quality equity research house Bernstein lowered their total S & P 500 earning forecast for 2009 from $66,10 to $58,10. Using the Friday S & P 500 close at 869 it results in an expected P/E ratio of 15 for 2009.

Now, you might start to figure my point out J

I would never argue just to look at P/E, or say that S & P 500 is the whole world nor might the research forecast be right. But P/E ratio’s can be an interesting piece of information and S & P 500 is after all a leading stock index. The forecast off course fits my opinion, but I still argue that there is quality behind the forecast.

My thinking is very simple. In the autumn 2007 the world was running for full speed with high expectations to corporate profits. Even growing corporate earnings were priced in the market. In the meantime the global economy is in the worst crisis since 1930 some say (I would argue since 1982 – 1983, but it will soon be worse than the early 80’s). Corporate profit deteriorates at a pace we haven’t seen long, the US housing market continues down, countries within the Euro Zone might default, Central and Eastern Europe is heading towards yearly negative growth rates of 10%, Far East suffers in general from bad to worse.

The global economy will not V shape rebound but L shape meaning we won’t see a jump in corporate earnings later this year. It’s most likely that the results this year will be repeated in 2010 because the world totally is gearing down in activity.

Added all this global macro economic and corporate earnings turmoil together, I ask myself if it makes sense that the P/E just goes down from 17 to 15? You know my answer, it’s no.

Last week Dow Jones found support below the 7950 area again (S&P 500 around 810), and I respect that right now is the investor world betting on the US stimulus package once more. All in all giving wind to the large bull fraction in the market (those who beat the benchmark last year by only losing 40%……). This fraction certainly is looking forward…..One day it works of course, but we haven’t found true economic foothold yet. I continue to argue that the P/E ratio needs to be lower with the current risk scenario.

Ok, back to the tactical decisions. Last week equities were bid, but Japan didn’t really perform. Investors in Japanese stocks have within the last year been very realistic despite Japan would benefit relative more from a Chinese rebound than other old large economies. Either, Japan will go up this week or the world will correct lower – I go for the last one. The Japanese machinery orders form this Monday surely didn’t support a rebound in Japan.

Targets: Nikkei 225 6.683  Topix 697  DAX 3.906  FTSE 100 3.456  Dow Jones 6185  S&P 500 656 Nasdaq Comp 1191

China – China mainland is going from upbeat to real bid……

Hang Seng (13.769)  Shanghai B (141,00)  USD/CNY (6,8325)

Shanghai B is up from 126,50 to 141,00 on the week (11,5%) and up more than 50% since November last year.

This is serious for a bear like myself. It would not be trustworthy just to keep a target on the downside without reacting on the developments. I remain skeptical but raise the target from 90 to 110 for Shanghai B.

The current development is very tricky as we have the Communist Party using all possible methods to create a turnaround feeling, hungry Chinese investors buying A shares sending B shares higher as well, foreign investors jumping on the B wagon. All partly based on some official data combined with rumours, where the last part paints a worrisome picture.

As mentioned last week, we are playing on the same hand as Chinese government if we buy Chinese mainland stocks because the government influence the economy so strongly. So I will try to highlight the supportive measurements that are initiated but also what developments we should worry about.

The current growth incentives that the government is taking are CNY 130 billion investments primarily in rural areas (this is a batch of the CNY 4 trillion package, I can provide you with the details if any interest). Additional support have been given to the following sectors, machinery builders, textile (though less increase in export rebate than expected), automotives and future measures are soon to be announced for electronics and the real estate sector.

The banking sector is expanding after lending restrictions were lifted. This must give stimulus impulses, certainly in the stock market.

Now, many are very happy about the expansion in banking lending as it signals new growth. Can we trust the figures? Yes. What do they show? We don’t know……..This what some say. In reality is bank lending not expanding at all. 25% of the increased lending in January was provided by one bank to power grid, railway, road and hydroelectric power projects plus a large portion to discounted bills to small and medium companies.

The project finance is apparently hunted by all Chinese banks due to the stable returns (and very smart with the Chinese government supporting these projects). The discounted bill business is fine, but it is basically just providing working capital to existing business in a corporate world where liquidity seems to bee tighter.

Some sources claim that under the lending restrictions during 2007 and 2008 bank lending was taken off the balance, and this lending is simply coming back on the balance sheet again. And last to the unofficial lending market. A couple of times I have mentioned that hot money are leaving China, which corresponds well with less activity in the unofficial credit market (25% -33% of the total market).

Wenzhou is the capital of informal banking in China. Very funny can some analysts out People’s bank of China branch data from Wenzhou see that the unofficial lending is shrinking.

The conclusion is that lending is not growing as the figures suggest, maybe not at all. It correspond well with the PMI numbers for January that went up from 41,2 in December to 45,3. Is was widely celebrated as a turnaround but it is contractive as long as it stays below 50,0 (the employment component actually was lower).

Of the companies listed on Shenzhen Stock Exchange that so far reported the result for last year, 20% suffered losses, which for many companies was the first time. Among the profitable firms around half experienced a deteriorating profit.

That happens these days, but where there is a concerning Chinese twist is regarding lay off’s. Companies in China are now urged to maintain jobs. This is mainly a subject for government owned companies but also spilling over to private owned companies.

I respect that if enough investors believe that the market will go up, then it goes up. It can be that the Chinese government can change the development, but the stakes have grown very large pretty fast. Not only regarding the stimulus package, but also the “official intervention” towards private companies in attempts to avoid social unrests and further economic downturn.

I still go for a downwards correction in equities, but respect that the chips on table now is a high rolling game. One day the China turnaround is reality, but I fear that people betting on fast recovery are cashing in before we have seen all hands.

The Hang Seng target is unchanged.

Targets: Hang Seng 11.000     Shanghai B 110

Read more about all the interesting happenings in the financial markets in the 4 entries here below. I hope you find it interesting to read my private view about the consequences for the stock markets, currencies, China and what to expect from the central banks.

The 4 entries from today are:

Currency markets – A bagful of mixed sweets this week.

Equities – Which late night show are you watching ?

China – So far China mainland is upbeat.

Central bank rates – Another cut to save the world this week……

Currency markets – A bagful of mixed sweets this week.

EUR/USD (1,2810): Heavy stuff weights on Euro. Some Euro Zone countries fundamentals deteriorate pretty fast now. It apparently leads to speculation among Far East market participants about an ECB rate cut in mid February, though that would be against the guidance from Mr. Trichet, so I doubt that one.

Equities has changed the sentiment again which already sent EUR/JPY somewhat lower, taking EUR/USD down as well. This pressure will continue during the week.

Last week I thought 1,3450 would be the top but it turned out to be 1,3350. This week it feels that the top and range will be even lower trading at 1,2650 – 1,3250. Long term the Greenback will come under renewed pressure due to an oversupply of US debt and Dollars, but that’s another story.

I see the US labour market data on Friday (exp.-500 / 7,5%) as the true heavyweight numbers this week. Until then, especially the stock markets once more will dominate EUR/USD and EUR/JPY.

Target: Range 1,2650 – 1,3250.

  
EUR/GBP (0,9035) – GBP/USD (1,4180): Sterling I got totally wrong as GBP went much stronger by end of last week.

Some global UK based corporations was bought pretty well plus the financial stock rally also supported the capital flow into UK.

Furthermore caused some serious model adjustments buy back of GBP. I expect both factors to reverse into sterling selling again.

Some UK PMI numbers will be released during the week but the true number to watch is the Dec. industrial production on Friday (exp. -7,9% y/y). The expectations are very low, but they could come out even worse…

The Bank of England rate cut down to 1,00% on Thursday is priced in the market.

I argue that EUR/GBP will jump back up in the 0,9300 – 0,9700 range, where GBP/USD will trade in the low end of the 1,3750 – 1,4250 range.

Targets: EUR/GBP range 0,9300 – 0,9700 followed by 1,0000     GBP/USD range 1,3750 – 1,4250 .

EUR/JPY (115,25) – USD/JPY (89,90): ok, it’s all about equities as we have seen so many times before.

The fundamental data from Japan is incredibly weak, with rumours of a double digit negative GDP growth in Q4. It would of course have sent any currency lower if it hasn’t been for the equity linked flows.

It’s hard to say anything else. On Friday, the leading economic index for Dec is worth to keep an eye on (exp. 79,0) but not a true market mover.

It’s too early to consider a long term short bet in JPY as the above factors still are working in the other direction.

EUR/JPY is now trading in the very low end of last weeks expected range, so with the above outlook I will lower the range from 115,00 – 121,00 to 112,00 – 118,00. USD/JPY I leave unchanged.

Targets: EUR/JPY range 112,00 – 118,00  USD/JPY 88,00. Expect intervention.

Equities – Which late night show are you watching ?

Nikkei 225 (7.874)  Topix (778)  Dax (4.267)  FTSE 100 (4.072) Dow Jones (7.922)  S&P 500 (822) Nasdaq Comp (1.483)  

My wife now and then complains about that I occasionally watch late night shows. Around 11 in the evening it gets exciting. I need to admit that some of them are good looking, tall, blond, present hot stuff, they look deep in your eyes and show very nice curves – Sorry, did I forget to say, that I am talking about “after the New York Stock Exchange closing bell” commentators and quests turning up on the business channels (late evening I like Bloomberg TV in particular, because of the US twist and the ongoing upbeat view on equities.

Last Friday evening it happened again. A quest speaker (though asset manager and therefore most likely long stocks) explained that shares would go up but near term they might drop further. An important precondition was just that the credit market and lending to private consumers would get going again.

I went puzzled to bed and concluded that they haven’t got the full picture yet. People do not really understand how difficult it is to run a bank (or other financial companies) when the clients can’t make the monthly repayments on their loans. Regardless if there is provided sufficient liquidity for banks and even risk capital, then do the banks of course not lend out if they think that clients can’t repay the debt.

Private households might be too optimistic in booming times, but private individuals are actually fairly realistic when times changes. A majority are not interested in taking new loans if the outlook is that they will have too big difficulties to repay (or no fortune growth in sight).

Surely there is a difference in what banks currently can offer in credit and what private households dream about. If both groups take the realistic view, the difference might not be that big because people in both camps clearly feels the very difficult economic outlook (always too late but that’s another story).

The group that remains very unrealistic is to find among market participants. Some still don’t want to understand that we had a global liquidity and credit oversupply. The natural consequence was an overconsumption that now leads to an oversupply of production capacity. This oversupply is now getting closed down. Some investors still argue for a rebound, but to what ? New oversupply of goods or credit ?

We mentally need to understand that the world is gearing down to a new absolute activity level with lower income opportunities for both individuals and corporations.

So what do we do now ?

Hmmmm, I am bearish, so it might sounds strange, but don’t worry, because what happens is very natural. We come from an over-everything situation in a world that turned out to be more global than anyone thought. It leads to this severe and deep downturn and recession as there are no economic zones to compensate. This is how the world is and it’s very difficult to change.

Allow me to refer to the equity comments from the first week of this year – the limbo dance comment about “how low can you go in 2009”. When I prepared the comments it felt very bearish to suggest a zero gain in stocks this year and a realistic -10% performance seemed almost unserious. Simply due to too many late night show quests who talked shares higher.

Over the weekend it became clear that many have turned bleak after the January negative performance for most markets. As mentioned in the limbo article I expect that stocks will be down with around 25% sometime during 2009, but end the year down between -10% to 0%.

Despite that people say I am very bearish (I call it realistic), you should notice that I am not in the camp that forecast another 3 years of downturn. This camp will grow from now until summer, sending equities lower as the sour mood spreads.

The well prepared investor that sees the current trend as unpleasant, but at least understandable for the above reasons, also considers what areas to enter when it’s time (more on that when we are so far). Right now I forecast that it will be this year but we need to detect some economic foothold first.

Fundamentals are back in focus so the rumours about a Japanese double digit negative GDP growth in Q4 won’t cheer too many (released by end February). This week, the Jan US labour market data will overshadow any other number by far (exp. -500k / 7,5%). With the big attention on the labour market, I watch the US ADP employment report on Wednesday (exp. -530) closely as well.

Also on earnings is US dominating this week where the important are Motorola Inc and Walt Disney on Tuesday and Cisco Systems and Kraft Foods on Wednesday.

Just to conclude on the start of these comments, then don’t trust the late night shows, as it’s a fake what they want to sell you……..again, I of course only speak about the business channels J

I keep the targets.

Targets: Nikkei 225 6.683  Topix 697  DAX 3.906  FTSE 100 3.456  Dow Jones 6185  S&P 500 656 Nasdaq Comp 1191

China – So far China mainland is upbeat.

Hang Seng (12.861)  Shanghai B (126,50)  USD/CNY (6,8475)

China mainland stocks continued up on the first on the first trading day after the Chinese Lunar New Year celebrations.

I have long argued that Chinese shares will be among the first to rebound when its time to go long again, but is it time now ?

Chinese mainland stocks have shown some strength since the low last year, but as always, are stock investors playing on the same hand as the Chinese government. The current positive sentiment is mainly due to trust in increased government support rather than healthy growth. This makes the position as investor more difficult and life after the stimulus packages even more unclear. It’s also the reason why I believe in a new dive for mainland equities.

Today’s rise in the agricultural sector was on the back of Beijing’s efforts to support farmers, the same for the textile industry (Sunday, the Chinese government issued guidelines for agricultural development this year – I can provide you with more information if needed). For some time ago it was different sectors within machinery and other manufacturing sectors. Banks are getting told to boost credit growth to private households, with lower loan quality as a consequence i.e. losses will rise over years to come.

In earlier comments I have mentioned stocks in or linked to the agricultural sector as interesting but due to the fundamental changes for pheasant farmers. The above developments include a big risk for a set back if the state is involved too much.

Another very important message Sunday was in the Financial Times interview with the Chinese Premier Wen Jiabao. He is already now talking about a second economic rescue package even before the one announced last year is implemented. Short term equity markets like such news but it also shows how severe the situation is.

With interest for the US Treasury he also mentions China’s appetite for US Treasuries. One quote I find worth to note is “Whether we will buy more US Treasury bonds, and if so by how much, we should take that decision in accordance with China’s own need and also our aim to keep the security of our foreign reserves and the value of them”.

There can be many reasons why he says exactly so, but nowhere it’s just a one way street anymore. 

That was about the fundamental thoughts. Here is a short update on some indications from the last 24 hours. The CLSA manufacturing PMI in January increased to 42,2 from 41,2 last month. It’s still a low level, but export showed the biggest rise.

The Shanghai housing market showed a month on month drop of 43,53% in January a statistic from Shanghai Uwin Real Estate Information Services Co showed. It seems as a large drop, but it happens every year due to the Chinese New Year. This year the decrease was lower than other year, but the supply of new homes is falling very fast which is a sign of slowing activity.

The first numbers from Shanghai regarding consumption during the Lunar New Year week has been released. The number of tourists went up with 4,39% to 2,49 Mio but the turnover in hotels only went up with 1,6% to approximately 2 billion Yuan, though not adjusted for inflation.

The Shanghai numbers do not have any statistical value but it still underline the global picture of consumption – it is dropping in real terms.

Other funny numbers from the week in Shanghai where, 21 million passengers were transported by taxis, 12 million people used the 8 Metro lines, 30.000 staff worked during the week to collect garbage and the number of consumer complaints dropped with 9% to 425 cases.

As of national Chinese numbers this week offers one, but important, on Wednesday. The NBS PMI for January, that many would expect to point upwards after the higher manufacturing index today.

I keep the targets as they are.

Targets: Hang Seng 11.000     Shanghai B 90

Central bank rates – Another cut to save the world this week ……….

US Federal Reserve Bank: Now Fed is at 0,25% and it’s difficult to go much lower. They claim to have other methods to help the market (or you could read force the market) to get moving. Though it is not very healthy – creating a new credit bubble.

Bank of England: They will drive it as low as possible – another 50 basis points to 1,00% will come this week. Lower than the 315 year low….. 

European Central Bank: Priced in the market is a 2 step move down to 1,50%. Right know it feels like the way. From Mr. Trichets comments it is important to note that ECB won’t cut in February and next time earliest is in March. Some are now talking about 0,50% at year end – it won’t happen……

Bank of Japan: 0,10% – that was it.

Currency markets – Capital flows decides once again……

EUR/USD (1,3140): Like last week it’s more about risk aversion and swings in equity markets than anything else. EUR/JPY plays a good role in this game, where the large sell off did sent EUR/USD below the expected 1,3000 – 1,3500 range last week. I keep the same range as I expect stocks to trade more in the positive territory (please read the equity part).

Like for equities, this coming Friday’s US GDP number (exp. -5,0%).will decide if EUR/USD closes the week up or down.

The moves in EUR/GBP and EUR/JPY will also mean a great deal this week. EUR/GBP has rebounded but the trend is higher, and with slightly upwards moving stocks EUR/JPY should trade higher as well. It speaks for a EUR/USD move towards 1,3450 before 14.30 CET Friday.

Target: Range 1,3000 – 1,3500.

 
EUR/GBP (0,9420) – GBP/USD (1,3925): Sterling remains to be the wild one……EUR/GBP is back in the middle of the 0,9300 – 0,9700 range but GBP/USD went south of the expected range.

The EUR/GBP range I keep as it is, also the view that we will reach 1,0000 but we need more bad fundamental data to trigger the move. This week doesn’t offer this sort of data and another sell off in equities is not to expect right now either.

A fair discussion is if the market will be hit by intervention if EUR/GBP reaches 1,0000 ? We are close to that level but haven’t heard any real warnings from Bank of England. Britain welcomes the low Sterling as a monetary impulse so it’s hard to say how much political will there is to intervene. We are talking about 2 currencies within the Euro Zone. Meaning it’s highly sensible and both parties need to agree, and probably coordinate, on the action. It doesn’t seem likely right now. If the market panics above 1,0000 we will have verbal intervention from Bank of England.

GBP/USD will trade on the weak side during the week but around 1,4000 giving a range of 1,3750 – 1,4250.

Targets: EUR/GBP range 0,9300 – 0,9700 followed by 1,0000     GBP/USD range 1,4300 – 1,4700 .

EUR/JPY (117,50) – USD/JPY (89,40): USD/JPY will stay in the positive trend where higher equities supports USD/JPY higher and vice versa. Though, fundamentals also will move JPY this week.

The December retail sales on Thursday (exp. -0,4%) is important but Friday we have a whole bunch of December numbers. I regard the jobless rate (4,1%), household spending (exp. -3,6%) and industrial production (-9,0%) as very important – all of them. Thursday and Friday morning is the time for JPY followed by the US GDP data on Friday afternoon – it will be an exciting day.

Despite EUR/JPY is fairly volatile I keep the range from last week. The USD/JPY target at 88,00 was reached. I stay with that target as well. Looking ahead USD/JPY will be sold off again after this week.

Targets: EUR/JPY range 115,00 – 121,00  USD/JPY 88,00. Expect intervention.