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 magazine includes the following articles this month:

Global Equities: Ouch! – What now?

China: Not time to get nervous – yet

India: Stimulus is running out, can growth compensate?

Foreign Exchange: Investment flows or economic data?

Hot Topic: Inflation or deflation – Do I hear deflation?

I hope you will enjoy reading the magazine.

Peter

The results I have noted in my dairy to watch out for in January are:

Date Corporation

19th IBM
25th Royal Philips Electronics
26th Catarpiller Inc.
        DuPont
        Johnson & Johnson
        Novartis AG
        Siemens AG
27th SAP AG
28th Eli Lilly
        Microsoft

More will of course follow in February, but those I mention will give an interesting picture of the current condition. The pharma companies I see as important because they most likely will come with good results, helping to a general happiness in the market.

The new issue is getting distributed right now.

This month is it includes the following subjects:

Global Equities with ”Unemployment – lower numbers needed”, “Hello Japan – are you awake ?” and “The most important Q4 earnings this month”

China with ”Cooling down the housing market”, ”confusion about the stimulus package” and ”Renminbi – Explosion ahead”

Foreign Exchange covering the major currencies and FX volatility.

India covering the rising inflation, the capital inflow and the risks for stock market.

The Hot Topic this month is global debt – Hopefully not a Japanese headache.

I hope you will find a few minutes to look at the magazine

Best regards

Peter

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

The first 9 month GDP growth this year is so far reported as 7,7% (year on year) but will most be revised up. It actually means that China is about to overtake Japan as the second largest economy in the world.

For many it is not a surprise and the market didn’t react on the news today. Long term it should be noted as it confirms the steady picture of the Chinese economy, that the service sector grows faster than expected and the growing global importance of the economy. Another argument for having Chinese stocks in the portfolio and manage them actively.
The short term focus in the Chinese market is still on the confirmed ongoing loose monetary policy – positive impact.
Peter

The Chinese monetary policy is important but the US numbers we had yesterday are more important. How should we judge them ? Both personal income and spending went up but not as much as expected. Again a sign for me that the world is finding a new level of activity but not the fast rebound that is priced in the equity markets.

The housing data was more worrisome with the November new home sales that plunged 11,3%. This is actually the lowest level since March. Like I wrote in the last comment, then I watch the US housing market very closely. In total, I still only see a sort of stabilization but not the

rebound that the market is hoping for.
A positive market is of course good for many people so it is fine for Christmas. The blog is open during the Christmas holidays so I will be back tomorrow.

Peter

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

Some say that the rebound is on track, I judge it more like stability, like mentioned several times. The domestic demand is pushed and forced higher by the public stimulus package. That the domestic Chinese demand is growing stable will not help the rest of the world, as the outside world cannot produce as cheap as the Chinese companies can. There is no “save the world effect” in these numbers. The higher import is more due to higher commodity prices, so no happy days there.
It leads to the inflation number, higher than expected (+0,6% y/y). Also in China many have pointed at the very loose monetary policy and the risk of higher inflation. So far the change from deflation to inflation was only caused by higher food prices. That has never been seen as positive in any country, and one should keep an eye on this, as food inflation in China is very critical.
The last, but very important export data, disappointed (-1,2% y/y). More was expected based on the hope of increasing global demand.
It still gives me the ongoing picture of China being stable, partly due to stimulus, and not rebounding in any significant way. The global demand is still on hold and that inflation is coming to town just before Christmas – watch India as well.
The bulls are still in the lead and will try to use the above numbers as a buy opportunity, but it should be over by Monday. The numbers are not a reason to buy more stocks, sorry to say.

So Dubai took the center stage all of a sudden, but how should we treat it ? We all know the short term logic consequence some developers, private investors and banks will lose money. Probably are the banks the most hurt as they regarding all debt in Dubai as quasi sovereign supported, but it was not.

Apart from these very direct losses the Dubai problem shouldn’t affect the world in any particular way, unless the financial markets are in some sort of stress. But they are and that’s why the reactions are so negative. For me it shows that the upside momentum in the global equity markets is getting more and more heavy as all coming positive news already are priced in.

The Dubai meltdown also gives the markets a lead for next year, as next year will be a reality year and not a boom year. The markets have priced the swift turnaround in but if we are lucky growth will be flat in 2010 with a recovery in 2011. Next year will about coming through and survive in a credit strapped environment. This means that only corporations and banks with healthy balance sheets, some cash and a decent business will run ok in 2010. All banks globally have rebounded 300 – 400 % since the lows earlier this year and at the same time the bad debt continues to grow. It’s a bad cocktail and mainly it’s the same picture for all listed companies. Repayment of debt will become an issue in 2010 combined with zero or low growth.

The Dubai lesson in my view is to go through the stock portfolio is December and quit the stocks with a too high debt ratio compared to earnings and equity. They will be too risky next year.

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.

Data published by National Bureau of Statistics of China lately confirmed that the world’s 3^rd largest economy is on track.

Retail sales gained a 16.2% year-on-year increase, which is 0.7% above the figure of last month. Some economists hold the opinion that China’s economy rebound is mainly due to its huge stimulus package. This mainly drive up its fixed investment, and this kind of economic growth mode is not sustainable when government retreat from this huge economy. The steadiness in the private consumption gives the economy a long-term momentum which we notice as a positive factor.

Very important was the industrial output that recorded a 16.1% increase, which is the highest during the past 19 months. What should be paid more attention to behind this increase, is some other key related data. The PMI, which empirically should be lower due to the seasonal factor, increased to a year-high of 55.2. Especially the data on PMI showed a substantial decrease of the inventory of completed goods. All the data confirmed the potential expansion of factories’ production.

 Last but not least, the export, though still fell 13.8% year-on-year, is the smallest decrease in 10 months. As the Chinese government has publicly reinforced its determination to hold its exchange rate unchanged and the global economy is alive gives investors even more appetite on the export companies.

 No doubt that all the data will give renewed happiness in the stock market. Though it should more be taken as a stable story than a train to jump on.

I think the quarterly Bank of England report released Wednesday 11^th give some good hints to the market. Particularly when we bear in mind that Bank of England has been very negative. The Bank forecast growth rates of 2.1 per cent for 2010 and 4 per cent for 2011. This is suddenly much higher than the outlook of private sector economists and the Treasury’s forecast.

Bank of England still tells us not to be too excited with the wording from the governor Mr. King “Small movements in quarterly growth rates will not alter the extent of the challenges now facing the economy, such is the scale of the fall in output over the past 18 months,” he said. “We have … only just started along the road to recovery.”

I fully agree that the recovery (where ever we look) will take a long time. Though, I take this as a further sign of a good chance that UK will leave the crisis before the European continent. I continue to like GBP and some UK stocks.

During the last month I have explored some technical problems which I apologise. I have have been working on some changes as well. The new updated version of the blog I expect to launch in mid December. The comments goes on as usual.

Best regards

Peter

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 ?

After hitting a bottom at 82,2 in March the German IFO index has gone steadily up since to reach 87,3 at the latest reading in July. Are the people at the German companies cheered by the investor optimism or are things simply improving ? Honestly, I also feel at bit more comfortable and would rate the world less bad than for six months ago. The people I speak with at different companies have the same feeling, but in Germany are companies also getting a few more orders than in March / April. As mentioned in the China article, some selected Japanese and German companies will benefit from the large Chinese fixed asset investments. Another reason for the pick up is that inventories have been run down to the absolute minimum. Some inventories now need to be rebuild and traditional export countries will benefit slightly from this effect. This will not rebound the world, but just confirms that the world didn’t drop into a black hole. We do still consume, but as mentioned in prior comments are the consumers buying goods that they need to have, and not those who are nice to have. The goods bought in emerging countries are still cheaper low technology products produced in low cost countries and not the high tech stuff. A consumption pattern I think that investors should have in mind when picking the stocks.

It would be tempting to conclude that the US consumer is alive again, and just recommend to buy more stocks as US consumer confidence also hit a clear bottom in March / April. The common sense speaks against it. We all know that many private households are heavily indebted, the unemployment continues up and that the housing market is just looking less bad. The way I read the consumer confidence numbers is that, US consumers also have concluded that the world didn’t disappear but continue at a slower pace.

In the context of expecting a lot from each other, did the Asian Development Bank (ADB) publish a very interesting report on the economic outlook for the Far East. It confirms that things are improving, but to get the economy rolling again, the western old economies should start to import and consume more.

The old western economies hope that China can save the world, particularly the Euro Zone wants to export more. Far East waits for the old western economies to consume more again. At the same time are all public stimulus packages designed to help the domestic demand. So we all wait on each other. This way the economic recovery will move on, but not as fast as the expectation indices signal.

All stock markets are bid

Where ever we look it says recovery. I fully admit that I am behind the curve regarding the turnaround in the stock markets since March. So I am trapped between the currently very bid market and my view that it has already gone too far this year.

As mentioned earlier this year I found it necessary to buy 1/3 of the intended portfolio of global stocks when S&P 500 broke 925. The next tranche is when the index trades at 1030. I have always argued that Far East will turn first, but the speed surprised me. The first allotment of Japanese shares (1/3 of intended total portfolio) is when Nikkei breaks 10.500. As the rest of the world I also look for Japanese corporations with good Chinese market share within fixed asset segments, special machinery tools and luxury consumer goods.

Globally I still search for companies who sells products that supports internet based sales or services. Preferably products that generate steady fee incomes. The entry levels I mention above are stop entry levels, i. e. a stop loss on my sceptic view regarding the current uptrend in all stock markets.

As you can read, I am uncomfortable with going longer in equities but I need to respect the market. Please be aware of the relative low turnover there has been as stock prices has gone up lately. It is dangerous, and the bullish sentiment is based on our expectations to each other instead of real earnings. If stocks goes up without earnings are rising, then it can be explained by the cheap liquidity the central banks flood the world with = an asset bubble, that’s the risk.

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.

Targets: EUR/GBP range 0,8250 – 0,8750 GBP/USD range 1,6050 – 1,6550 .
EUR/JPY (135,50) – USD/JPY (95,15)
Like in the last comments – Japan is simply getting more interesting. The JPY related capital flow comments are mentioned under EUR/USD, and these are still the most important.
I watch the company results coming out these days, to see if they are willing to invest more in Japan or upgrade the production output – is the unemployment topping out ?
This week we get truck loads of economic data, one more important than the other. Wednesday retail trade and business conditions for small businesses, Thursday the preliminary June industrial production – pretty important and Friday it is labour market data, CPI and housing starts. These are basically all market movers.
Since the last update USD/JPY reached the 93,00 target on the downside and even traded lower. I know that JPY is getting sold these days but I keep the range in EUR/JPY and go for another test of 93,00 in USD/JPY.
Targets: EUR/JPY range 133,00 / 138,00 USD/JPY target 93,00

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.

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

US Federal Reserve Bank: Quantitative easing……

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

European Central Bank: A surprise cut with only 25 basis points, but another 25 basis points will come very soon, down to 1,00%.

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 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