I can only say that it’s more than interesting to work in the financial markets. During the last 20 years I have only seen a few similar situations to what we explore now. Before I started in the market we had the first Far East crisis, then the ERM that broke together and the wild FX market after that, then the second Far East crisis. But these crises were mainly new pricing of financial assets. These are often painful but short lived. 2 other situations are very important to learn from – the Japanese real estate melt down in the early 1990’s and the same in the Nordic area around the same period. The lessons to learn from these 2 occasions are very unfortunately that they are painful but long lived – i.e. what we are going through now. It’s now we need to remember that the doesn’t go down, one day it will point up. It’s still too early to buy any asset, but the good old bear here starts to watch out for opportunities (China).

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

Before my holiday I was travelling where I unfortunately had some technical problems, meaning I couldn’t enter the weekly comments. I apologise for that. The last 2½ weeks I had my summer holidays, but not totally away from the market – it was too exciting.

Instead of a “hot topic” I have spend some more time on China this time, so it’s a separate entry below this weeks comments.

Equities

Global comment

Hmmmm, what to say? Of course it wasn’t too wrong to be bear and I stay with the bear view so far. But the swings are so wild that it is difficult to consider the new levels as the market reverses within 24 hours. Before my holiday the market was spilt in hopers looking for investment opportunities and the bear camp. Now people are scared more than anything else and in exactly such times one normally should buy stocks. This time is different, as unnatural events push equities up. When short selling of some financial stocks is banned, the shorts are bought back and the equity prices goes up, but it’s not a signal to go long this time. The lows in financial stocks last week and around 17th July might now be interesting entry levels if they come again, but it’s another story. The global happiness about the US taxpayers USD 700 billion bail out is justified but only because it saved the world from a global melt down in the financial industry. Hangovers will come and most likely some nasty ones, as banks will need to make immediate write downs if they sell assets to the new “Bad Bank”. It is a part of the clean up and over time it will restore confidence, but the rebound is too early.

USA:

Dow Jones (11015)  S&P 500 (1207)  Nasdaq Comp (2179)

Like in the last months the banking sector overshadow rest of the stock market where fundamentals and other company news are forgotten. US is weak with the unemployment at 6,1% and rising, industrial production fell by 1,1% last month and retail sales is the weakest since 7 years. A very bad cocktail for any equity market and we havn’t seen any earning forecast for 2009 from US companies yet. When the earning estimates are released (and then subtract 10%), we could get an idea about the right pricing of stocks. During my holiday the target for S & P 500 was almost reached at 1.140 and the low in Dow Jones was around 10.600 but I leave the targets as they are.

Targets: Jones 10.250  S&P 500 1.140  Nasdaq Comp 2.055

Japan:

Nikkei 225 (12090)  Topix (1168)

The targets in Nikkei and Topix was more than reached and given the global sentiment I set new lower targets, but not that far away from the current levels due to my believe in Far East. The conclusion is, that the market is still repricing but we are getting closer to targets where some equities might be interesting.

Targets: Nikkei 225 11.300  Topix 1.100 

Europe:

Dax (6070)  FTSE 100 (5190) 

The rebound in FTSE was even more extreme where the 4.825 target nearly was hit as well, but I keep it as the UK economy is on the way down where in particular domestic oriented companies must be hurt more. The Q3 German GDP growth will be negative, though not official yet, but it was hinted by a senior government member. German exporters are good in doing business, but I think that the negative European environment is too heavy for DAX so the target at 5.760 still seems realistic. The Euro PMI indices Tuesday and IFO Wednesday should normally be an impulse for DAX but the US stock market is still dominating.

Targets: DAX 5.650  FTSE 100 4.825 

China:

Special edition below.

Foreign Exchange

EUR/USD (1,4795)

When I sent out the latest weekly before my holiday, EUR/USD was trading at 1,4795 and now we are back again…..Yes, I did follow it all the way down below 1,4000  What I clearly misjudged was the magnitude of the unwinding of long EUR/JPY positions primarily from Far East. Before my holiday the market thought that US was on the way out of the woods and Europe would be the next to go down. Now everybody argue that US will come into trouble because of the USD 700 billion bail out. Overshooting both ways – US is in trouble and I keep the view that in US we still have the steepest downturn resulting in the pressure on the greenback. The Euro Zone is heading towards problems but due to the nature of the economy, the slowdown is not as steep, but with longer duration (some of the reasons are a less flexible labour market, higher social transfers and that a bigger part of private households has less debt than in US). The wild moves we observe is also caused by market makers cutting their risk appetite, but where market users still are crowding in and out at the same time in the same direction. The Lehman chapter 11 filing means that banks are forced to close down positions with Lehman that partly end up in EUR/USD positions. These positions just get executed regardless of the market conditions. In what direction is impossible to say, but I expect a major part was executed last week. Fundamentals are hardly in focus at all but I watch US existing home sales on Wednesday (expected 4,95 mio) and US new home sales on Thursday (expected 515k), and of course Fed’s Mr. Bernanke Wednesday afternoon – he should have enough to speak about…..EUR/USD is back in the 1,4550 – 1,5050 range but I lower it to 1,4450 – 1,4950. I still go for a spike above 1,5000 when the uncertainty towards the US presidential election rise, but the target is 1,5300 now.

Targets: The current range in EUR/USD is 1,4450 – 1,4950 followed by target 1,5300.

EUR/JPY (155,75) – USD/JPY (105,50)

As mentioned under EUR/USD, I really underestimated the capital move back to Japan. It is very interesting to see that Japan is gaining a safe heaven status, but I think it’s mainly among the Japanese investors (plus some carry trade unwinding). Looking for the next upswing some of you might have noticed my preference for Far East (China piece). The new upturn will not origin in Japan but the country will surely participate in the rebound, though with the biggest effect for equities and not Yen as such. Getting closer to the Japanese ½ year might support Yen, but in October I am more bearish regarding JPY. Fundamentally are the CPI numbers on Friday the most important this week (expected +2,1% nationwide). I have set new targets, but no wild ones.    

Targets: EUR/JPY 159,50 – USD/JPY 106,00

EUR/GBP (0,7850) – GBP (1,8550)

When I had a glass of red wine in my holiday, EUR/GBP hit the 0,8150 target and now the market is back to pre holiday levels. The big attention on US took UK and Sterling out of the limelight. I still see the same problems for UK which should send GBP lower, but the focus is elsewhere and with a week without fundamental news, GBP will trade sidelined. The EUR/GBP target remain 0,8150.

Targets: EUR/GBP 0,8150 – GBP/USD 1,8350

Central bank rates

US Federal Reserve Bank: The next step is a hike from the current 2,00%. The million Dollar question is about the timing, where I would have said mid to late November if it wasn’t for the US presidential election. Early December seems more realistic.

Bank of England: The current 5,00% is high compared to rest of the world, so it’s very unpleasant with rising inflation as I don’t think the BoE people have the guts to hike with growth deteriorating. Unchanged for a long time ahead.

European Central Bank: These people are tough on inflation. If the Euro Zone headline inflation exceeds 4,3% I go for another hike.

Bank of Japan: They should hike with the Japanese inflation rising but another example of the central bankers being afraid of the political and public opinion. As a consequence BOJ will stay at 0,50% rest of this year.

I am looking forward to your comments and wish everybody a profitable week.

Peter

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