10/12-08   -   Press releases

Financial Markets See More Contractions

Markets received a jolt of pain on Friday, as US employment numbers came in at -533,000, way beyond consensus estimates. The figures were the worst for three decades and are yet another instance to add to the ever growing pile of “once in a generation" type extremes that we´ve seen in 2008. Friday’s numbers were predicted by just one outfit (ING) and that was seen as an outlier. However, as a sign, that perhaps markets are becoming inured to the dreadful economic news US markets actually managed to rally into the close on Friday. The Dow, S&P 500 and Nasdaq finished down on the week, but well above the week’s lows.

Last week’s announcement that the US was officially in recession was a bit of a non event. A recession has been in train for both the UK and US economies for some time, but optimism or fear over its severity has been waxing and waning over recent weeks, as world governments released various stimulus packages. Last week was certainly not for the optimists, with investors flying to the safety of US Treasuries, pushing the benchmark yield down to record lows. Friday NF Payroll numbers confirmed what many Americans are already experiencing; the number of people in private employment is falling. Like readily available credit, jobs are being squeezed on both sides of the Atlantic.

The latest UK purchasing managers’ survey showed that UK manufacturing fell at a record pace in November. The falls mirror similar record declines in US manufacturing which also contracted the most since 1992. The outlook for the UK in particular looks grim, with mortgage lending falling to near record lows. The poor manufacturing data and dramatic interest cuts sent the pound sharply lower against most major currencies. Last week, the pound hit 0.87250 against the Euro, its lowest level since the introduction of the European single currency.

Demand for US Treasuries shows no signs of stopping. In addition, sovereign credit default swaps have gone through the roof, reflecting both the cost of the planned stimulus packages and the growing severity of the global recession. At the start of the year, Credit default spread for the UK were just 8.9. Last week they moved higher than 125, meaning it would cost $125 to insure a $10,000 sovereign investment. Germany currently has the lowest CDS levels, while Argentina has rocketed to over 4,000. Russia is also elevated with CDS levels approaching 800. With its extreme moves, the bond market is telling one story, while the stock market recovery on Friday told another slightly less apocalyptic tale.

Resource and energy stocks were under pressure as crude prices continue to slide. Oil prices made a century of sorts last week, at below $47, oil prices have now fallen over $100 from their peak in July. The decline is all the more remarkable when you consider the fact that oil started the year under $100. Crude eventually closed the week at just above $40, though oil majors such as BP, Shell and Exxon Mobil managed to hold up relatively well. The divergence between oil prices and oil majors may possibly be a function of oil producers being able to extract good margins, as the price at the pumps hasn’t fallen to the same by the same severity as the price of crude.

Next week’s stand out economic announcements include UK PPI on Monday, and manufacturing production on Tuesday. US pending home sales are released on Tuesday afternoon with trade balance and unemployment claims out on Thursday. With Christmas around the corner, US retail sales will be followed closely on Friday, as will the University of Michigan consumer sentiment numbers. When markets go up on bad news, it can be a positive sign that buyers are willing to step in and take control. Friday’s rally brought the S&P 500 just shy of 900 and while a rally from here is very possible, there may be some overhead resistance above 900.

A one touch trade predicting that the S&P 500 will touch 899 at any time during the next 9 days could return 15%.