Articles from December 2006



Government bonds again hit by US economic data

Government bonds suffered further falls on Thursday after a second day of strong US economic data dented investors’ hopes of a near-term interest rate cut in the world’s largest economy.

Existing US home sales rose in November, adding to other recent encouraging housing numbers, while other figures showed US consumer confidence surging to an eight-month high.

A regional manufacturing indicator rebounded in December while the latest weekly initial jobless claims rose less than expected.

The last series of data for the year – which pointed to strength in the US economy – sent Treasuries sharply lower, pushing up benchmark yields to their highest levels in two months. The sell-off in the US hit sentiment in other bond markets.

The rise in Treasury yields further squeezed the risk premium of emerging market bonds, whose spreads over US Treasuries touched a new record low of 166bp, as measured by JPMorgan’s EMBI+ index.

In the eurozone, Bund prices fell and the yield on the 10-year Bund rose 2.6bp to 3.958 per cent. The 10-year UK gilt yield rose 0.2bp to 4.790 per cent. The yield on the 10-year Japanese government bond rose 3bp to 1.665 per cent.

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Bonds fall on US housing data

Government bonds round the globe fell yesterday as investors reacted to a higher than expected rise in new homes sales in the US.

Sales of new homes rose 3.4 per cent in November to a seasonally adjusted annual rate of 1.047m homes, beating market expectations. The data dampened hopes of an interest-rate cut by the US Federal Reserve early next year and sparked a sell-off in US Treasuries.

The bearish sentiment spilled over into the European markets, which were already under pressure from an earlier sell-off in the Japanese government bond market. Thin trading conditions in the markets following the holiday exacerbated price movements further.

By late trading in New York, the yield on the benchmark 10-year US Treasury was up 5.4 basis points to 4.658 per cent. The yield on the two-year Treasury rose 6.5bp to 4.782 per cent. Still, the US market absorbed an auction of $20bn of two-year notes.

In the eurozone, the yield on the 10-year Bund was up 4bp to 3.926 per cent. In the UK, the 10-year gilt yield was 5.9bp higher at 4.788 per cent after earlier hitting 4.79 per cent, the highest since March 2005.

Japanese bond prices fell sharply amid renewed speculation that the Bank of Japan might raise interest rates next month. The yield on the 10-year JGB jumped 7.5bp to 1.64 per cent, a sharp swing from Tuesday, when a flurry of buying sent the 10-year yield to a 10-month low of 1.565 per cent.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Review of 2006- Investors ride wave of liquidity

A wave of global liquidity helped spur world markets higher in 2006 with gains for equities, bonds, commodities and property. US and European markets produced double-digit returns, and emerging markets did even better. Chinese shares stormed ahead as did zinc, nickel and the Thai baht.

Investors could have made bad choices – Turkish and Israeli shares, the Japanese yen, and US and UK natural gas were among them. But generally positive conditions saw most asset classes advance.

Liquidity was plentiful even though the world’s leading central banks were in tightening mode. The Federal Reserve continued to increase US interest rates before pausing at 5.25 per cent in August. The European Central Bank increased interest rates four times, and even Japan ended the zero interest rate policy that had prevailed during years of deflation.

Alongside the liquidity, came a remarkable fall in volatility. In US equity markets, the Chicago Board Option Exchange’s Vix index – dubbed Wall Street’s “fear gauge” – fell to 13-year lows this month, and almost dropped below its record nadir of December 1993.

The biggest disruption in this benign environment came in May and June, when global equity markets suffered a sharp sell-off, as worries about inflation came to the fore and risk aversion returned. But the turbulence proved to be a correction, not a switch from a bull to a bear market.

Once the Fed stopped raising interest rates and after oil prices subsided from their highs and geopolitical concerns subsided, markets raced ahead again.

Equity markets performed well thanks to a healthy global economy, robust growth in corporate earnings and a boom in mergers and acquisitions. The M&A; sector was readily funded thanks to extraordinarily benign debt-market conditions that made borrowing cheap.

The focus of markets towards the end of the year was whether the US economy would achieve a soft landing in 2007. There were clear signs of a deterioration in the housing market, and some slowdown in manufacturing, but the market was betting there would be no US recession next year.

Indeed it was a year in which the market shrugged off much bad news. There was barely a blip when North Korea claimed to have tested a nuclear weapon, or when Amaranth Capital, the US hedge fund, racked up $6bn of losses after a disastrous bet on gas futures.

One question, as the year came to an end, was whether markets were again experiencing “irrational exuberance”. There were certainly signs of complacency – but still plenty of commentators forecast another good year for investors in 2007.

Equities
In September the Dow Jones Industrial Average hit a new record high, closing above 11,722.98 for the first time since January 14 2000. It was heading for gain of about 15.5 per cent over the year as a whole. The S&P; 500 was up around 13.5 per cent.

Across the Atlantic, the FTSE Eurofirst 300 index rose 15.8 per cent, and was hitting 5½-year highs this month, while the FTSE 100 gained 10 per cent. The Nikkei 225 in Tokyo did less well, rising only 6 per cent.

Emerging markets enjoyed their fourth consecutive year of gains, after another year of record inflows from foreign investors. Chinese shares – underperformers for eight years – finally came into their own. The Shanghai Composite index more than doubled.

Credit markets
This year was supposed to see the credit cycle turn. However, despite the rash of M&A; activity, some increased borrowing by companies and heightened fears around economic growth and inflation, the year drew to a close with spreads at record low levels.

The reason? Abundant liquidity continued to hunt for yield, with many investors moving into ever-riskier areas as returns in their traditional hunting grounds were squeezed. In derivatives, strong demand for credit exposure through structured products pushed spreads on credit default swaps to levels much lower than many of the cash bonds on which they are based.

Currencies
In a generally calm year, the dollar fell suddenly in November amid concerns that yield support could be undermined by cuts in US interest rates next year and talk central banks were diversifying their currency reserves.

However, the dollar defied predictions that it might breach the $2 level against sterling or hit a fresh record low of about $1.36 against the euro. The weak yen was the other main story of the year as expected increases in Japanese interest rates failed to materialise.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Christmas lends a hand to weak US data

Holiday trading surroundings dampened the impact of yesterday’s weaker than expected US economic data. Q3 growth was yesterday revised down to 2.0% from the previous reading of 2.2%, which was down from the Q2 growth rate of 2.6%.

Today focus may be on the Fed’s preferred estimate on inflation, the core PCE price index, which was unchanged in November at 0.2%. Following recent soft data, markets may try and assess the timings of possible shifts in the Feds policy.

The Pound fell against the Euro for a second day as speculation that the UK’s interest-rate advantage over the euro region will narrow next year as the European Central bank keeps raising interest rates.

The Bank of England kept interest rates at 5 percent while the ECB raised its benchmark rate for the sixth time in a year, to 3.5 per cent.

The Australian dollar may weaken for a second day on a decline in the price of commodities the country exports, including gold and oil. The Westpac commodity futures index, an export-weighed average of Australian raw material prices, fell 0.6 percent today after a 0.9 percent slide yesterday.

Gold dropped for a second day and crude oil fell from a three-month high.

Finally for today’s blog- Wise Money wishes you a Merry Christmas

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Currency converters lift dollar in quiet trading

The US Dollar gained a little yesterday across the board with profit taking and positioning ahead of today’s data and the Christmas period driving the market.

Sterling gained initially following stronger than expected mortgage and retail sales data but gave the gains up once New York trading began. The Bank of England minutes released yesterday showed the BoE were still concerned about inflation pressures from money growth, investment and housing data. This has the market looking for another 25bp hike next year.

The big loser of the day was the JPY which came under further pressure after poor data reduced the chance of a Bank of Japan interest rate increase. Data out of Japan has been mixed recently which has the Bank of Japan sitting on their hands, unsure of further developments. The latest move saw the EUR/JPY hit new record highs of 156.39 overnight.

Today sees the release of several key pieces of data including – UK GDP, UK Current Account. US GBP and jobless claims at 13.30 while the Philadelphia Fed index is released at 17.00.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Sterling gains in currency markets

After a few days of US Dollar gains the EUR and GBP reversed the trend following positive data out of both Europe and the UK.

The EUR pushed higher, breaking back through 1.3200 after a strong German Business Sentiment report. The Ifo index hit its highest level in 15 years and suggests European companies are not suffering because of the stronger EUR. This data reaffirms the view that the ECB will continue to hike rates in 2007.

On the UK front housing prices rose in November for a 13th consecutive month, helping suggest the Bank of England will raise interest rates at least 25bp next year. The GBP/USD pushed up above 1.9700 after trading below 1.9500 earlier in the day. Support looks strong at 1.9440 with GBP/USD bouncing of this level a few times since breaking above 1.9500.

The USD did have a brief spurt of strength following data showing a sharp rise in US wholesale prices. The move however was short lived with the market more focused on the potential EUR and GBP interest rate rises.

The JPY was the other loser on the day after the Bank of Japan left interest rates unchanged and warned the that domestic consumption and consumer price gains had softened.

Elsewhere the Thai Baht was hammered after the Thai central Bank announced regulations on foreign currency inflows designed to curb speculation in the Thai Baht. This sent the Thai Baht tumbling while the countries share market plummeted 15%.

Today ECB President Trichet is speaking while the Bank of England minutes are released.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Dollar mixed on position squaring

Sterling and the euro have strengthened this morning pushing back up to yesterday’s opening prices with traders suggesting strengthening in GBP/JPY and EUR/JPY helping push both currencies higher against the USD.

Yesterday saw the USD strengthen despite a widening of the US current account deficit to USD 225.5billion from USD 218.4b in the July to September months.

The rise in the USD was attributed to position squaring ahead of the holiday period with traders taking profits after the recent rises in GBP and EUR.

GBP/USD fell to 1.9440 and the EUR/USD slipped to 1.3050 yesterday before recovering this morning. Currently GBP/USD has moved to 1.9570 while the EUR is at 1.3140. As mentioned earlier it appears the move is on the back of a weaker JPY.

The JPY has fallen this morning after Bank of Japan Governor Fukui said Japanese consumption and consumer prices had softened, raising doubts the Japanese central bank will raise interest rates in January.

GBP/USD is running into resistance at 1.9581 while the EUR/USD is struggling to break 1.3150. GBP/USD has actually just managed to break higher but will it be able to continue the momentum.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

US Dollar strengthens on capital inflows

The US Dollar initially fell across the board after US inflation came in relatively benign increasing the talk of an interest rate cut by the Fed in quarter 1 of next year. The CPI was unchanged versus an expectation of a 0.2% increase. On the back of the data the GBP/USD pushed up from 1.9580 to 1.9650 while the EUR/USD strengthened up to 1.3170.

The rally was short lived however as traders began to reverse the trend after it failed to continue the move higher. Furthermore a robust increase in capital inflows into the United States put a dent in rate cuts early next year and actually saw the USD strengthen to below post data levels.

Net inflows increased to USD 62.2 billion in October from 57.8 billion which was sufficient to cover the trade deficit of 58.9 billion.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Yet more glory for the British Shopkeeper…

As today’s blog heading suggests, there is yet more good news this morning. Yesterdays UK Retail Sales showed an annual increase of 3.2% against expectation of 2.9% and a monthly rise of 0.3% against an expectation of zero.

So be warned, this week we have seen unemployment down and a retail boom. If you haven’t yet bought your Christmas presents, the shelves may be a little bare, leaving you a simple purchase choice of either a book on ‘The life and times of Dickie Davis’ or a CD of ‘Chas and Dave live at the “Bull and Bear”.

So once the cheers subdued what was the impact on exchange rates. The answer is very little and it would take the literary genius of Dilbert to make this sound exciting.

GBP/USD remained in the 1.9650-1.9700 level for much of the morning. The addition of better than expected US jobless claims gave greater momentum for a downward move and briefly pushed the spot rate below 1.9600. EUR/GBP was also somewhat subdued yesterday morning before moving downwards in the afternoon, briefly pushing through 0.6700 (1.4925). EUR/USD was also pushed downwards and this morning sits safely below 1.3200

And finally, looking at the main movers in Asia, the Yuan fell after the Asian currencies the central bank uses to manage its exchange rate weakened against the dollar.

South Korea’s won weakened on concern regional central banks will sell them to maintain export competitiveness and the Yen is now considered undervalued, following a comment from Jonathon Gray of FSW, by at least 10 percent on average and will rally next year because the Bank of Japan will lift interest rates.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Roll up, roll up US Dollars and Euros getting cheaper by the day….

And hopefully the news above will bring yet more seasonal cheer to all you currency buyers out there. For those of you who are on the other side of the market, then you can draw comfort from the events that have bought about this bargain basement sale.

Yesterdays UK unemployment data recorded a fall in the number of claimants of 5,700 in November. This is the biggest fall since January 2005 and confounded expectations for a further rise. Average earnings also rose, coming in at 4.1% against 3.9% last month. In addition the US retail sales came in at +1.1%, much stronger than the expected +0.3%.

So how did all this marvellous data impact on the exchange rates? GBP/USD reacted sprightly to the UK unemployment data rising from around 1.9680 up to a day high of 1.9729.

The US Dollar staged a spirited fight back on the back of the retail sales and briefly tested 1.9600, but this US Dollar strength was to prove as short lived as a dot.com share around the Millennium and this morning GBP/USD is back above 1.9700. GBP/EUR drifted further from the doldrums, tested 0.6725 and finally broke through reaching a day low of 0.6710.

With EUR/GBP showing some movement it was the turn of EUR/USD to be the stagnant currency yesterday morning. The retail sales created a brief spell of sub 1.3200, but overnight has seen some retracement.

This morning sees the publication of UK retail sales and this afternoon US import prices. Both of these are expected to show little change to last month.

A negative retail sales could be interesting here, given the current momentum for high interest rates.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.