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Prieur Perspective: Oil Weaker, Dollar Stronger


What went down (and up) last week.


Financial markets witnessed another roller-coaster week as renewed concerns about the global economy and the health of the financial sector surfaced, resulting in a mixed week for world stock and bond markets, an improved U.S. dollar and continued weakness in oil and commodities.

U.S. stocks plummeted on Thursday after two days of gains as investors' recent optimism was dented by renewed doubts about financials stocks, manifesting in the sector dropping 6.8% – its largest one-day decline in more than eight years.

In a rare Saturday session, the U.S. Senate passed housing rescue legislation aimed at helping struggling homeowners avoid foreclosure and providing financial support to troubled mortgage giants Fannie Mae (FNM) and Freddie Mac (FRE), reported The bill, which cleared the House on Wednesday, now goes to President Bush.

Reuters highlighted that U.S. banks' direct primary credit borrowing from the Federal Reserve rose to the highest level ever in the latest week, reflecting the growing need of the banking sector to rely on the central bank for cheap funding. On the day of July 23, banks' primary credit borrowings rose to $17.68 billion, the highest borrowing since September 12, 2001 when banks borrowed $45.5 billion in a single day.

No wonder John Paulson, who recorded what was thought to be the single biggest profit in the history of the hedge fund industry last year by betting on a financial collapse, is planning a new fund to provide capital to cash-strapped banks.

President George W. Bush, as reported in the Financial Times, also had his take (albeit unofficial) on matters: "There's no question about it. Wall Street got drunk … it got drunk and now it's got a hangover. The question is how long will it sober up and not try to do all these fancy financial instruments."

Given all the shenanigans, Richard Russell (Dow Theory Letters) thought there was too much complacency. "… I guess everybody thinks the Fed or the Treasury is going to bail the whole economy out. Why worry, if you're in trouble, call Mr. Bernanke, and he'll drop a bundle of Federal Reserve notes in your mail box. Be sure the box is big enough," said Russell, a day after turning a youthful 84.

Key to mapping out the intermediate stock market cycle is whether the July 15 levels for the S&P 500 Index (1,215) and Dow Jones Industrial Index (10,963) will hold. Specifically, the extent to which bank shares can sustain their moves above recent lows will be a vital determinant as to how well stock markets in general can rally from these levels. Short-term movements aside, do not expect a quick convalescence period.

Let's briefly review the financial markets' movements on the basis of economic statistics and a performance round-up.


The Federal Reserve's Beige Book, released on Wednesday, noted slower growth since the last report issued on June 11. Weakness in consumer industries, housing and finance offset strength in IT and healthcare. Retail and wholesale price pressures were mounting, although there was little concern yet about wage inflation.

More specifically, the past week's economic reports in the U.S. included the following notable releases:

The Index of Leading Economic Indicators (LEI) fell by 0.1% in June, following a revised 0.2% drop in May. The quarterly average of LEI is down 2.0% from a year ago, the largest decline in the current business cycle. Historically, such large year-on-year declines of the quarterly average of the Index were associated with recessions.

Weakness continues to characterize the housing market. Existing Home Sales declined by 2.6% month on month in June, according to the National Association of Realtors. Sales declined to 4.86 million annualized units. Inventories are rising and the months of inventory are about flat at 11. The median existing home price is declining, with a year-on-year drop of 6.2%, but not as severely as earlier this year.

The Census Bureau reported a -0.6% month-on-month decrease in New Home Sales in June. However, the Bureau revised the monthly sales figures upward back to March, and thus June sales were stronger than expected at 530,000 annualized units. The median new home price declined slightly in June, as did months of inventory. Months on the market, however, are rising.

Furthermore, U.S. foreclosure filings more than doubled in the second quarter compared to a year ago, representing an increase of 121% from a year earlier and 14% from the first quarter, according to RealtyTrac.

Summarizing the economic situation, David Rosenberg, North American economist of Merrill Lynch, said in a research report: "Though fiscal stimulus will provide a lingering boost to 3Q, we expect GDP to plummet 2.5% in 4Q and see a similar decline in 1Q. In all, we have shaved our 2009 GDP forecast to -0.5%, a full percentage point lower than where it was previously, while 2008 is broadly unchanged at 1.5%."

As far as interest rate policy is concerned, Asha Bangalore (Northern Trust) remarked: "It is … important to recognize that the Fed is not in a position to raise rates until there is financial market stability, the housing market crisis improves, and firms decide to expand their payrolls. Concerns about economic growth will prevail over inflation, for now. In other words, tough talk about inflation will continue but it cannot be translated into action in the near term."

Across the pond, the U.K. was faced with a relentless stream of negative economic news. The minutes of the Bank of England's (BoE) monetary policy committee meeting in June showed that the BoE was struggling to balance the downward price pressures of slowing economic growth against the upward price pressures of strong oil and food price growth.

A slew of weak data also came from the Eurozone, with the RBS/Markit composite PMI dropping from 49.3 in June to 47.8 in July, the lowest since November 2001 and clearly indicating a contracting economy. It appears unlikely that the European Central Bank (ECB) will hike rates any further in the second half of this year.

Elsewhere, Japan's trade surplus was nearly 90% lower than last year's surplus, and core inflation ballooned to a fresh decade high of 1.9% year on year in June.

Here are this week's economic reports, courtesy of Yahoo Finance, July 25, 2008.

Next week's economic highlights, courtesy of Northern Trust, include the following:

1) Real GDP (July 31): Real GDP is predicted to have advanced at an annual rate of 1.5% in the second quarter, supported by consumer spending. The fiscal stimulus package accounted for the strength in consumer spending, a one-off event. Real GDP grew by 0.6% in the fourth of 2007 and by 1.0% in the first quarter of 2008. The forecast range for growth in GDP in the second quarter is 1.4% to 3.0%. This report will contain revisions for the period 2005:Q1 to 2008:Q1. Consensus: 2.4%.

2) Employment Situation (August 1): Payroll employment in July is predicted to have declined by 75,000 after a loss of 62,000 jobs in June. The forecast range is -150,000 to -10,000. The unemployment rate is projected to have risen to 5.6% in July from 5.5% in June. Consensus: Payrolls: -72,000 versus -62,000 in June, unemployment rate: 5.6% versus 5.5% in June.

3) ISM Manufacturing Survey (August 1): The consensus for the manufacturing ISM composite index is 49.2 versus 50.2 in June.

4) Other reports: Consumer Confidence (July 29), Construction Spending, Auto Sales (August 1).


This performance chart from the Wall Street Journal Online shows how different global markets performed during the past week.


Global stock markets, in general, maintained their positive tone during the past week after the strong recovery of the previous week, with the Dow Jones World Index registering an increase of 0.9%.

The Japanese Nikkei 225 Average was the strongest performer among developed markets, rising by 4.2% – its biggest weekly gain for five months.

The real stars, however, were among the emerging markets, including Pakistan (+7.8%), Taiwan (+6.1%), South Korea (+5.8%), the Philippines (+5.2%), Indonesia (+4.8%) and India (+4.7%). On the other side of the scale, previous strong performers Russia (-8.6%) and Brazil (-4.7%) suffered as oil and commodities fell further.

The U.S. stock markets were mixed, with smaller and technology stocks outperforming their larger counterparts, as shown by the major index movements: Dow Jones Industrial Index -1.1% (YTD -14.3%), S&P 500 Index -0.2% (YTD -14.3%), Nasdaq Composite Index +1.2% (YTD 12.9%) and Russell 2000 Index +2.5% (YTD -7.3%).

This "market map," courtesy of, provides a quick overview of the performance of the various segments of the S&P 500 Index over the week.

The managed healthcare group was the best performer for the week, rising by 13%. The Internet retail group was the second-best performer (+9%), led by (AMZN), its largest member, with better-than-expected earnings and guidance.

The thrifts and mortgage finance group was the worst-performing group, down by 14%. Washington Mutual (WM) was down 35% after it reported second-quarter losses in excess of expectations. Fannie Mae and Freddie Mac, the two largest members of the group, were each down by more than 10%.

The consumer finance group was the second-worst performer, declining by 12%. The largest group member, American Express (AXP), reported second-quarter earnings below analysts' consensus estimate.

Halfway through the second-quarter earnings reporting season in the U.S., the numbers have generally been better than feared. Of the 248 S&P 500 companies that have reported results, 72.2% have registered positive surprises, 4.8% have been in line, and 23.0% have missed expectations, according to Bloomberg.

Data from Thomson Reuters show that S&P 500 earnings so far are down by 17.9% versus a year ago, but 7.7% higher when excluding financials.

Fixed-interest Instruments

Government bonds experienced a mixed week, with yields declining in countries/regions with poor economic data (Eurozone, UK, Japan) and rising where the economic numbers exceeded expectations (U.S. – consumer sentiment, durable goods orders and new home sales).

For example, the two-year U.S. Treasury Note increased by six basis points during the week to close at 2.72%, whereas the U.K. two-year Gilt yield declined by 11 basis points to 5.05% and the German two-year Schatz yield dropped by 10 basis points to 4.44%.

U.S. mortgage rates also increased, with the 15-year fixed rate rising by seven basis points to 6.05% and the 5-year ARM 16 basis points higher at 6.04%.

The three-month U.S. Treasury Bill jumped by 35 basis points during the week to close at 1.69% as investors' risk appetite recovered.

Credit markets eased somewhat as shown by the slightly narrower spreads of both the CDX (North American, investment grade) Index and the Markit iTraxx Europe Crossover Index.


Currency traders' benign view of the U.S. economic situation, together with lower oil and commodities prices, caused the U.S. Dollar Index to rise by 0.9%.

Individually, the greenback gained against the euro (-0.9%), the British pound (-0.3%), the Swiss franc (-1.3%), the Japanese yen (-0.9%) and the Australian dollar (-1.6%).


Oil prices declined further during the week under review, with West Texas Intermediate sinking by 4.8% to $123.26 by Friday's close. The crude price has declined by 16.3% since reaching a record high of $147.27 on July 11.

The correction in oil prices again weighed heavily on the entire commodities complex (especially precious metals), with traders reducing their commodities exposure on the back of mounting global growth concerns. The chart below shows the past week's negative performance of the various commodities.

Click to enlarge
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