2010 10 27

The markets were looking ugly by lunch time in NYC, but then staged a good sized come back undoing much of the morning action.

Seems like the WSJ report of the Fed going soft into QE2 had scared a lot of the investors initially – and it could very well have impacted the bond market which sold off steadily throughout the day. USD was stronger versus every G10 currency but not by a big margin except in Australia where weak inflation is likely to slow rate hike cycle.

Looking at fundamental data the theme is clear – things are CLEARLY SLOWING DOWN everywhere in the world. But I do not believe in double dip or anything near that for 2010. For the final two months I am still optimistic on equities and like USD. In the bonds space the yields have risen rather sharply in the last two weeks making me doubt if risk/reward is still attractive to short bonds at this point. Fundamentally current yield levels are totally justifiable, and over longer term we would go lower in yields as 2011 unfolds.




Korea GDP slows down drastically
• South Korea's GDP growth slowed in the third quarter to 0.7 percent from 1.4 percent in the previous quarter, as exports fell drastically in the wake of cooling global growth.
• The exports sector gained just 1.9 percent in the third quarter, led mainly by increased exports of petrochemical products, semiconductor and automobiles. This was sharply lower than the 7 percent growth recorded in the previous quarter.
• A marked reduction of exports to China in September to an 11-month low weighed on third-quarter growth figures. China accounts for as much as a quarter of shipments from South Korea. Analysts say a further slowing of Chinese domestic demand resulting from a recent rate hike by the Chinese central bank will further erode confidence in the Korean exports sector.

Australia – benign inflation data means RBA likely to take time on rate hikes

France – consumer spending in Sep surprises to the upside
• Basically offsets fall in Aug. (1.5% rise in Sep after 1.6% fall in Aug) and surely an encouraging sign.
• However, French private sector activity growth slowed in October to its lowest level in more than a year, according to Markit Economics. Purchasing Managers' survey signaled a downshift in growth at the start of the fourth quarter as production and new order growth weakened.

US – durable goods orders were not good if you subtract airplanes
• Orders for durable goods—manufactured items meant to last at least three years, such as copper coil and cars—rose 3.3% in September from August, the Commerce Department said Wednesday. That increase owed entirely to orders for nondefense aircraft and parts, which more than doubled. Indeed, Boeing Co. reported that it received orders for 117 planes in September, up from 10 in August. Stripping out aircraft, orders fell 0.1%.
• Aircrafts are hugely pricey and tend to come in lumps, so economists usually exclude them in durable goods data analysis – similar to why foods and energy are excluded from CPI (price volatility)
• That suggests that the rebound in capital spending that began in the second half of last year—as companies made purchases they had deferred during the downturn—may be coming to an end.