World Equity Spread Trading

The Financial Markets - 29 July 09

• Japanese retail sales fell more than expected in June from a year earlier, suggesting that worsening job and income conditions were offsetting the positive effects on spending of government stimulus measures. The outlook for consumption is weak with summer bonus payments likely to fall from last year’s levels, which may add to downward pressure on prices as Japan struggles with its second spell of deflation in a decade. Retail sales fell 3.0 percent in June from the same month a year earlier, more than a median market forecast for a 2.5 percent decline, marking the 10th straight month of falls. While government subsidies on energy efficient appliances have boosted sales of flat screen TVs and air conditioners, spending on other items remains very subdued.
  
  
• China State Construction Engineering Corp (CSCEC), whose $7.3 billion initial public offering last week was the world’s largest in a year, jumped 60% on debut, besting expectations, but also stirring concerns about asset price bubbles. It was the second big listing in Shanghai since China resumed IPOs last month, and followed on the heels of Sichuan Expressway’s runaway success on Monday. Local-currency A shares in CSCEC, China’s biggest homebuilder, kicked off trading at 6.70 yuan, well above their IPO price of 4.18 yuan, and then climbed to 90 percent above the public offer price within 15 minutes of trade.
  
  
• San Franciso Fed’s Janet Yellen sees “first solid signs” of end of US recession, although the recovery is likely to be “painfully slow” as consumers spend less and save more, she warned. In response to audience questions, Yellen said the Fed would need to stay “ahead of the curve” and tighten policy before the unemployment rate returns to a more normal level of about 5 percent. “That said, this is not the time” to raise rates, she said, pointing to the fact that risks to the outlook remain, with the commercial property slump the biggest threat. Otherwise, Yellen expressed optimism regarding the price of US Treasuries, which she said should remain “strong because savings throughout the global economy is very strong and competition from private issuance is very weak.” We have indeed pointed out for a long time that overall the stock of US debt (public + private) will soon start to shrink.
  
  
• In Irish news, ahead of the publication of the NAMA legislation on July 30th, the latest report from Richard Ellis CBRE suggests that demand in the Dublin office market showed a bit of a pick-up in Q2, albeit from a very low base. Dublin office take-up in Q2, at 23,242 square metres, was over double the Q1 level although it remains c.30% lower year-on-year and well below the five-year average for the quarter, which CBRE puts at 40,000 square metres. Meanwhile, prime yields reportedly held steady ay 7.5%. Regarding NAMA the Irish Times, quoting Government sources, reiterates that the value of the assets being taken over by NAMA will be ‘based on the underlying collateral, adjusted for the longer-term economic value in line with EU guidelines … on a case by case basis’.
  
  
• According to Bloomberg the Euro Stoxx 600 is now valued at 28.1 earnings. It’s most stretchy level since January 2004. Be careful out there.
  
  
• Always worth a read. Jeremy Grantham’s quarterly words of wisdom.
  
  
• The safest place to put your money.
  
  
• In spite of all the hype, it seems bank failures are picking up. No doubt we will be told that this is just another lagging indicator.
  
  

Chinese Banks To Row Back On Lending