Investment Postcards from Capetown

From Dow Theory Letters:

“‘What we are watching today is a fierce and unrelenting battle by the Fed and Europe’s central banks to avoid a collapse of the global banking system. To say the battle is deadly serious is an understatement,’ remarked Russell.

“Following last week’s announcement of the Office of Federal Housing Enterprise Oversight (Ofheo) relaxing its capital surplus restrictions on Fannie Mae (FNM) and Freddie Mac (FRE), a further positive development saw the Federal Housing Finance Board authorizing Federal Home Loan Banks to increase their purchases of agency mortgage-backed securities.”

From Moody’s Economy.com:

“US economic reports released last week showed further weakness in the US housing and consumer sectors, but a somewhat improved inflation reading.”

From John Mauldin’s Millenium Wave:

“We are in a [US] recession, and that means rising unemployment and falling consumer spending. It means tighter profit margins, etc. It is going to take a long time for the economy to recover. Welcome to Muddle Through,’ said Mauldin.”

In addition to Fed Chairman Ben Bernanke’s testimony on the economic outlook in Washington on Wednesday, April 2, the next week’s economic highlights, courtesy of Northern Trust, include the following:

1. ISM Manufacturing Survey (April 1): The consensus for the manufacturing ISM composite index is 48.0 versus 48.3 in February. If the consensus forecast is accurate, it would be the third monthly reading below 50.2 in the last four months. Consensus: 48.0 versus 43.3 in February.

2. Employment Situation (April 4): Payroll employment in March is expected to post the third monthly decline (-50,000) following a loss of 63,000 jobs in February. The jobless rate is predicted to have risen to 5.0% from 4.8% in February. Consensus: Payrolls: -50,000 versus -63,000 in February; unemployment rate: 5.0% versus 4.8% in February.

3. Other reports: Construction spending, auto sales (April 1), factory orders (April 2), ISM non-manufacturing (April 3).

Markets
The performance chart obtained from the
Wall Street Journal Online shows how different global markets fared during the past week.

29-march-v2.jpg

Source: Wall Street Journal Online, March 29, 2008.

Currencies

The US dollar resumed its downward trend last week as the weakening economic data created the expectation of a further 50 basis point interest rate cut at the FOMC’s meeting next month. The euro, however, rallied as Mr Jean-Claude Trichet, chief of the European Central Bank, rejected calls for an interest rate cut after a surprise rise in German business confidence this month, insisting that fighting inflation was his priority.

The US dollar lost 2.1% against the euro over the week and also weakened against the Swiss Franc (-1.1%), the British pound (-0.4%), the Australian dollar (-1.7%) and the New Zealand dollar (-0.8%). On the other hand, the Japanese yen gave up 0.5% against the US dollar as risk aversion took a back seat, putting the low-yielding currency under pressure.

Iceland became the first deficit state succumbing to investor flight, forcing the central bank to raise interest rates to 15% this week in an emergency move to halt the collapse of the krona. The Icelandic currency lost a further 2.7% against the euro, having fallen 18% since mid-March.

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