11.01.10 1 Market Snapshot: Summary of rate movements and important - - PowerPoint PPT Presentation

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11.01.10

Week Beginning 11th January:

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Economics Watch:

Market Snapshot: Summary of rate movements and important announcements

Monday: Conclusion of BIS meeting in Basel with statement from Trichet UK BRC Retail Sales Monitor Tuesday: UK RICS Housing Market Survey UK Trade Balance US Trade Balance BoE 2036-2060 reverse gilt auction Wednesday: US Beige Book Report released Germany GDP UK Industrial Production UK Manufacaturing Output UK 2049 Gilt Auction Thursday: ECB rate announcement Eurozone Industrial Production US initial jobless claims Friday: Eurozone HICP ECB & Eurostat ‘Core’ Inflation US CPI US Industrial Production

Source: Bloomberg

Contents:

Last week Economics Watch 3 Equities 4 Credit 5 Nominal Yields 6 Inflation 7 Real Yields 8 Appendix 9

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Last week Economics Watch

Date Economic Data Consensus Actual Figure Prior month

Monday, 4th January Eurozone Manufacturing (Dec Final) 51.6 51.6 51.2 UK Manufacturing PMI (Dec) 52.0 54.1 51.8 US ISM Manufacturing PMI (Dec) 54.3 55.9 53.6 Tuesday, 5th January Eurozone CPI (Headline) 0.9% 0.9% 0.5% Wednesday, 6th January UK Service PMI (Dec) 56.8 56.8 56.6 US ISM non-Manufacturing (Dec) 50.5 50.1 48.7 FOMC Minutes Thursday, 7th January Bank of England MPC meeting No change to rates or asset purchases No change to rates or asset purchases No change to rates or asset purchases US Jobless claims 440k 434k 432k Friday, 8th January US Non-farm payrolls Flat – Unemployment 10.0%

• 85k; Unemployment 10.0%
• 11k; Unemployment 10.0%

Key data released last week

Equity markets in the UK ended the week slightly higher with the FTSE 100 up 34 points (0.6%) at 5,534. The S&P 500 finished the week unchanged at 1,145, up 2.5% and the EuroStoxx 50 was up 0.6% at 3038. Figure 1 shows the relative performance of MSCI World and Emerging Markets Total Return indices. Emerging markets were clear winners of 2009 posting total returns of 62% outperforming developed markets. The key economic data: The MPC kept rates at 0.5% and planned asset purchases at £200bn. US non-farm payrolls were well below consensus at -85k versus flat expectations. UK manufacturing PMI came in ahead of expectations at 54.1 vs 52.0. The VIX Index, a measure of equity market volatility ended the week slightly lower by 1.9 at 18.13. This is lower than at any point in 2009 at a pre-Lehman (August 2008) levels.

Source: Bloomberg, Redington

4 Figure 1: Total Return MSCI World vs Emerging Market Figure 2: S&P VIX Volatility Index from Jan 2009

Source: Bloomberg, Redington

Equities : “Equities ends the first week of 2010 up...”

Over the last week, corporate spreads as measured by the Barclays Sterling Non- Gilt Corporate Index tightened across the board. Spreads on the AAA index widened by 3.1bps while those on AA, A and BBB tightened by 7.7bps, 8.9bps and 25.2bps respectively. On a sector basis, spreads tightened in sub financials (35bps), senior financials (12bps), cyclicals (10bps) and non-cyclicals (9bps). Main talking points for the week were : Sovereign CDS risk was keenly discussed this week, a quote from the FT Lex column: For the UK 10 year CDS sellers that is 80 basis points per annum of income. PIMCO were in the press saying that they were sellers of UK and US debt based on negative supply/demand outlook. Iceland’s President announced that his country would hold a referendum on whether to make good payments of lost bank deposits to the UK and the Netherlands.

Figure 3: Corporate Spreads by Rating Figure 4: Barclays Sterling Non-Gilt (Investment Grade) by Sector

Source: Barclays Capital, Redington

Credit: “Sovereign default risk comes to the fore...(again)”

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Source: Barclays Capital, Redington Source: Barclays Capital

“Any country that borrows in its own currency and has its own central bank can always print money to pay its debts. That renders sovereign CDS

• n countries such as Britain and the US – unlike, say, Eurozone members –

essentially meaningless.“

Nominal swap rates remain above gilts at all maturities up to 10 years (Figure 5). Over the last week, while gilt yields increased by about 2-9 bps, swap rates decreased by 0–6 bps (5y-50y points). Z-spreads increased by around 5-7 bps across the curve as gilt yields increased while swap rates fell. Bank of England maintained Bank Rate at 0.5% and continued with £200 billion asset purchase programme in its Monetary Policy Committee meeting on Thursday, 7th January.

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Nominal Yields: “Gilt Yields rise while swap rates fall across the curve...”

Figure 6: Nominal Swap Spreads (Z-spreads*) on Selected Gilts

Source: Barclays Capital, Redington

Figure 5: Nominal Term Structure of Gilts vs. Swaps

Source: Bloomberg, Redington

Figure 7: UK Base Rates

Source: Barclays Bank – Interest & Exchange Rate Outlook - December 2009 * Z-Spreads are the weighted average constant spread added to the swap zero curve to get the market price of the gilt. They are used as a relative value measure

between cash and the swap market.

Gilt breakeven inflation increased by about 8-9 bps in 10y-50y points in the curve. Swap inflation moved by less than gilt breakeven, rising by about 3-10 bps across the curve. As a result, the gap between Gilt breakeven inflation and swap inflation narrowed at most of the points on the curve (Figure 7). Between the 10 and 20 year tenors the gilt breakeven was higher than an inflation swap. Global inflation fell short of expectations last year (Source: Lloyds TSB Economics weekly – 11 Jan 2010) (Figure 8): As we move through 2010, economists’ opinions over the global inflation outlook differ between those that believe that spare capacity and weak growth will keep inflation pressures at bay, and those that think rising commodity prices, economic recovery and the flood of global liquidity will unleash a global inflation shock.

Figure 7: Swap Inflation- Gilt Breakeven Inflation 7

Inflation: “Breakeven Inflation rises...”

Figure 6: Gilt breakeven inflation term structure vs. swaps

Source: Barclays Capital, Redington Source: Bloomberg, Redington

1Source: Bank of England website

Figure 8: Global Inflation levels

Source: Lloyds TSB Economics weekly – 11 Jan 2010

Swap real yields remain roughly the same as gilt real yields up to around 15

• years. From 15-45 years, gilt real yields remain above swap real yields after

which the difference disappears (Figure 9). The difference in real yields may be driven by differences in swap and gilt breakeven inflation. Z-spreads on linkers remain positive, but over the week saw a marginal decrease for IL2020 and increases of around 4 bps for IL2037 and about 1 bps for IL2055 (Figure 10).

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Real Yields: “Z-spreads on linkers remain positive...”

Figure 10: Z-spread* on selected linkers

Source: Barclays Capital, Redington

Figure 9: Real Gilt yield term Structure vs. Swaps

Source: Bloomberg, Redington * Z-Spreads are the weighted average constant spread added to the swap zero curve to get the market price of the gilt. They are used as a relative value measure

between cash and the swap market.

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Appendix: Summary Tables

Figure 11: Growth Assets Figure 12:Traditional Liability Matching Assets:

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Contacts

Disclaimer

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