Need To Know News

Bonds were well-bid on the day as equities sold off across the board on the final day of trading in 2007. U.S. Treasuries recorded their best yearly returns in five years amid a large scale flight to quality in the final months of 2007. The 30-yr. traded within the 115-25 to 116-23 range, closing at 116-12. The 10-yr. closed at 113-12 and traded within the 112-31 to 113-18 range. The 5-yr. finished at 110-09 while spending most of the day between 110-00 and 110-9. The 2-year traded within a narrow 5-tic range before closing at 105-04. Fed Funds put the implied chances of a 25bps cut at 92%.

Equities started the day lower and never quite recovered, despite the brief immediate boost brought on by better than expected Existing Home Sales data. Light volume ahead of New Year’s Eve likely explains much of the losses. Dow Futures were down 110 on the day to close at 13317. S&Ps closed down 1150 to 1474.00. Nasdaq futures finished down 22.25 to 2102.75

Gold sold off as the dollar strengthened against EUR and GBP, closing down 5.80 to 837.00. Platinum and copper also posted declines today of 18.8 and 3.70 respectively. Silver eked out a marginal gain, finishing up 0.15 to 14.910.

Wednesday’s releases include Johnson Redbook weekly retail sales at 8:55am. Construction Spending data for November will be released from Commerce at 10:00am. It is expected to fall 0.4% m-o-m. Also at 10:00am the ISM Manufacturing Index comes out, expected to be 50.5 after a prior reading of 50.8. Finally, FOMC minutes from the December 2007 meeting will come out at 2:00pm.

Market participants are under no illusions regarding the real estate market, despite today’s slightly better than expected data. November Construction Spending is expected to have drop 0.4%, a better reading than the -.8% in September but certainly not a recovery of any kind. Indeed, with tight credit conditions, falling prices and some fear of recession creeping into the economy, its difficult to see how this number could not disappoint. In fact, the pattern of data suggests a revisit to sub -1% level (September 06) is not out of the question. The only area in which the report might be able to pull out on the upside is in public spending which has been rising rather steadily since last year - up 14.6% year on year.

The dollar rallied today against both GBP and the EURO after slightly better than expected November Existing Home Sales. Thin market conditions exacerbated the move against the EURO and GBP with charts on both pair now indicating an “outside day, down”. Should today’s low be broken on 2 January, we might expect a good bout of dollar buying. USD/JPY broke back down through 112 on yen carry unwind and end of year squaring up; this move also extended in thin markets. EUR/JPY carry trades are also being unwound to the tune of 240 pips in today’s session. EUR/GBP stayed within Friday’s big range, selling off the somewhat better than expected data but spent the rest of the day retracing those losses to “close” near .7350. USD/CNY, at 7.2971, was off 70 pips today.

A surging USD and a day of thin trading have sent energies on a wild ride on the final day of trading in 2007. Crude was volatile throughout day, trading within the $2 range between 94.73 and 96.78 before settling at 95.94. A tropical cyclone halted Australia’s oil production until some time in the next few days. Gasoline seesawed throughout the range of 245.80 and 249.85 before closing at 248 even. Heating oil traded in an equally large range from 262.84 to 267.70 and closed at 265.75. Natural Gas steadily ticked upward throughout the day before settling around 7.500.

The March TEN YEAR has been creating a series of lower highs since it’s peak at 114-11 on December 4th, 2007. The lower highs have been accompanied by lower lows as well so the daily chart looks like a ratcheting low in price. Today’s high price came very near a parabolic stop and reverse signal - in this instance the 3 day upward trend, according to parabolic analysis, is over. So the next move is likely to be to the downside - the magnitude of the downside move cannot be predicted from a parabolic study alone; perhaps this week’s FOMC minutes will provide some inspiration in the Treasury futures market.

Thomson Financial released year-end statistics for U.S. bond issuance and the year’s top underwriters.  U.S. asset-backed issuance dropped to $863.6bln from $1.249trln.  U.S. high-grade corporate debt issuance rose to a record $978bln from a level of $935bln in 2006.  Furthermore, U.S. high-yield debt issuance fell to $136bln from $146bln in 2006.  Thomson is also reporting federal agencies issued $820bln worth of debt in 2007, a rise from the 2006 figure of $686.2bln.  Finally, U.S. mortgage bond debt issuance dropped off to $922.1bln in 2007 from $1.052trln in 2006.  Citigroup was dubbed the top asset-backed securities lead underwriter, the top global debt/equity underwriter, and top high-grade corporate bond underwriter for 2007.  JPMorgan held on to its spot as top underwriter for federal agency debt issuance in 2007 and picked up the title for top high-yield bond underwriter in 2007.  Lehman Brothers emerged as the top U.S. mortgage bond underwriter of 2007 as well.  Merrill Lynch took the title of top global underwriter in 2007 in terms of disclosed fees.

Equity markets have turned sharply lower and bonds have turned up having worn out the post Existing Home Sales bounce.   While the data was better than expected coming in at a 5mln annual pace and the October Data was revised higher, there is little hope that this anomaly is an actual upturn in housing.  Indeed, with Employment data hitting 2 month lows (4wk moving average of initial claim and continuing claims), abysmal readings in Durable Goods and Consumer Confidence not to mention spiraling energy and food cost there is little reason believe the FED can come to the rescue in housing.   Robert Schiller of the Case/Schiller Index  predicted in an interview that U.S. house prices have fallen about $1trillion thus far in the slump and he sees potential for a tripling of that amount plunging the U.S. into a recession.  Schiller has been a long-time bear on housing, in fact years before the implosion, so there is some scope for error here.  However, if the Equity Markets are looking for a V shaped recovery in the housing markets, it will be a long time coming.