Results from the European stress tests are difficult to interpret since many suggest that the tests were inconsistently given from bank to bank. Nonetheless, banks still need to improve capital ratios.
The domestic economy likely grew over 2% in the second quarter. The first estimate of growth will be published on Friday morning and drivers of growth should come from capital investment (equipment and software). Don’t expect much support from inventory growth as firms remain cautious. Efficient “Just-in-Time” management should also keep inventories lean.
Interest rates are staying low and will likely remain there for the foreseeable future. Interest on a 30-year fixed rate mortgage is the lowest since the data series began and there are no signs that the Fed is interested in raising their target rate this year. Inflation is virtually nonexistent so investors continue to demand fixed income.
QUANTITATIVE
Domestic equities continued their choppy trading last week (7/19-7/23) with the S&P 500 closing up more than 3.5% for the five days. Risk assets were in favor with small caps (Russell 2000) and emerging markets (MSCI EM) up more than 6%.
Year to date, the S&P 500 is roughly flat and has been less volatile than in 2008 and 2009 when we compare average daily returns.The standard deviation of the daily returns in 2010 has been 1.3% as compared to 1.7% in 2009 and 2.6% in 2008.
Curve steepness increased last week by approximately 5bps for both spot and forward markets (2yr vs 10yr swaps) which is a positive sign for risk assets.
FUNDAMENTAL
The price to ship goods on the ocean's largest ships has been depressed for over 18 months. Many capesize ships (ships that are too large to use the Panama Canal) were sidelined in light of the more than 90% decline in shipping rates in late 2008.
Roughly a quarter of the 1000 capesize vessels in service are currently anchored, as owners wait for prices rebound. Global dead weight tonnage being shipped is clearly at a low point since the capesize vessel accounts for more than 60% of the dry bulk traffic around the world, and other classes of vessels have experienced similar, though less pronounced, metrics.
The issues in global shipping portray another side-effect of the commodity bubble's inflation and subsequent burst. Ship builders cranked up new vessel construction in panic to meet the seemingly insatiable, growing demand for commodities. As commodity prices rebound over the next few years, the glut in shipping capacity will gradually ease. Last week's large increases in iron-ore and steel prices may give the water transport sector some hope.
DISCLOSURES
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