Monthly Mirth - 4th May

Monthly mirth…
The pandemic had subsided temporarily over the weekend as fewer cases were reported, but the spread across the US confirmed this morning has encouraged authorities to ensure all remain aware of the potential dangers. The great US stress-test debacle has once more been pushed back to Thursday amidst rumours Citi and BofA will need to raise capital in the near future ($10bn in total is reported figure). As if Wall Street hasn’t experienced enough turbulent times in recent months, reports today seek to confirm New York was once hit by a massive tsunami (in 300BC) flowing over from the eastern Atlantic, and may be open to a repeat performance – another soaking for bankers. Fiat succeeds in both its endeavours for Chrysler and GM Europe. Funny that, as one charming Italian manages to woo not one but two new partners, his countryman’s president, Berlusconi, managed to make a total mess of his marriage – his wife has declared she “must” divorce him to get away from his constant “flirtations” with other women – really…Berlusconi not a faithful character? – shocking revelation.

*Great start to the month for markets as Asia returns from a long weekend holiday to push markets high and far – seems the holiday break had all the right ingredients for many people and the positive outlook on the economy they had been fumbling with over the last few weeks now taking hold – but for how long? Japan is still closed until Thursday, but all other markets were buoyed by the consensus reached by the Asian economies to create and finance a $120bn currency reserve fund (almost ¾ from Japan), better than expected manufacturing numbers out of China, Chinalco’s continued pursuit of Rio Tinto, as well as the China/Taiwan agreement. A number of upgrades across the region by international brokers also helped matters, such as China Mobile (+10% today). Some short-covering has certainly been noted, but volume has kept up well, and in the absence of a number of players via the UK bank holiday, it is a good sign of interest returning to the region.

*In fact, Hong Kong opened higher and just kept going, matching pace with Taiwan and Korea (+5.5%, +5.6%, +2.1% respectively). All the ASEAN nations participated in today’s strong market sentiment, with even Vietnam +4.7%, in a real sign of a return of some investor risk appetite. A cursory look at any financial screen will show a significantly different picture to the start of ’09, with many +ve YTD returns now prevailing. Several markets are touching 7mth highs – where markets go from here is a crucial case of whether we have real long-term confidence or have simply enjoyed short/medium term opportunistic trading.

*So far, Europe has reacted slightly more demurely after their long-weekend break (UK closed today), with some decent gains on decent volume, but nowhere as bullish or widespread as further East. News that Euro area GDP will shrink by about 4% this year (double earlier predictions) bringing some down-to-earth but not enough to eradicate all positive outlooks. It seems the ECB will hold a meeting later this week to revisit some additional measures to facilitate the member economies – talk of a floor having at least been created seemingly helping markets remain positive for now .The risk of further capitulation selling now looking more distant than just 6 weeks ago. Realistically though, whilst we are in the midst of what our global strategy team terms “the twilight zone” markets will continue to oscillate between periods of significant gain, followed by further disposals for several months at least as more of a clearer picture continues to emerge. Government efforts have helped with this first oscillation upwards, combined with some welcome respite from any major negative financial “blow-ups”. We are certainly at the very beginning of this period though, and it will take time till consensus and level-heads prevail.
*Just back on the Fiat story – it is slightly ironic that the most capitalist indication of Darwinian “survival of the fittest” is embodied in the charismatic Marchionne who is admiringly looking to seek a great advantage on the back of the current industry woe’s – creating a European supergroup that will surely enjoy some great returns once markets and consumers return – if they do.
*Some releases to look out for: Euro-Zone PPI (-2.9% YoY cons, -0.6% MoM cons), Retail Sales (0.1% March cons), ECB Rate Announcement on Thursday. In the US: Construction spending later today (-1.7% March cons), Non-farm productivity on Thursday as well as Initial jobless claims and the all important change in Non-Farm Payrolls on Friday (Apr -606k cons).

*If Buffet is to be believed, he is cautiously optimistic for US corporate strength in 2010 but does not see much reason to take views over 2009. He is of course a heavily invested long-term player and the coupon payments he is enjoying on some of his larger stakes (Goldman Sachs comes to mind) are serving him well as he sits back and awaits the inevitable capital accumulation. A few risk indicators are turning positive as we have higher Oil, Gold and CDS spreads continue to narrow.

*US futures looking good a couple of hours ahead of the open: DJIA +49pts, S&P +5.5pts. What might helps markets this week are a number of risk indicators turning positive as mentioned above. AUD play and similar trades are all gaining, and the Baltic Dry Index is up again and is experiencing its own “twilight zone” period as shipping companies are probably trying to digest all the latest global macro-data to determine what demand may exist through global trade requirements.
*Currencies have seen cable remain firmly at 1.49 over the last several days as traders contemplate the next phase.