Equity Markets – markets in Europe are higher this morning as ECB President Draghi appears to be signaling that easing could be coming as he expects inflationary pressures to ease in 2013.  This is likely as much in response to recent political events as real expectations of what’s going on in the economy there but there continues to be signs of further weakening after the UK released Q1 GDP numbers which showed a 2^nd consecutive quarter of negative GDP growth (recession).  The pressure continues to build on Germany as they are quickly becoming the lone voice proclaiming that austerity will be the savior of the EMU which is of course easier for them to do as their economy easily outperforms the rest of those in the EMU which in turn makes their calls for austerity elsewhere ring somewhat hollow. 

Markets in Asia were mixed overnight after Chinese Premier Wen pledged to maintain steady growth but this failed to rally the rest of the markets as they’ve heard this before and concerns are growing that there will be no significant policy changes prior to the new government being selected in the Fall.

Here in the states, earnings continue to come in better than anticipated although the ultimate impact on employment levels remains in question as the housing market continues to struggle despite modestly better numbers out yesterday on new home sales.  The likely increase in the numbers of repossessed properties finding their way onto the market from the banking system continues to weigh on the market in general along with questions about what the ultimate resolution to the GSEs (Fannie and Freddie) will be.  The banking system here remains a pin ball knocked back and forth between events in the EMU and regulatory questions here.  Until a clear path asserts itself for the banks it is difficult to see a clear path to a stronger recovery in the US economy as the potential catalyst for stronger growth (cheap natural gas) continues to go wanting for a coherent energy policy out of DC which is now in full-on campaign mode.  Today, I expect early trading to wane as we move through the morning toward the FOMC rate announcement due out at 1230 and then the Bernanke “presser” at 1415.  While no change in rate outlook is anticipated the market clearly wants to hear what the Chairman has to say about monetary stimulus in the form of additional QE going forward.  The odds are that we will get more of the same “unemployment remains too high”…”the recovery remains fragile and uneven”…with the ultimate outcome being that he FOMC remains “on watch” for signs that additional stimulus could be necessary without committing to anything in particular.

Economic Releases – yesterday’s heavy home sales tilted data was somewhat mixed with the Case/Shiller data coming in modestly disappointing but the new home sales data better than expected in units (SAAR) with last months’ upward revision (an annualized 40,000 unit revision).  Today we’ll get durable and capital goods order and shipment data for March but all eyes (and ears) will be on the press conference for the Fed Chairman following the release of the short term rate decision scheduled for 1230.

Events – FOMC rate decision out today at 1230

Earnings – another big day on the calendar for S&P 500 earnings with almost 10% of the index reporting (47 companies scheduled).  The NASDAQ is indicated higher this morning after AAPL posted a 22.7% earnings surprise based on better sell-through numbers than expected for iPhone and iPad sending the stock back over $600 in afterhours trading and setting the stage for today’s trading, at least in the morning session.  So far this earnings season, profits have outpaced estimates in 82% of announcing companies…the highest rate since Q1 2010.

 

News

·         UK economic GDP for Q1 was -0.2% marking the 2^nd consecutive quarterly decline in GDP and thus an “official” recession…this is the first “double-dip” recession for the UK since the 1970s.  The expectation had been for +0.1%.  The news of recession will be ammunition for those in parliament who want to criticize PM Cameron for his austerity moves that have to date provided support for gilts and sterling.  Of course the stronger sterling relative to the euro isn’t helping exports with many EMU countries continuing to show weak economic growth.

·         European banks could be back on ECB-sponsored life support soon as none of the EMU banks have sold debt since the end of Q1 as spreads have widened significantly amid renewed concerns about the fiscal viability of Spain and Italy.  The LTRO program which has been on hold since February, may be needed once again if the banking system finds itself in need of capital…regardless, the situation continues to be one of tighter lending to the public as banks will horde capital and raise lending standards as fears of another crisis rise.  This is just one more link in the potential “death spiral” chain…austerity shrinks the economy, banks won’t lend as they fear rising defaults due to higher unemployment, tax receipts fall as unemployment rises, more austerity is needed…repeat

·         ECB President Draghi is now calling for inflation to moderate in 2013…this is a significant change in stance from the 4^th of April when he announced concerns about “upside risks” to the inflation numbers…clearly the ECB is seeing weakness in economic growth continuing to manifest itself across the continent as well as in key Asian markets.  This could be interpreted as the ECB moving toward more of an “easing” mode on short term rates, which at 1% are 50 bps higher than the UK and 75 bps higher than the US.

·         Credit Suisse reported a 96% profit decline in Q1 after booking a CHF 1.55 billion charge for increased market value of its own debt…it’s the crazy mark-to-market accounting for liabilities…your credit improves and it reduces your earnings, your credit worsens and it improves your earnings…the market paid little attention as the stock is virtually unchanged in trading.

·         The FOMC continues to struggle with “rules-based” decision making vs. flexibility necessary when exogenous shocks to the system occur…good luck with that

·         French presidential candidate Hollande has taken aim at “Merkozy” as he’s using the current situation on the continent in seemingly all countries other than Germany to criticize the austerity policies proposed by Merkel and backed by Sarkozy as he argues against austerity, free markets and limitless competition…if this becomes the new rallying cry as politicians across the continent pander to the populace then the euro is going to get crushed.

Credit Markets

·         Bids for German 30-yr bund issuance fell short of the €3 billion target as investors declined to take the duration risk implied by a 2 ½% coupon with so much uncertainty about what’s next for the EMU.  A 100 basis point rise in rates to 3.5% would result in a roughly 22.4% loss in the face value of this paper.

·         S&P raised Ford to BBB-, the first time the company has moved beyond the below investment grade rating since 2005 and marks a significant milestone in the tenure of Alan Mullally

·         The question has been asked but is the answer “it’s over already”…as even northern European governments begin to push back against the German diktat of austerity to cure the EMU of its ills (see the French election results and the collapse of the Netherlands coalition)…the feeling of many is that we’re now on the downhill side of this argument and the Germans have effectively pushed it too far.

Sovereign CDS – spreads are tighter this morning as the periphery could benefit from this move against austerity…if the ECB ends up opening the spigot to monetize debt around the region it’s either the beginning of the end for the EMU and the euro or else Germany is going to have to end up funding a lot of deficit spending around the region…either way, it was destined to end badly.

US Corporate Credit – The high yield CDS index led the way yesterday, tighter by 11 basis points to +616…meanwhile the leveraged loan index was tighter by 7 bps (+320) while the investment grade index tightened by 1bp to +100.

Energy Markets – WTI is outperforming this morning and that has the spread vs. Brent back below $15/barrel…today we get the Department of Energy numbers on week crude and distillate supplies.

·         Expectations are that crude inventories rose 2.8 mm barrels last week after risking 3.9 mm barrels in the prior week… the API data from yesterday after the close actually showed crude inventories lower on the week by almost 1 mm barrels after rising 3.4 mm barrels the previous week.  These numbers are out at 1030 and are worth watching.

Futures –  with WTI up this morning and natural gas little changed the energy equivalence ratio is widening back toward 7x.

 

Equity Markets – European markets are trading higher this morning after yesterday’s dismal session in which Spain’s IBEX entered “bear territory” having closed the session down more than 20% year to date.  This improved tone isn’t due to any new revelations about which direction the EMU is heading in its drive toward more fiscal consolidation.  If anything, there is clearly pushback coming from the electorate in member states outside of Germany at what can only be viewed by the non-German populace as austerity imposed by Berlin.  The Germans are not helping their cause either…they effective refuse to acknowledge that they were able to pay for the incorporation and rebuild of East Germany on the backs of the rest of the EMU which borrowed to buy German made goods and now can no longer afford them.  Now the Germans want to impose fiscal austerity on the rest of the EMU so that they don’t ultimately have to pay for each of the member states largesse which has benefitted them to date.  It won’t take long for this to become a huge sticking point if nationalistic fervor is stirred by election results (Hollande is only the first) as countries will simply refuse to go along with diktat’s from Berlin and if it comes to that we’ll have a real mess on our hands.  What’s holding up the markets today would appear to be the FOMC meetings that will go on throughout today with a rate decision announced tomorrow.  Of course, everyone knows that the short term rate range will be unchanged, the focus will be on what is either said or unsaid regarding additional monetary stimulus measures (QE3) when Chairman Bernanke holds the 1415 “presser”.  I don’t look for the Chairman to change his tone with regards to expectations for additional QE unless the Beige Book data is far more disturbing than is currently build into economic expectations here.  So we wait…

Economic Releases

 

Events

·         The FOMC meets today and tomorrow with a short term rate decision due out tomorrow afternoon

·         The WTO dispute body meets today  in Geneva

·         An IMF staff note on bank debt restructuring will be released this afternoon

Earnings – big volume day as we get 39 companies announcing calendar Q1 earnings…to date, slightly over 20% of the S&P 500 have announced earnings

 

News –

·         China’s leading economic index rose 0.8% in March, down from a revised 1.0% rate in February (originally announced at 0.8% as well)…viewed as additional evidence of moderating growth and after the +8.1% GDP growth rate for Q1 the calls for additional monetary stimulus are growing.  At some point, you have to take a step back and realize that the Chinese central government leadership turns over this year and it could be that the current government will simply wait until the change over in the fall to enact any policy changes.  That of course assumes that there is no large negative economic event that occurs between now and October.

·         The FOMC will meet today and tomorrow morning with a short term rate announcement forth coming in the afternoon…there are essentially zero expectations of a rate change or discussion of changing the existing target date (late 2014) to consider a rate change…what everyone will focus on here, and likely speculate on in the market today, will be what will or won’t be said about additional QE out of the Fed.

·         The PM of the Netherlands, Mark Rutte, resigned after austerity measures failed to muster sufficient support and the coalition government’s cabinet splintered…the current budget deadlock is over €9.5 billion  in additional budget cuts necessary to satisfy EMU deficit limits.  What’s also interesting in all of this is that it’s another northern European nation that is in essence pushing back against the German-led austerity moves…the Netherlands has to date supported the Germans but that may be changing.

·         The RoK’s state procurement agency purchased 3,000 metric tons of high-grade Indian aluminum at a premium of $179/per ton over the LME futures price for July delivery…that was roughly a 10% increase versus recent purchases made earlier this month.

·         US Defense Department sources said that there are no indications that the DPRK is readying for a nuclear weapons test…the comments came hours after the DPRK threatened to turn the RoK “to ashes in three or four mintues”

·         Australia’s core inflation rate rose 0.3% in Q1, the slowest pace of price increase since 1998.  This raises expectations that the central bank could cut short term rates from the current 4.25% when the governors meet next week.

·         Metallurgical coal prices could be set for a rebound as early as July based on the steel production output goals in China and India that will likely result in imports of “met” coal which peaked at $330 per ton last June.

·         Chancellor Merkel maintains her insistence that budget austerity in the EMU is unavoidable if the debt crisis there is to be solved.  This is in response to the collapse of the coalition government in the Netherlands and the victory by Hollande in France as popular resentment to austerity is clearly gaining momentum outside of Germany.

·         Hungary’s central bank will likely leave its short term rate unchanged at 7% for two-week repo money as the government there has failed to start negotiations with the EMU and the IMF on fiscal support.

·         Italy was forced to pay an additional 1% discount rate on a zero-coupon bond auction following the announcement that the Monti government would move back the balanced budget target date to 2014 from 2013.

·         The Spanish Treasury sold 1.9 billion euro of bills which fell short of the maximum target even after that goal level was reduced…the rates paid rose to 0.63% from 0.38% in the March 27^th auction for 3-month bills and 1.58% up from 0.84% for 6-month bills.

·         The Portuguese government will hold discussions with unions on Thursday about cutting state jobs…the voluntary job cuts may only be at government departments that have the funds to pay severance.

Credit markets –

Sovereign CDS – spreads are modestly tighter this morning in the aftermath of yesterday’s widening following the election victory by Hollande and news that the coalition government in the Netherlands had collapsed.  This followed last weeks’ announcement out of Italy that the balanced budget target date in 2013 would be moved back to 2014.  Merkel remains convinced that austerity is the only solution to the debt crisis but that’s easy for her to sell at home where Germany is quickly becoming the only country with decent growth prospects and resentment to what is being viewed as German enforced austerity is growing everywhere else in the EMU.

US Corporate Credit – corporate CDS indices were modestly wider at the close of trading yesterday with the leveraged loan index out 3 bps (+326), the high yield index out 2 bps (+627) and the investment grade index out 1 bp (+101)

Energy Markets – WTI is little changed this morning and the spread to Brent remains around $15/barrel

·         Natural gas for May delivery in the UK fell to a 7-week low as weather there was predicted to be back to normal next month, May electricity prices also declined

·         This afternoon we’ll get the API crude inventory numbers for both Cushing and the US…last weeks’ numbers were an add of 3.4mm barrels in the US and 581k barrels in Cushing

 

Futures – futures remain little changed from yesterday’s close with the energy equivalence ratio  at 6.65x down from its recent high around 7x

 

Equity Markets – markets are in retreat in Europe this morning following the release of the Chinese “PMI flash” from HSBC that signals continued weakness in manufacturing there along with the news that Chinese oil demand is at a 5-month low (9.5 mm bpd).  Combine this with news from the weekend that the Dutch coalition government appears to be falling apart over austerity measures, the YPF / Repsol debacle in Argentina is creating new tensions, the Socialist Hollande won the 1^st round elections in France which could turn a key ally for Germany in the EMU into a rival and new tensions for Israel in the MENA as Egypt threatens to end its natural gas supply agreement with Israel and you’ve got more “factors” which should boost volatility and could throw the equity and debt markets into turmoil as we head into May…expect to hear more calls for “sell in May and go away”.

Economic Releases & Events

Economic Releases – there are no releases scheduled today

Earnings – to date, 94 of the S&P 500 have reported with the average EPS growth rate coming in at +6.37% and the average surprise at +8.49%...so far, the energy sector leads the earnings race at +30.07% growth in EPS with 5 of 43 companies having reported.

 

News

·         Francois Hollande won a narrow victory in Sunday’s first round election to select the next French president.  While this result (Sarkozy vs. Hollande) was anticipated we now await the final election process in May as Hollande has pledged to abandon some of the fiscally conservative moves that Sarkozy has supported both at home and via the EMU leadership.

·         The IMF received $430 billion in pledges to build the coffers of the international bailout fund following managing director Legarde’s plea for additional contributions at the spring meetings this past weekend.  However, total pledges fell short of the $600 billion that was sought as the US refused to up its contribution, Canada proposed making it more difficult for the EMU to gain additional aid and several emerging markets countries demanded more influence over IMF operations before actually contributing additional capital.  In the end, the IMF has a larger fund but leaves itself open to public criticism if additional funds are sent to the EMU.

·         Spain’s GDP fell 0.4% in Q1 according to the Bank of Spain

·         La Nacion reports that Argentina is attempting to come up with ways to reduce the value of the 51% of YPF that is owned by Repsol and that the Argentine government may pay nothing to Repsol following last week’s seizure.  This has set-off discussions in the EMU over possible sanctions against the Argentine government and risks ensuring that Argentina will maintain its financial markets “pariah” status for years if not decades to come.  Repsol may sue any potential new outside investor in YPF (although I can’t see why anyone would invest a dime in the entity) to block funds from flowing to Argentina to boost production at YPF.

·         Business confidence in France fell in April to 95 in a recent survey from the 98 reading in March…this follows on the heels of a 22-month low reading of 92 in January.

·         The Dutch government faces a call for early elections after the latest round of austerity talks resulted in one of the coalition members pulling out of the existing government’s camp over the weekend.  The remainder of the Dutch cabinet will meet today to determine if there is a chance to pass the new austerity measures before a call for new elections.

·         ECB President Draghi and other EMU finance ministers said that the EMU has “done enough” to warrant outside support from the IMF and that they don’t plan to beef up the EFSF/ESM further and that the ultimate problems in the EMU can’t be solved by monetary policy measures alone.

·         The “flash” PMI (put out by HSBC)  is 49.1 for April in China indicating that manufacturing is headed for a 6^th month of contraction.  The positive spin argument here is that the number itself remains around the 50.0 level and that the contraction therefore is modest and the economy will have a “soft landing” and the government will likely add some monetary stimulus at some point.  The estimated reading in the PMI for April of 49.1 compares with the official number in March of 48.3.

·         Chinese refined copper imports were 345,667 metric tons in March compared with 375,831 in February and 192,161 last March.

·         Auto production in Japan reached 574k units in February, the highest since 2008, as the country’s auto makers return to their pre-quake/tsunami production capacity one-year after the disaster.  Japanese automakers had 43-days of supply in the US compared with 60-days for the domestics which would indicate that there is still some production “catch up” that remains.

·         The worsening trade deficit in Japan may in the end keep more manufacturing capacity on the island nation as the yen has weakened as a result of the trade deficits which has in turned helped Japanese manufacturers…

Credit Markets –

·         Fitch Ratings published a report that examines the refinancing risk posed by structured finance obligations and finds that CMBS and CLOs in Europe and Asia pose the largest potential risk given their maturity profiles and more limited refinancing alternatives

·         The roughly 1/3 of US government debt that doesn’t trade is paid 47% of the total interest bill as debt sold to the Social Security Administration, savings bond holders and certain foreign entities receives an average coupon of 3.9% vs. the average of 2.2% paid on the $10 trillion of government debt that trades in the open market.  Much of the discrepancy speaks to the maturity differential between the traded and non-traded debt.

·         The EFSF plans to issued so-called Partial Protection Certificates to governments requesting EFSF support.  These “PPCs” will offer limited credit protection of up to 30% of the face value of the bonds but are only guaranteed by the “faith and credit” of the EFSF/ESM.  It remains unclear if the additional credit protection will be enough to lure investors.

Sovereign CDS – spreads are mostly wider this morning as some disappointing macro news combines with the win in France over the weekend by Holllande, the potential that Argentina may choose to pay nothing for the 51% of YPF that it seized last week from Repsol and the breakdown of the Dutch coalition government over additional austerity measures to trump the additional funding commitments received by the IMF over the weekend (of course those were not without controversy…see above).

Energy Markets – oil is generally lower in morning trading following the news that Chinese oil demand is at its lowest level (9.5mm bpd) in 5-months…the WTI / Brent spread stands at $15/barrel

·         Oil is declining in Europe and the MENA as Chinese crude consumption fell to the lowest level in 5 months (9.51 mm barrels per day)

·         Egyptian General Petroleum Corp has said that it intends to terminate its supply agreement with Israel.  The move is likely to further enhance political tensions in the region

·         The China Electricity Council published a report indicating the possibility of severer blackouts in China due to a shortage of up to 40 million kilowatts of electric power.

·         The administration decision to increase import tariffs on Chinese manufactured solar cells is a move trumpeted as a job saver for the manufacturers but likely kills the industry here as higher cost cells means less installation and 70% of the employment in the industry is on the installation side…oops.

 

Crude Oil  Basis Differentials – as can be seen in the table below, the most expensive crude in the US is located in the Gulf of Mexico and surrounding areas as this crude tends to price relative to Brent and has a transportation advantage in cost over oil coming out of the North Sea…this also points out the logistical problems currently existing in the North American crude pipeline system as companies rush to build new pipelines (Keystone XL) and reverse the flow on existing pipelines  away from Cushing toward the Gulf region (Seaway).

 

Equity Markets – overnight trading results on Asian markets were mixed as the early closing indices felt the weight of what went on here yesterday and the concerns about the Spanish bond auction that was held earlier this morning.   The later closing Asian markets found out that the auction raised more money than initially targeted and a late rally ensued that has continued this morning in European indices.  Futures here indicate an open that is little changed from yesterday as we await weekly jobless claims numbers and the March leading economic indicator numbers…there is also a  large earnings announcement slate this morning (see below).

Macro, News & Events

Economic releases – we get initial claims data, March home sales figures but most important we get the March LEI…as for yesterday, mortgage applications were reported higher on the week and the Department of Energy reported that crude inventories continued to swell even with refinery utilization climbing (+0.8% vs. -1.9% in the prior week). 

 

Events

·         The G-20 trade ministers will meet in Puerto Vallarta to discuss trade barriers…

Earnings – so far we’ve seen 10% of the S&P 500 report and earnings growth has been somewhat anemic at +2.54% but having said that, there is still hope as the reporting companies have on average surprised to the upside by +4.75%.   today is another full day with some 37 companies reporting.

 

Yesterday 4-20-12 – here are yesterday’s earnings results, sorted by earnings surprise

Asia, Europe & USA

·         March exports rise 10.5% year over year vs. estimate of +7% in Japan.  The trade deficit was ¥82.6 billion vs. an estimate of 223.2 billion

·         South Korea unveiled their own missiles that have the ability to strike targets anywhere in the DPRK

·         India announced the successful test launch of missiles that could carry nuclear warheads to major Chinese cities

·         Diesel imports to India likely rose 74% in Q1 as Reliance industries shut its largest refinery for maintenance…expectations are that demand in India for fuel will increase 8.3% this year.  Diesel costs 27% less than gasoline at the pump in India because of government subsidies.

·         Spain sold €2.54 billion of bonds, just above the 2.5 billion target…the 10-year paper cleared the market at 5.74% (34 bps higher than the last auction in January) while the two-year paper cleared at 3.46%.  Spanish bank holdings of government debt stood at 220 billion in January up  from 178 billion in November as funds from the LTRO program were used to buy Spanish government paper in the resurgence of the carry trade.

·         France auctioned €8 billion in debt today amid rising yields linked to the uncertain outcome of the May elections

·         The estimate for GDP growth in Germany is +2% for 2013, up from the estimated +0.9% this year according to economic estimates presented to the government today in Berlin

·         The Italian parliament passed a bill today that will now create an auction process for spectrum, before it was simply given away…this is a blow to former PM  Berlusconi whose media empire benefitted from the previously free spectrum.

·         So far roughly ½ of the 58 banks based in the EMU have announced plans to restructure that may involve the sale of up to €2 trillion (7%) in assets as the banks struggle to raise capital.  It is expected that more restructuring plans will be forthcoming

Credit markets

Sovereign CDS – spreads are mixed this morning but Spain is modestly tighter after a bond auction of 10- and 2-yr paper raised more than the targeted 2.5 billion euro…France also paid more to issue 8 billion euro of debt as the election politics draw a stark contrast between the Socialist candidate Hollande and current president Sarkozy…Hollande has said that he will raise the minimum wage and seek to amend the EMU “fiscal pact” that was agreed to by the Sarkozy government.

US Corporate Credit – spreads were wider yesterday amid the modest equity market sell-off and concern over the Spanish bond auction held this morning…that auction cleared the market with demand slightly higher than that targeted but rates paid exceeded those from January by about 36 bps on the 10-yr issue.   This should put a positive bias on the US credit markets to begin the day as equity markets clearly like the results (at least so far).  As for yesterday, all corporate CDS indices were wider with the high yield index out by 10bps (+623), the leveraged loan index out by 5 bps (+324) and the 5-year investment grade index out by 1 bp (+100).

Energy Markets – WTI is up almost ½% in morning trading as equity markets feel a little better for the moment following the successful bond auction in Spain…the Brent / WTI spread is $15 / barrel as higher expectations for the German economy in 2013 has the European-centric crude complex outperforming WTI as production and crude inventories rise in the US.

Futures – the relative positioning of natural gas and crude oil is virtually unchanged this morning with the energy equivalence ratio at 6.68x…hearing an increasing number of calls to invest in natural gas now with prices at decade lows and economic strength potentially building around the world.  The latest voice added to this call is that of Jeff Gundlach, yes he of TCW infamy…he likens natural gas in the current environment to gold back in the mid-90’s when it was around $250/oz

Equity Markets – markets are slumping this morning following the rally overnight in Asia as growing concern over the situation in Spain casts doubt on the wherewithal of the EFSF/ESM (once again) and investors flock to the safety of Germany as the two-year auction there this morning brought a record low yield of 0.14%.  All of this points to a likely increase in volatility as uncertainty about any resolution to the situation in Spain and its potential impact on Italy could negatively impact global markets.

Macro, News & Events

Economic Releases

0700       Weekly MBA Mortgage Applications…last week was -2.4%

Events

0830       Secretary Geithner will speak at the Brookings Institution

1830       Bank of Japan Governor Shirakawa speaks in New York

1900       IMF Managing Director Legarde will give a speech to the Bertelsmann Foundation in Washington, DC

Asia, Europe & USA

·         The decline in Chinese mainland home prices is spreading as a record 37 of 70 cities reported declines in March…officials there have maintained their pledge to keep restrictions on purchases of residential real estate which have trimmed demand and prices along with it.  For many analysts this spells continuation of the slowdown in growth as the downward momentum in real estate prices may be difficult to reverse in short order and non-construction centric growth drivers may take some time to fill in the gap.

·         Japan plans to host an international LNG conference in September…this would be the inaugural event.  As the world’s largest importer of LNG, there are reports that Japan is trying to negotiate better contract terms (i.e. lower prices) but in order to get better price terms they will likely have to accept longer term contracts if they want to attract new supply.

·         Unemployment declined in the UK as jobless claims rose less than projected for March…the rise in employment indicates that the private sector is making up for the public sector job losses and couldn’t come at a better time for PM Cameron who has been under attack from the Labor Party for reducing the size of government in a effort to restore fiscal stability.

·         Average weekly earnings in the UK were up 1.2% year over year in February vs. the 0.5% year over year increase in January.

·         Natural gas in northern Australia has been a boon to Darwin as a new $34 billion LNG facility there will supply LNG to Japan for 40 years…Australia remains stuck in a two-speed economy with the resource rich north thriving as the southern regions that are more service economy driven suffering with a relatively strong A$.

·         The DPRK announced that they would no longer adhere to an agreement to halt nuclear weapon and long range missile tests after the US cancelled food assistance following the rocket launch last week that failed…this is almost comical and shows the folly of trying to negotiate with states that can only survive by extortion.

·         The IMF estimates that the potential bank restructuring in Greece could clip €22 billion in bank capital from a system that has a total of €23.8 billion…interim PM Papademos is trying to come up with a recapitalization plan as the country approaches the May 6 election date that promises no clear majorities in parliament according to polls.

·         State-owned development lender KfW Group may step up new loans to the troubled shipping industry as their private sector counterparts pull-back from that market.

·         Luxembourg PM Juncker has confirmed that he will step down as the leader of the group of EMU finance ministers when his term ends this summer…this means that the job will likely go to Schaeuble

·         Argentina rejected Repsol’s demand for $10.5 billion in compensation for the nationalization of YPF…the Argentine government said that they will rely on “solid data” to value the 51% of YPF that they are nationalizing

·         Eurotunnel transit sales were up 21% in Q1 as train “shuttles” carried more cars and trucks between England and France…passenger traffic rose 4%

·         Non-performing loans on the books of Spanish banks jumped 8.16% in February, the largest increase since 1994 and up from  7.9% in January.  The total book value of loans described as “doubtful” by the Spanish regulator now stands at €143.8 billion.  Spain is facing a “depression” like scenario in which credit availability is almost non-existent, loan losses are rising and the economy is shrinking as unemployment stands at 24%...this is the “death spiral” scenario that may ultimately require intervention.

Credit Markets

·         Deutsche Bank analysts said that the next five years of corporate and sovereign defaults could be worse than the last five years if the default rates implied by credit spreads are realized…the key issue will remain central bank financial support levels going forward.

·         Germany opposes any plan that would allow banks to tap the EFSF/ESM bailout fund fearing that this will slowdown the sovereign fiscal restructuring process…

·         The EFSF auctioned a  €1.8 billion 26-yr loan whose proceeds will be lent to Portugal following the latest review of the country’s fiscal situation

·         Germany auctions two-year notes at a record low yield of 0.14%.

·         US Treasury officials are reportedly “leaning” toward a recommendation that would replace Fannie Mae and Freddie Mac with a government “safety net” for the mortgage finance system and  continuation of federal backing for loans to low income homebuyers…Secretary Geithner has indicated that the recommendation could be released in the coming weeks.  The November elections make it extremely unlikely that anything will be done this year.

·         Minutes from the last policy meeting of the Bank of England showed that Adam Posen has dropped his push for more QE which signals that the BoE is expecting higher inflation and potentially better economic results…sterling rose following the release.

Sovereign CDS – spreads are mixed this morning as the periphery is modestly tighter following the IMF’s improved outlook for global economic growth but the potential burden of a Spanish bailout weighs on core countries.

US Corporate Credit – The leveraged loan index outperformed yesterday, tightening by 14 basis points to +319.  The high yield index was in by 11 bps (+614) while the 5-yr investment grade index ended 3 basis points tighter at +99.

Energy Markets – crude markets are lower this morning but WTI continues to outperform as better macroeconomic results out of the US combine with the anticipated reversal of the Seaway pipeline helps to alleviate logistical bottlenecks that should bring WTI  Cushing prices (NYMEX traded crude contract) more in line with Brent.

 

Futures – natural gas future continue to underperform crude oil futures as the one-year futures strip average energy equivalence ratio expands to 6.7x

Equity Markets – markets in Europe are modestly higher this morning after a mixed overnight session in Asia as concerns about the Spanish fiscal situation and its impact on Spanish and Italian borrowing costs continue to weigh on global markets.  Speculation about what the next step in “crisis resolution” in the EMU will be has begun, here are few of the headlines:

·         Chancellor Merkel may have to consider a coalition with the SPD in an attempt to win re-election in 2013…the SPD favors “euro bonds” to quell the crisis

·         Expanding the ECB mandate is the latest election topic in France as Hollande and Sarkozy prep for next month’s election

·         Spanish economic ministry calls for more ECB purchases of Spanish debt

·         EMU finance ministry officials will meet  with the IMF this week in hopes of garnering explicit support for the EMU bailout “firewall”

For the most part, the market appears to believe that the “Bernanke put” and the “ECB put” remain in play even without an LTRO III announcement (not to say that it won’t happen).  Add to this the Chinese government’s decision to increase the trading band on the yuan (renmimbi) to 1% from 0.5% daily (which could signal their expectations of a more stable economic growth situation) and you start to form the scenario where   “bad news = good news”.

Macro, News & Events

Economic Releases

Events

·         The World Bank will choose its next President according to several board officials…current Dartmouth University President Kim is favored to succeed Robert Zoellick which has been held by a US citizen since the inception of the World Bank.  The other two nominees are the Nigerian Finance Minister Okonjo-Iweala and Colombian Finance Minister Ocampo.

Earnings

Asia, Europe & USA

·         Goldman Sachs is rumored to be selling more of its stake in Industrial & Commercial Bank of China at HK$5.05/share.  Temasek Holdings revealed that it will buy 3.55 billion ICBC shares from Goldman.

·         The Chinese Government is set to  double the renminbi currency trading band beginning today (16^th)…the new limit will be 1% (up from 0.5%) and makes sense in light of the less restrictive foreign investment policy recently announced…

·         The Bank of Japan today offered to buy ¥500 billion in JGBs as part of the stepped up QE strategy

·         The Bank of Korea lowered its 2012 GDP growth estimate amid volatile commodity prices and the ongoing credit crisis in the EMU…the BoK now expects the South to grow at a rate of +3.5% in 2012…down from the +3.7% estimate in December.

·         DPRK celebrated the birth date (100^th anniversary) of Kim Il Sung and ignored the satellite bearing rocket failure from last week.

·         Expectations continue to build that the RBA will trim rates, perhaps as early as next month, as forecasts for inflation in Australia are declining by the most in 30 months.  The Reserve Bank will release the minutes from its April 3^rd meeting later today.

·         EMU officials will travel to DC this week to meet with the IMF and see what if any improvement in support they can expect to receive from the IMF in terms of the EMU bailout facility.  Many think that by running the EFSF & ESM in parallel this increases the size of the bailout fund when in fact the ultimate commitment remains at €500 billion and so far the leaders in Europe (especially Germany) have so far been unwilling to raise this commitment ceiling.  Consequently everything else is just for show and I can’t see the US changing its position on the EMU really increasing their potential exposure to additional bailouts.

·         BMW sales in Brazil were down 30% in Q1 due to a hike in the import duty on vehicles not built in Brazil

·         Spain will auction 12-month and 18-month bills today and will auction 2-year and 10-yr paper on Thursday…the ongoing issuance without more LTRO money to take up any amount that the public won’t buy has the market concerned.

·         The CEO of Siemens Wind Power said that the wind industry in the EMU is struggling with low margins that are creating an unsustainable situation…Siemens thinks that with cost cutting, onshore wind could become competitive with fossil fueled generation sources this decade but that offshore will take longer.

·         The EMU’s aggregate trade surplus shrank more than expected in February as import demand outpaced export sales…the seasonally adjusted surplus shrank by 30% from January to €3.7 billion from €5.3 billion

·         German chancellor Merkel may have to turn to the SPD for coalition help as her CDU party strength has been significantly diluted by last years’ election losses…the problem?   The SPD favors using so-called “euro bonds” or joint and several debt to battle the ongoing debt crisis.

·         French presidential candidate Francois Hollande says that the crisis in the EMU could have been avoided had the ECB simply bought up sufficient amounts of Greek paper to begin with…this follows Sarkozy’s call yesterday to expand the ECB mandate to include actively using monetary policy to stimulate growth (in direct conflict with the existing single mandate to control prices) as the ECB becomes the latest political lightning rod in the upcoming French elections.

Credit Markets

·         Moody’s indicated that asset backed securities backed by Spanish consumer and business loans are the worst performing European ABS securities…9 of the 14 securitizations with the lowest ratings contain Spanish assets

·         Yields on 10-year Spanish paper are at four-month highs and Spanish 5-yr CDS are at their all-time wide spreads as concerns continue to grow about the worsening fiscal situation in the kingdom.  The lack of demand for Spanish paper prompted calls from Spain’s economics ministry for the ECB to increase its purchases of Spanish bonds.

·         Italy’s government debt fell to 119.6% of GDP in February as tax receipts were up 2.7% year over year.  Meanwhile, the February budget deficit was €8.8 billion up from the 3.9 billion deficit in January.

·         EMU finance ministers postponed a decision on filling an ECB executive board position until after the French elections…

Sovereign CDS –

Energy Markets – crude oil is down this morning in sympathy with the equity markets and following the first talks with Iranian officials about that country’s nuclear program in 15 months.  The talks in Istanbul on Saturday concluded with an agreement to talk again next month in Baghdad…in other words, no resolution.  The WTI / Brent spread is currently at $17.22/barrel.

·         Speculation is building that Argentina is preparing to nationalize the Repsol unit known as YPF…the potential action increases tensions with Spain and is having a negative impact on Argentina’s dollar denominated debt.

·         An ethanol surplus continues to build in the US as producers followed government forecasts for use of the “biofuel additive” and boosted production into the teeth of an ongoing slump in gasoline demand.

Futures – natural gas futures continue to decline faster than crude futures, driving the energy equivalency ratio to 6.54x…in other words, NYMEX crude is 6.54x more expensive per barrel than an energy equivalent amount of Henry Hub natural gas (6,000 cubic feet).