Equity Markets – Asian markets were mixed in overnight trading with the later closing markets outperforming as the EMU finance ministers appear to be settling on keeping both the EFSF and ESM “alive” until mid-2013.  Meanwhile, earnings at the largest Chinese bank surprised to the upside.  European indices are at or near their session highs on renewed enthusiasm over the bailout fund situation.  Domestic futures are off of their lows for the session and indicate a higher opening.

Macro, News & Events

Economic  Releases – once again, the market received  marginal news on the macroeconomic front yesterday (that seems to be the theme this week).  The Q4 numbers were unchanged for the 3^rd updated but jobless claims were higher than anticipated and the previous week’s number was revised higher by 16,000.  The Kansas City Fed manufacturing activity survey was also worse than anticipated.

Events – none scheduled for today

 

Earnings – no earnings announced today…with a little over a week until the beginning of Q1 earnings season there remain 4 firms in the S&P 500 that have yet to announce their earnings for the calendar 4^th quarter season.   At present the average growth rate in EPS for those companies who have reported is +4.75% with an average earnings surprise of +3.35%.

Asia & Europe –

·         The Foxconn audit finds “serious violations” of China labor laws 

·         The Chinese government will increase financial support for consolidation of the cement industry according to an official at the National Development and Reform Commission

·         China’s largest bank (ICBC) reported a 17% increase in net income year over year which exceeded the consensus estimate.

·         A survey of property developers in China suggested that the group is comfortable with the current rate environment and suggests that the worst may be over.

·         Economists remain split on the outlook for the PBoC to ease monetary policy ahead of the April 1^st release of a manufacturing index that is expected to decline to 50.6 from 51 in February.
·         Japanese industrial production fell 1.2% in February…expectations had been that production would increase 1.3% following a 1.9% increase in January.  Meanwhile, the unemployment rate in Japan fell to 4.5% in February.

·         Japanese imports of wheat may surge as much as 82% in the year beginning April 1^st…the demand increase is due to the record corn prices in the US last year as the substitution effect kicks in.

·         The RoK cut its US dollar share of F/X reserves to lowest level since 2007…dollar holdings dropped to 60.5% of reserves from 63.7% in 2010.  Most of the shift in funds went into yuan and Australian dollar denominated assets.

·         EMU finance ministers near an agreement to run the EFSF and ESM in parallel until mid-2013.  The amount of potential financial support immediately available would be between €340 – 640 billion.  The ministers are trying to come up with a way to walk the fine line between what Germany wants (a ceiling of €500 billion in the “permanent” bailout fund, the ESM) and what the IMF has demanded (additional support from the EMU).

·         Commerzbank has said that it will establish a “bad bank” for its Eurohypo unit in order to unwind most of that units public finance, commercial property and sovereign debt assets.

·         The inflation rate in Italy leapt to a 5-month high in March on increased energy prices and taxes.  The rate rose to 3.8% from 3.4% in February…the consensus estimate had been for a 3.3% rise.

·         Current PM Monti said that he feels that the return to an elected government does not pose a threat to the Italian economic recovery as in his view all Italians understand the sacrifices that must be made.

·         Spanish PM Rajoy is set to unveil the deepest budget cuts for that country in three decades when he reveals his 2012 budget today.  The government risks a deeper recession in an attempt to avoid a bailout.

·         Moody’s trimmed the ratings on five Portuguese banks as the rating agency cited “expected further deterioration of…domestic asset quality”

·         Consumer spending in France rose for the first time in 4 months as a result of colder temperatures and higher energy prices.

---

Credit markets –

Sovereign CDS – spreads are modestly tighter this morning as EMU finance ministers claim that they are close to an agreement on keeping both the ESFS and ESM in place until the middle of 2013 in an attempt to satisfy demands from the IMF.  Having said that, it remains unclear to me why the IMF would view a temporary move like this as a permanent boost to the bailout facility.

US Corporate Credit – credit default swap spreads were wider yesterday, led by the high yield index (+11 basis points to +576) and the leveraged loan index (+8 basis points to +290).  The investment grade index was out 2 basis points to +93 on the  5-year index.  Concerns over global growth, increasing concerns about Spain, Portugal and Greece and a trend of modestly worse macro data drove the widening.

---

Energy Markets – crude oil prices rebound modestly from their three day slide…the WTI / Brent spread is near $20 / barrel.

·         Traders are speculating that Iranian sanctions will constrain global supplies of crude leading to higher prices and increasing the volatility resulting from a potential counter move from Iran.

·         Speculation about tapping into the Strategic Petroleum Reserves remains rampant but even so, the change would be only temporary…the larger long term impact on prices in the US will be due to additional infrastructure such as the enhanced Seaway pipeline which will bring cheaper oil from The Bakken and Canadian oil sands to the Gulf coast which should reduce basis differentials in price to their underlying transportation costs (around $9 / barrel from Canada to the Gulf).

Futures – The trend lower in natural gas continues even as crude stages a modest rally…spot market natural gas at the Henry Hub in Louisiana is currently at $2.01 / mcf.  Natural gas has been hovering around the $2/mcf level for a couple of days which is the lowest level seen since September of 2009.  The energy equivalence ratio is back up to 6.3x as crude oil outperforms on price.

Phillip Pennell, CFA

Turnberry Capital Management

(203) 861-2708 (Direct)

(203) 861-2700 (Trading)

(203) 917-2255 (Mobile)