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).