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