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).