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Thursday's Seven

Marc To Market's picture




 

A nervous calm continues to cast a pall over the capital markets. The US dollar is narrowly mixed, but within the ranges seen yesterday. Asian markets were mixed, new that HSBC's flash Chinese manufacturing PMI rose to 51.7 in March from 50.4 in February failed to have much impact. European bourses opened softly and, encouraged by disappointing flash PMI figures, sold off further. Near midday in London, the Dow Jones Stoxx 600 is off about 0.5, led by tech and basic materials.

Peripheral European bond markets are firm. Italian bonds continue to outperform Spain, with the latter perhaps hindered by anticipation of today's supply. The 10-year spread has moved almost 15 bp in Italy's favor over the past five sessions. Greek bonds also are recovering for the second session after falling for the previous seven. A general exception to the pattern comes from emerging market stocks, where the MSCI benchmark has fallen to new lows for the year.

There are seven developments between yesterday and today that are shaping the investment climate.

1. The FOMC tweaked its macro-forecasts a bit and recognized that the Q4 slowdown was temporary. It will continue to purchases $85 bln a month in long term assets. The pace of purchases may vary as the economic conditions change. We think it will take the real Troika (Bernanke, Yellen and Dudley) a few more months to feel confident that the improvement that the Fed recognizes is not temporary, as it has proven in the recent past. While the Fed is continuing to evaluate the effectiveness of its purchases and discuss the exit strategy, the situation is still fluid. It will take several more months at least for this to be worked out. Bernanke did indicate a period between the end of the asset purchases and the beginning of the remove of accommodation is anticipated.

2. The UK budget projected GBP61 bln greater borrowing through 2017-2018 than anticipated three months ago. That means the peak in debt/GDP is not seen until 2015-2016 and at over 100%. This may spur more speculation of a credit downgrade by Fitch and S&P. There was a small adjustment to the BOE's remit, which seemed to largely affirm the flexible approach the MPC has shown regarding the fact that inflation has been above target for 3 years and counting. A further change is anticipated around shortly after Carney takes his post that will involve the BOE's forward guidance.

3.Separately, the UK reported much stronger than expected Feb retail sales and this lifted sterling back toward yesterday's highs and weighed further on UK gilts. Retail sales rose 2.1% in March, four times what the consensus expected. This is the largest rise in nearly a year and is more likely to reflect the rebound from the weather-induced weakness (-0.7%) in January. Key resistance in sterling is seen in  he $1.5200 area, a neckline of technical pattern that would project toward $1.56.

4. The flash PMI readings for Germany and France were disappointing. German manufacturing PMI slumped back below 50 to 48.9 and the services reading fell back to 51.6 from 54.1. While Q1 GDP may still be positive, it is clear that with headwinds from its neighbors, Germany is struggling. France saw a small uptick in its manufacturing PMI, but at 43.9 (from 43.6), it is hardly inspiring. And the flash service PMI was worse. It fell to 41.9 from 42.7. This produces a composite that is the lowest since March 20009.

5. The Cyprus crisis continues. It has become clear in recent days that the creditors are demanding 5.8 bln euros from Cyprus, but Cyprus officials continue to pursue particularly onerous and odorous ways of raises those funds. The new elected President had favored the tax on small depositors. When this was rejected, Plan B is yet another way to throw its people under the proverbial bus. It has reportedly floated the idea of capturing the state pension assets and in exchange providing government bonds backed by future revenue tied to the gas discoveries and then raising the remainder (~1.6 bln euros) with a tax on large deposits. The Troika will not be able to sanction this as it does not stabilize the country's debt/GDP ratio. Separately, the ECB which we understand had previously threaten to deny Cyprus banks to any more ELA funds as of today appears now to have given Cyprus the weekend to reach an agreement.

6. Australia's PM Gillard withstood a leadership challenge and is set to lead Labour into the Sept election. However, the fissures in the party have not closed and support for the party is flagging. Separately, New Zealand reported a stronger than expected Q4 GDP (1.5% vs 0.9% consensus)which gave the local currency boost. Although the RNBZ has indicated no rate hike this year, many in the market continue to see the risk of a year end move.

7.  At pixel time, the market is still awaiting BOJ Kuroda's first press conference.  He is expect to indicate willingness to buy more government bonds and with longer maturities (5 year instead of 3 years currently).  The open-ended nature of the operation, which was to being next year will likely begin sooner.  Separately, Japan reported a February trade deficit of JPY777.5 bln, which while a bit smaller than expected is still the eighth consecutive monthly deficit.  The details were disappointing as exports fell 2.9% after rising in Jan for the first time in eight months.  Imports rose 11.9%, a little less than expected, but well above the 7.3% pace seen in Jan.   While we recognize the data may be skewed by the lunar new year, we also see how the price of imports is rising faster than the yen's weakness is helping exports.  

 

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Thu, 03/21/2013 - 11:40 | 3357314 the grateful un...
the grateful unemployed's picture

somebody needs a chart, with Productivity on one side and Employment on the base. As long as this chart stays 1:1, there is a chance that we can muddle through, that the politicians will figure out a way everyone can share the wealth, not just the guys who own the robot assembly line factories. the shortest distance to being in the 1% is to automate, and the quickest way to go broke is to work for a living. That said, once Productivity falls faster then Employment, then there is no chance the social and economic problem will be solved. A Cyclical bear market within a Secular Bear Market. look out below

Thu, 03/21/2013 - 10:19 | 3356859 ISEEIT
ISEEIT's picture

When sleeping feels more real than being awake...Something is amiss.

Thu, 03/21/2013 - 10:06 | 3356798 suteibu
suteibu's picture

While we recognize the data may be skewed by the lunar new year, we also see how the price of imports is rising faster than the yen's weakness is helping exports.  

I don't understand why the Lunar New Year has anything to do with it.  It happens every year.  It's not like it sneaks up on everyone.

As for import prices increasing, I suppose Abe forget to instruct overseas suppliers to eat the falling Yen.

On the whole, a nice report, Marc, although the evidence suggests I need more cowbell is correct.  The Nikkei topped 12,600 (highest since Sept '08) on the export/import news which a rational person would conclude is not bullish.

Thu, 03/21/2013 - 09:55 | 3356733 disabledvet
disabledvet's picture

This feels an awful lot lime 2008 "only worse." Lehman brothers obviously was an "accident" in that as we all know only VERY few were in the know of just how massive the problem really was (even Goldman was amazed at how many billions a guy by the name of John Paulson was raking in.) As such did the Government make a bad call on the LB? No doubt. But in my view "it was just that." Needless to say Dick Fuld had no idea. I REALLY don't feel this is the case with...ahem..."Cyprus." if this is as I am surmising...and I AM surmising here..."a Government hit" then clearly this bodes I'll...if not the end of the Euro Project. This is not something I think ANYONE wants to see obviously...the implications are more than merely "political" as they say. Hey...I might be getting on in my years but I remember the "4+2" agreement like it was yesterday. For those of you who don't know what that is this re-united Germany and put Berlin as it's Capital courtesy of a guy named George H.W. Bush. "Guilt" aside that's what we call in the parlance of Diplomacy "a FACT Jack." obviously we have heard that The President's "go to guy" is in fact a girl by the name of Chancellor Merkel. Nuff said. We're in the Age of Peta flops and meta data Marc. These "data sets" ARE reality. Only the Germans (and it was a German mathematician by the name of Dr. Reuter who taught when I was just a little shaver) about computer programming and "the Almighty Data." needless to say even he was amazed at what a bunch of 12 year olds could do with "nothing more than a Tandy TR-3 and a cassette player." a few of us hit it big...but the rest of us thought nothing of it and moved on. "oh the Places You'll Go" said a famous author.

Thu, 03/21/2013 - 09:55 | 3356732 Orly
Orly's picture

Cable's rise has stalled at 1.52 as expected.  1.55 was entirely too rich.

Next stop is about 1.456, so there could be some sympathy selling in other "risk" pairs as well, such as AUDUSD.

:D

Thu, 03/21/2013 - 09:58 | 3356749 disabledvet
disabledvet's picture

Yeah well J Paul Getty was a bad ass too bitch.

Thu, 03/21/2013 - 10:24 | 3356884 Orly
Orly's picture

I didn't know you were a vulgar old man.

You may piss off now.

:/

Thu, 03/21/2013 - 09:46 | 3356686 I need more cowbell
I need more cowbell's picture

All reported as if any of this micro shit matters one iota, as if markets exist, as if the whole shebang has meaning, as if all is well, that we really haven't woken up in an Orwellian/Huxley smash-up world. No offense Marc, you have trained all your life for a life that is gone, and just keep on truckin as if, well, as if...

Thu, 03/21/2013 - 10:32 | 3356943 HardlyZero
HardlyZero's picture

Yes, but in Italy...

Italy seems a microcosm of the EU between the North and South.

In July 1992, Italy's government under Prime Minister Amato took 0.6% of all bank deposits (imposed a 0.3% tax on all real estate).

By the 1990s, the Italian government was fighting to lower the internal and external debt, liberalise the economy, reduce governmental spending, selling business and enterprises owned by the state, and trying to stop tax evasion; the liberalisation of the economy meant that Italy was able to enter the EMU (European Monetary Union) and it later, in 1999, qualified to enter the eurozone. However, the main problem which plagued the 1990s, and still plagues the economy today, was tax evasion and underground "black market" business, whose value is an estimated 25% of the country's gross domestic product. Despite social and political attempts to reduce the difference in wealth between the North and South, and Southern Italy's modernisation, the economic gap remained still pretty wide

Thu, 03/21/2013 - 09:56 | 3356736 ebworthen
ebworthen's picture

Agree.  When Central Banks are willing to steal depositor's money, there is no such thing as investment in markets, or markets as we have known them in the past.

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