One Minute Macro Update - Market Quake

U.S.: Markets strongly negative this morning as the Japanese earthquake and its accompanying nuclear threat continue to worry investors despite the pledge for government support. The FOMC will meet today and will likely maintain rates at their current levels and show support for the completion of QE2. However, the Japanese earthquake and respective stimulus reaction offers the potential for an unexpected announcement, though we ascribe a low probability to this occuring. Today’s Empire State manufacturing survey for March is expected to come in at 16.10E v 15.43 prior, in line with its recent correlation with the rising Philadelphia Fed Index. The Treasury will release US foreign net transactions today showing a decrease to $55.0BE v $65.9B prior.
Europe: This weekend’s news of the EMU’s renewed support of a rescue mechanism lifted sovereign debt worries, but will likely be short lived. S&P announced yesterday that the new package will be detrimental to current sovereign bond holders as funds borrowed from the mechanism will come ahead in repayment, putting into motion our circular reference/CDO characterization of the EFSF/ESM mechanisms.  ISDA’s Credit Derivatives Determinations Committee will be looking at the Irish bailout to see if the monies layered in ahead of bondholders constitute a credit event.  By our reckoning, most players on both sides of the market would not desire an event to have occurred at this juncture.   European finance ministers yesterday began working out the technical details involved with boosting the true lending capacity of the fund to €440B from €250. The EMU’s six AAA-rated countries will be mostly responsible for funding the increase. Complimenting the improved European outlook was Spain’s release of a decrease in ECB borrowings to €49.2B in February from €53.1B in January. The figures took hold in Spain’s latest auction, selling €3.97B in 12M bills at 2.128% v 2.410% with b/c of 2.37x v 2.08 prior and €1.53B in 18M bills at 2.436% v 2.938% prior with b/c 3.51x v 5.30x prior. Belgium postponed a 6Y bond auction, due to unstable market conditions related to Japan’s earthquake. French CPI rose 0.5% MoM 1.7% YoY, matching market expectations. The German Zew Survey hit 85.4 v 86E and 85.2 prior for the current situation and 14.1 v 15.9E and 15.7E for economic sentiment. The survey attributed the decline in confidence to the ECB’s announcement of a potential rate hike and respondents answering the survey after the earthquake.  German courts also overturned the North-Rhine Westphalia state budget as being illegal under constitutional rules. 
Asia: The aftermath of Japan’s earthquake and tsunami worsened yesterday as the Fukushima Daiichi nuclear power plant located north of Tokyo continued to threaten nuclear disaster. The Japanese government reached out to U.N. experts to control the impending crisis. The death toll, already estimated to top 10,000 will likely continue to rise, especially as the current nuclear situation unfolds. The nuclear mayhem has triggered protests in Berlin and German Chancellor Angela Merkel announced a 3-month moratorium on additional use of the country’s nuclear facilities. While pledging $183B in stimulus funding, the Bank of Japan also left its target rate at 0.10%. The Nikkei 225 reported its largest two-day drop since 1987 and its worst one day performance since 2008.  RBA minutes show a downgrade to the 2012 inflation threat. 

From Brian Yelvington of Knight Capital


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