Profit-taking puts the brakes on risk appetite trades post-G20 and ECB


MAJOR HEADLINES – PREVIOUS SESSION

  • EU ECB cuts rates by 25bp to 1.25% vs. 50bp cut expected

  • US Weekly Initial Jobless Claims out at 669k vs. 650k expected and revised 657k prior

  • US Weekly Continuing Claims out at 5.728m vs. 5.59m expected

  • US Feb. Factory Orders out at 1.8% vs. 1.5% expected and revised -3.5% prior

  • AU Mar. AiG Performance of Service Index out at 35.6 vs. 32.2 prior

  • GE Feb. Import Price Index out at -0.1% m/m vs. -0.5% prior; -6.4% y/y vs. -5.4% prior


THEMES TO WATCH – UPCOMING SESSION

  • Swiss CPI (0715)

  • EU Euro-zone PMI Services/Composite (0800)

  • UK PMI Services (0830)

  • US Non-farm Payrolls (1230)

  • US Unemployment Rate (1230)

  • US Avg Hourly Earnings (1230)

  • US ISM Non-manufacturing Composite (1400)

Market Comment:

Once the “disappointment” of the ECB’s decision to cut rates by only 25bp and defer discussions about non-conventional policy measures until next month was out of the way, it seemed to be nothing but good news for markets to digest.

First off was the G20 summit communiqué (leaked in dribs and drabs) which stuck mostly to the previously-leaked drafts but surprised with a much larger-than-expected increase in IMF and other international resources – an almost 3-fold increase by some $1 tln, including $250 bln in trade finance. In addition, summit host Gordon Brown talked of a possible stimulus expansion of up to $5 tln by end-2010 (though later said to include stimulus already in the pipeline with confusion swirling on the exact amount of stimulus) while other measures included more coordinated financial market regulation and exposure of tax havens. In addition, G20 participants resolved to avoid competitive devaluations and protectionism. While it remains to be seen whether the commitments and pledges can be carried forward in the days/weeks to come as delegates return to their respective home towns, the broad consensus seems to be that the summit produced the best we could have hoped for under the circumstances.

The second factor prompting bullish sentiment came from the US’ Financial Accounting Standards Board which agreed to relax mark-to-market rules to give companies more flexibility in determining the fair value of assets. This relaxation allows so-called “toxic assets” not to be treated as distressed until otherwise proven, and hence reduce write-downs on certain investments, including MBS. Talk is the measure, which can be applied to Q1 results, may boost banks’ net income by 20% or more. It may be interesting to monitor its effect on the Geithner PPIP. Can assets now be regarded as “less-toxic” if they don’t have to be marked down as aggressively? In this case, will banks be less willing to offload at fire-sale prices to investors?

Finally, economic data tended to surprise to the upside. UK house prices increased for the first time since October 2007, the BoE's Credit Conditions Survey showed an improvement in conditions, China's PMI showed a surprise rise to 52.4 and US factory orders posted a bigger-than-expected rebound in February, rising 1.8% vs. 1.5% expected and a sharp downward revision to January’s number to -3.5% from -1.9% prior. This, and the above factors, helped overshadow a dismal initial jobless claims number, which came in at 669k in the week ending March 28, above expectations of 650k and marked a new high for the cycle.

The recent surge in risk appetite and sentiment may get a severe test this evening with the release of March non-farm payrolls data. Taking into account that the ADP survey on Weds showed a deeper 742k deterioration and last night’s worse-than-expected numbers, the risk is that tonight’s NFP may surprise to the downside. Recent newswire surveys suggest a 660k number though more analysts are shifting the bias towards a 700+ handle. Such a headline number would give recent bulls a severe slap on the wrist and likely undo all the solid gains seen this week. However, it may be worth noting that the employment component of the latest ISM survey did show a rise, so such a doom and gloom outcome may not be the case. The unemployment rate is slated to rise to 8.5% in March from 8.1% in Feb. At this rate of acceleration, double digit unemployment is only a matter of months away.

Asia struggled to get carried away with the euphoria from the overnight session. While stock markets continued to rally, the gains were nowhere near as impressive as on Wall St and were mostly restricted to below 1% at time of writing. FX markets saw a brief foray into higher territory, but momentum waned quickly and profit-taking and position paring ahead of the NFP numbers became the norm. Some suggest that the trimming of risk appetite could be as a result of a NY Times story which reported that GM, in a regulatory filing to the Treasury Dept, would be prepared to file for bankruptcy protection if it cannot restructure out of court. In the report, GM said it continued to "strongly believe" that an out-of-court restructuring would be the "highest value outcome". However, if the changes needed for long-term restructuring cannot be obtained out of court, the company is prepared and would consider in-court options. USDJPY had a fleeting look above the much-talked-about 100 mark, taking out a rumoured 100.10 option barrier, but could only manage 100.16. AUDUSD rose to 0.7230, its highest since early January but again was soon back below 0.7200 while both GBP and EUR succumbed to selling pressures against the USD. A general scaling back of risk appetite has basically been seen and chances are that we will see more of this ahead of the US numbers.