But a few roadblocks on the horizon that may dent sentiment. Tokyo holidays make Asian markets quiet.


MAJOR HEADLINES – PREVIOUS SESSION

  • UK Apr. PMI Manufacturing out at 42.9 vs. 40.0 expected and 39.5 prior

  • US Apr. Final Michigan sentiment out at 65.1 vs. 61.9 prior

  • US Mar. Factory Orders out at -0.9% vs. -0.6% expected and +0.7% prior

  • US Apr. ISM Manufacturing out at 40.1 vs. 39.4 expected and 36.3 prior

  • US Apr ISM Prices Paid out at 32.0 vs. 34.0 expected and 31.0 prior

  • HK Apr. PMI out at 44.3 vs. 42.7 prior

  • NZ Q1 Avg. Hourly earnings out at +1.1% vs. +0.6% expected and +0.8% prior

  • AU Apr. TD Securities Inflation out at flat m/m, +2.1% y/y vs. -0.1%, +2.6% expected resp.

  • AU Q1 House Price Index out at -2.2% m/m vs. flat expected and revised -1.2% prior

  • AU Q1 House price Index out at -6.7% y/y vs. -3.9% expected and revised -3.9% prior

  • AU ANZ Job Advertisements out at -7.5% m/m vs. -8.5% prior


THEMES TO WATCH – UPCOMING SESSION

  • GE Retail Sales (0600)

  • GE PMI Manufacturing (0755)

  • EU Euro-zone PMI manufacturing (0800)

  • HK Retail sales (0830)

  • EU Sentix Investor Confidence (0830)

  • US Pending Home Sales (1400)

  • US Construction Spending (1400)

Market Comment:

The US data releases in to the close of last week’s business were generally better than forecast, with US Final Michigan sentiment soaring to 65.1 vs. a preliminary reading of 61.5, its largest 1-month increase since Oct. 2006. The ISM manufacturing index reached its highest level since sep. 2008 at 40.1 vs. 38.5 forecast and extending the strong rebound from the 32.9 trough seen in December. Factory goods showed a small decline, but were generally in line with expectations.

As a result, risk was enthusiastically embraced and wall St responded with 0.5% gains and FX-land saw the customary correlation with commodity currencies bought at the expense of the USD and JPY. The markets remained impervious to the threat of an escalation in the swine flu pandemic, even after US Pres Obama cautioned about rail and air travel, with US data gaining the upper hand in the risk appetite/aversion stakes. The sense that the worst may be over was heightened when latest reports suggested symptoms so far are no worse than the annual winter flu that descends on the world’s population. This feeling was enhanced when Mexico revised down its reported number of deaths linked to swine flu to 101 from 150+ over the weekend. Mexican Health Minister Cordova said the virus appeared to have peaked between 23-28 April. However, we still remain cautious on the issue and prefer to defer judgement on this current rally in risk.

While on the flu topic, a report by the Bank of England, outlined in the telegraph and commissioned before the financial crisis in 2007, concluded that a flu pandemic could wipe 7% off the UK economy and cause financial market turbulence (granted it was before banks’ balance sheets were reduced to current decimated levels) while “growing absenteeism could affect operations at major financial institutions and infrastructure providers. Over time, credit losses for UK banks could increase as a contraction in activity, both domestically and abroad, leads to financial distress among households and companies. Banks’ incomes would also fall as a result of lower lending volumes and financial market activity”

Late last week it was announced that the Fed would postpone the release of the results of the recent bank stress tests on large US banks to Thursday from today as executives from the banks dispute/discuss the figures with the Fed and express concern about the impact of the announcements on stock prices. The WSJ carried a report at the weekend that Citigroup may need to raise as much as $10 bln in new capital.
Surprisingly, this broader issue of banks needing capital has been put on the back-burner after its appearance last week. Maybe it will feature more as we approach Thursday.

It’s a busy week for central bank meetings again, though the ECB meeting on Thursday is the one likely to garner the most attention. Market sentiment favours that the RBA will stand pat with rates at 3% tomorrow while the BOE has almost zero room to push rates below 0.5%. More likely we will see a progress report and update on the quantitative easing measures already introduced. The ECB on the other hand is expected to cut rates by 25bp and, more headline-grabbing, will look at other non-conventional easing measures to head off deflationary pressures, as promised at their last meeting.
This may help put a lid on the EUR’s recent rally but any further postponement or delay of QE would be beneficial to the single currency.

With Tokyo starting its Golden week holidays, and the UK also off today, market liquidity was noticeably decreased during the Asian session, but the over-riding theme was still to embrace risk and punish the USD and JPY. Asian bourses needed no input from the Nikkei and posted aggressive gains across the board, most up over 2%.