Which 10 Banks are in trouble?

Yesterday, the market took a defensive posture in front of a potentially turbulent week ending with another pivotal payroll report this Friday. We wait for Thursday, the day of convergence, Japan returns from Golden Week, Trichet takes center stage and will the real stress test ‘come on down’! It’s phenomenal that the market is enjoying this ‘risk reward’, today some bourses are now flat on the year while others like the DAX are small positive (+2%). Are we being over optimistic? Are we afraid of missing this ‘bull rally’ that goes back to the low of last Nov.? Are we to forget unemployment numbers as they are deemed a ‘lagging’ indicator? What ever reason, the end results are amassing new cash all the time. Lets’ hope we are not getting too far ahead of this week!

The US$ is stronger in the O/N trading session. Currently it is higher against 11 of the 16 most actively traded currencies, in another ‘whippy’ trading range.

With the largest currency trading center on holidays yesterday and Japan on Golden week festivities, participants had little market fat to chew on. However, whatever price gouging was achieved was done on the back of a circulating story that indicated that both BOFA and CITI plan to raise more than $10b independently, it is believed that they both need that much accordingly to the preliminary stress tests results, which we will hopefully get to see this Thursday after equities close. It seems to the neutral observer that they are trying to convince the US government that they do not need the Treasury’s money. Really who wants to be nationalized? Finally the Asian region is getting its financial house in order. Asian members of the Asian development bank are setting aside a $120b slush fund for the use in an economic downturn. To date, this is the first step it has taken to combat this global financial crisis. It never too late to come to the table!

US housing data yesterday showed that we may be have seen the bottom, as pending home sales unexpectedly surged +3.2%, m/m, in Mar. (the 2nd consecutive monthly increase). Analysts are now forecasting that we may see an increase in existing home sales last month. These indicators do not necessarily go hand-in-hand. Volatility remains the name of the game as regional results have varied tremendously.

Another surprise was seen in US construction spending, which gained in Mar. (+0.3% vs. -1.4%) after 5-consecutative months of weakness. Couple this with the above data results it gives us stronger evidence that we may be starting to develop a ‘housing bottom’. Similar issues, one set of positive data does not gives us a trend, the stats remain volatile with jobs continuing to disappear (this Friday’s NFP will not surprise us positively at all). Digging deeper, one notices that residential construction continues to account for the total monthly loss, while non-residential construction spending rose +2.0%, m/m.

The USD$ currently is higher against the EUR -0.48%, CHF -0.79% and JPY -0.10% and against GBP +0.16%. The commodity currencies are weaker this morning, CAD -0.30% and AUD -0.05%. The loonie managed to print a new 6-month high yesterday as global optimism believe that we may have seen the worst of this recession, which has helped to promote the ‘carry’ and riskier trades. If the equity market can keep the faith then by default commodity currencies will surely get another leg up in the short term. Not unexpected, but, the loonie has remained vulnerable on occasion, like many other currencies, as investors gravitated towards some sort of risk aversion trading strategies as fears that the ‘unstoppable’ virus combined with stress test rumors would curtail the growth of the global economy. Technically there should be some good market support for the USD at the 1.1740 level. The market seems to have bought into this euphoric move and traders want to sell USD on upticks for the time being. The move has been quick and brutal. Do not be surprised to see some profit taking and unwinding of riskier trades as the week progresses.

Governor Stevens at the RBA kept borrowing costs stable at 3% o/n to gauge whether the lowest borrowing costs since WWII and recent government spending would pull the economy out of its 1st-recession in 2- decades. Higher yielding currencies are benefiting from that glimmer of hope that we have witnessed the bottom of this recession. This renewed optimism is dragged the AUD to its 11th consecutive gain. The AUD rose to its highest level since Oct. in the O/N session as an expansion in Chinese manufacturing this week added to optimism that global slump is easing. The trend remains your friend, look to buy AUD on pull backs (0.7458).

Crude is higher in the O/N session ($54.27 up +8c). It’s impossible to keep a good thing down. Yesterday the black-stuff advanced to a new 5-week high on the back of stronger US pending homes sales and construction spending (see above), which may indicate that energy demand will grow with the economy. The market is dealing with the forward thinking mentality rather than any ‘overhangs’ than may be on the books, like the 19-year high inventory levels. Yesterday’s move started with China’s surprising manufacturing results (+50.1 vs. +44.8) which indicates that the world’s 3rd-largest economy after a 9-month hiatus economy is recovering. Renewed optimism has pushed oil up another 1%.This newfound optimism heavily favors forward thinking data. As noted last week, we are technically range bound, all because of the bigger picture, record inventories, H1N1 potentially curtailing travel demand and renewed optimism that the worst may be over. Last weeks EIA report was definitely bearish for the neutral observer. Supplies rose +4.05m barrels to +374.7m barrels vs. an expected increase of +1.8m barrels. This headline print prompted Libya’s top oil official to state that OPEC will ‘keep all its options open, including a production cut before the end of the months meeting’. Like all fellow members, they remain concerned with the overhang of prices with these elevated stock prints. Since Sept. OPEC members agreed to slash +4.2m barrels from its daily production and to date 83% of members have been compliant. Gold continues its rally as a safe heaven alternative ahead of this week supposed stress tests results on Thursday. It was the 1st-gain in 3- trading sessions ($903). Analysts point to strong gold fundamentals that should push prices beyond their recent highs.

The Nikkei closed 8,977 up +149 (holiday). The DAX index in Europe was at 4,897 down -5; the FTSE (UK) currently is 4,362 up +118. The early call for the open of key US indices is higher. The 10-year Treasury’s backed up 1bp yesterday (3.17%) and is little changed in the O/N session. Last week the FI asset class managed to solidify a monthly loss and a 6th week decline (the longest loosing streak in 2-years) as the Fed abstained from increasing purchases of government debt coupled with the US economy showing some signs of stabilizing. With ‘risk’ being back, the market does not have the appetite for FI. A record $71b in long-term debt is to be sold this week and expect dealers to cheapen the curve, with 10’s having a chance of trading towards 3.25%!

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