Friday, February 12, 2010

Early Look at the Market Fri 2.12.10

· Equities around the world had been trading higher overnight (i.e. China closed up 1.1% and Japan +1.3% ahead of Chinese New Year's Holiday) until China’s PBOC announced at 5amET that it is raising the Reserve Requirement Ratio (RRR) by 50bp, sending worldwide stocks lower (SP futures went from flat to dn 8pts, Europe went from +0.7% to dn 0.2%). Otherwise, news-flow generally on the light side ahead of the Holiday weekend (3 days in US and a week in China). Some eco datapoints in Europe came in on the weaker side with Eurozone Dec Industrial Output dn 1.7% m/m (vs. St +0.2% per DJ) and Eurozone Q4 GDP dn 2.1% yoy. JPM’s D. Mackie lowered his FY10 Eurozone GDP forecast to 2.2%ar from 2.4%ar. USD catches a safety big and rallies 0.8% while commodities sell off in response (gold dn $13.50 to $1,081; crude off $1.31 to $74). European trading – seeing strength in some earnings-related situations (i.e. Eni and ThyssenKrupp) while banks move lower.

· Clarity provided this week on the 5 big overhangs for the market: 1) China the markets were worried about aggressive tightening actions from authorities, esp. on the eve of the country’s New Year. However, today’s 50bp RRR hike is on the mild side and not as aggressive as some feared; 2) Greece – while the final outcome wasn’t everything the markets were hoping for, the message was enough to remove Greece as a risk/overhang for the time being at least; we could get more news on this front on Tues at the European Finance Ministers meeting; 3) US jobs picture – the jobless claims # this week came in better than expected and allayed some worry (although its only data from 1 week and may have been skewed by the East Coast storms); 4) Fed mortgage buying program ending – the decisions by Fannie/Freddie on Wed (see below) could cushion the impact of the Fed leaving the mortgage market (mortgage rates this week fell back under 5%); 5) Fed exit strategies – the Bernanke speech this week provided a lot of detail on how/when/under what conditions the Fed will exit its extraordinary monetary measures.

· Mortgage Market update from JPMorgan’s Matthew Jozoff; in light of the Fannie, Freddie mortgage buyout announcement on Wed, we are raising our mortgage bias recommendation from negative to neutral; we are hosting a conf call today 11amET on this topic. Fannie and Freddie announced Wednesday that they will commence accelerated buyouts of 120-day plus delinquent loans from mortgage pools.

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