JPMorgans Macro Research Break Down from over the weekend $SPY

JPMorgan Macro Research

· Economics – JPMorgans central macroeconomic view is that the global upturn is now completing its first full year has "legs" and that synchronized above-trend growth can be sustained for at least another year. Certainly, recent news has been supportive as significant upward surprises to Asian 1Q10 GDP readings and solid activity reports for March continue to push our 2010 global growth estimates higher. The latest forecasts place 1H10 GDP gains at an annualized 3.7% (4.6% using PPP weights)—a pace in line with global growth during its robust phase of expansion over 2005-7. The current pace of growth is, of course, not always a good guide for what lies around the corner. As such, it important to look past the growth numbers and assess whether the key components of our view are on track to propel the global economy forward even as unique drags related to the financial crisis temper the pace of growth. At present, these components appear to be falling nicely into place.

· The J.P. Morgan View - Any correction should be short-lived. The global rally gathered pace this week as equities and credit reached new cycle highs, while bonds and currencies stayed in a broad range. The almost straight-line nature of the rally over the past nine weeks and various signs of excess froth in the risk markets suggest that the probability of a profit taking
correction has risen significantly. We accept this risk, but plan to ride through any correction, as the underlying profit and value drivers of the rally are in our minds strong enough to prevent serious damage.

· Fixed income - Core bond markets rallied this week, partly on continuing concerns over Greek debt. Greece formally requested discussions on the EU/IMF support package, and seems increasingly likely to avail itself of it before its mid-May bond redemption. This facility largely removes near-term liquidity risks, and accounts for the strong demand for Greece's two Treasury bill auctions this week. Greek spreads remain stubbornly high, however, and will likely only narrow meaningfully in response to further progress on fiscal consolidation, which will take time.

· Credit - This week saw a broad-based rally in credit driven by positive economic and earnings news. Credit spreads reached new cycle lows on Thursday in both HG and HY. We stay long in credit and continue to focus our exposure on lower-rated, high-yielding sectors.

· Foreign exchange - Greece may be the first country this year to tighten dramatically, but it probably won't be the last. There are minor changes to the portfolio this week, mostly adding to shorts on euro crosses. We sell EUR/CHF in cash again—a trade we held from November 2009. At any moment Greece could ask for EU/IMF funding given its dwindling funding options. EUR/USD can rally from oversold levels, but its rise on the crosses would be shorter-lived given the much stronger outlook and debt positions in most other countries until March 2010—to complement an existing position in options. Also sell EUR/CAD and EUR/Asia through IDR.

· Commodities - Commodities are flat this week with base metals and agriculture posting positive returns, while energy and precious metals were down. The outlook remains supportive for base metals, due to strong demand from EM economies and the recovery in the global manufacturing sector