Market Update – The SP500 has been down now for 9 of the last 10 sessions “buyers are no where to be seen” $SPY

• Market Update – equities extended their decline this week, w/the sp500 dropping ~5% (on back of last week’s ~3.6% decline), although late on Thurs and into Fri, it appeared like the worst of the selling pressure had been exhausted. 
• The SP500 has been down now for 9 of the last 10 sessions (and 4 of those 9 days have been declines of more than 1%, inc. the 3.1% drubbing experienced on Tues June 29).  The big underlying catalyst behind the weakness has been a theme present in the marketplace for a couple weeks now but gaining more adherents every day – a concern that economic growth is quickly slowing and potentially heading for a “double dip”. 
• US investors have endured a slew of economic readings coming in below consensus really since the May jobs report back on June 4 (when the private sector adds of just 41K badly missed St expectations of +180K; that 41K has subsequently been revised lower to +33K). 

Fitch Downgrades Greece to 'BBB-'; Outlook Negative (thats a shocker, downgrade the credit just before the default)

Fitch Downgrades Greece to 'BBB-'; Outlook Negative   
09 Apr 2010 10:28 AM (EDT)

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Fitch Ratings-London-09 April 2010: Fitch Ratings has today downgraded Greece's Long-term foreign and local currency Issuer Default Ratings to 'BBB-' from 'BBB+'. The Outlook is Negative. The agency has simultaneously affirmed Greece's Country Ceiling at 'AAA' and the Short-term foreign currency IDR at 'F2'.

The downgrade reflects the intensification of fiscal challenges in response to more adverse prospects for economic growth and increased interest costs. It also reflects ongoing uncertainties about the government's financing strategy in the context of increased capital market volatility.

The sharp rise in interest rates faced by the government this year, in combination with a deterioration in the outlook for economic growth, will make it harder for the government to achieve its fiscal targets of reducing the deficit to 8.7% of GDP this year and ensuring that public debt peaks at just over 120% of GDP in 2010 and 2011. Pressures on the banking system underline the adverse spill-over from sovereign risk concerns on the wider economy, while contingent liabilities from the banking sector will increase as the government provides banks with increased guaranteed funding.

Fitch recognises some early indications of improvements in fiscal outturns and the strength of the government's commitment to fiscal consolidation measures, which have been supported by Greece's euro area peer governments. However, given that the credibility of the fiscal consolidation effort will only be established by sustained deficit reduction over a prolonged period of time, it is vital that the Greek authorities import credibility from external institutions, underpinned by a credible commitment of financial support. The agency reiterates the lack of clarity regarding the mechanism for timely external financial support may have hindered Greece's access to market finance at affordable cost and hence further undermined confidence in the capacity of the government to meet its fiscal targets. While Fitch judges that external financial support is likely to be forthcoming, greater clarity on back-stop financial support in the form of an explicit IMF programme is likely to be required to shore up market confidence in the face of still substantial near-term financing needs.

The Negative Outlook reflects substantial uncertainties remaining over the prospects for sustained fiscal consolidation over the medium term.

Applicable criteria, 'Sovereign Rating Methodology', dated 16 October 2009, are available on www.fitchratings.com.

Contact: Chris Pryce, London, Tel/email: + 44 20 7417 4342/chris.pryce@fitchratings.com; Paul Rawkins, +44 20 7417 4239/paul.rawkins@fitchratings.com

Media Relations: Julian Dennison, London, Tel: +44 020 7682 7480, Email: julian.dennison@fitchratings.com; Peter Fitzpatrick, London, Tel: + 44 (0)20 7417 4364, Email: peter.fitzpatrick@fitchratings.com.

Equity Derivatives Dynamics

Equity Derivatives Dynamics

The real medium/longer term issue for the markets is not whether troubled sovereigns get the needed aid/liquidity, but rather, whether the aid and the accompanying necessary fiscal retrenchment leads to an unexpectedly soft mid-cycle economic slowdown—or, worse, a double dip—for the developed world.


• Risk differentiation
• The euro will continue to weaken regardless of how the Greece situation evolves

•The significant economic growth differential of the emerging world (6.9% vs. 2.3%) will reassert itself, and thus its outperformance relative to developed markets

•If and when markets settle down, we expect the 10-year to meaningfully underperform as the flight-to-quality subsides

•The trade in global equities is still high-quality stocks that can handle uncertainty-induced swings. We are tactically bearish for 1H10, but become strategically more positive afterwards as recovery takes hold and equities are the risk trade to own

FULL REPORT HERE

Sovereign Crisis Roadmap

We recommend selling risky assets into strength over the near term. Even with an
expected announcement on Greece following the EU Summit today, the road to repair
will be a long, painful journey buffeted by tremendous uncertainty—not typically a great
environment for risk-taking. While the announcement details will garner the headlines,
the real medium/longer term issue for the markets is not whether troubled sovereigns
get the needed aid/liquidity, but rather, whether the aid and the accompanying
necessary fiscal retrenchment leads to an unexpectedly soft mid-cycle economic
slowdown—or, worse, a double dip—for the developed world.

What the markets are missing. CDS spreads on Greek sovereign debt, yield-curve
steepness, and earnings expectations implicit in equities are all too sanguine given the
severity of the crisis. The market is underestimating the tough domestic fiscal reform
needed, without which ECB liquidity support is unlikely to be forthcoming. And because
of the close interrelationships between the European banking system and sovereign
credit, the contagion effects are much greater than the market perceives.
Crisis reinforces our core views and recommendations. In a risk-differentiating
environment: (1) the euro will continue to weaken regardless of how the Greece
situation evolves; (2) the significant economic growth differential of the emerging world
(6.9% vs. 2.3%) will reassert itself, and thus its outperformance relative to developed
markets; (3) if and when markets settle down, we expect the 10-year to meaningfully
underperform as the flight-to-quality subsides; and (4) the trade in global equities is still
high-quality stocks that can handle uncertainty-induced swings.

At present, the Greek CDS spread at 355bp is pricing in a 28%
default probability over the next 5 years. This is up from a 9.5%
cumulative default probability back in June 2009. While we take real
issue regarding implied default probabilities on sovereign CDS, it is
nonetheless a useful point of context. Although Greece’s inclusion in
the EU complicates matters somewhat, we have yet to see a sovereign
or credit “crisis” bankruptcy-averting restructuring deal at a meager
price point of 355bp.

From a curve perspective, we would also have anticipated a flattening
of the various government curves, yet we experienced a parallel shift
instead. From a European earnings growth perspective, bottom-up
IBES consensus is 35% for 2010, and 24% in 2011. Given the
necessary fiscal retrenchment in Europe, those growth expectations,
particularly for 2011, seem potentially heroic.

Markets are in the early stages of differentiating risks. In its
simplest form, the negative market reaction around the sovereign debt
concerns of peripheral Europe is a natural by-product of “the end of the
easing,” both real and perceived. From necessary fiscal tightening in
Europe to monetary tightening in China, the markets are simply
reacting to the withdrawal of liquidity. With respect to the peripheral
Europe situation, the combination of fiscal austerity and contagion
concerns, which, not surprisingly, are linked, will persist for some time
to come, and thus so will volatility.

READ FULL REPORT HERE

Japan: 4Q real GDP jumped 4.6%, but details are not so encouraging

Japan: 4Q real GDP jumped 4.6%, but details are not so encouraging


Fourth quarter real GDP was stronger than expected, jumping 4.6%q/q, saar. However, details were not so encouraging; inventories continued to increase through last year when the inventory to final sales ratio elevated, and public consumption rose more than our expectation, which is basically irrelevant to economic cycle. While the strong growth in 4Q GDP validated our relatively bullish view that Japan's export-driven recovery continued, the details were not so positive in terms of near-term outlook. We maintain our forecast on 1H10, which looks for a slowdown to 1.5-1.8%ar growth from an average of 3.3% growth between 2Q09 and 4Q09.

Other details were not so far away from our expectation, but they were slightly softer. Indeed, despite a 1.7%ar fall in real labor income, private consumption was firm (+2.7%) as expected, rising at a close pace to in 3Q (2.4%). Net trade contribution to GDP growth (2.2%pt) was stronger than our expectation (1.1%pt), but that was mainly due to the softer than expected imports (+5.3%, instead of +15.0%) that probably portrayed the weakness of domestic demand. The capex eventually turned to grow (+4.0%), but the pace was much less than expectation (+12.0%). The decline in housing and public investment was larger than anticipated.

Worth noting is that the firmness of private consumption was mainly driven by the durable goods consumption, which has been supported by government incentives to purchases the enviroment-frendly goods. Service consumption fell again in 4Q. This skewed strength suggest that underlying trend of consumption remains weak when labor income continues to decline.

The revision of past data was significant, especially in 2Q (from 2.7% to 5.2%), mainly due to the change of export series, which reflected the revision of seasonal adjustment. According to the Cabinet Office, the motivation for the revision was that seasonal factors of the trade series were distorted by the extraordinary plunges in 4Q08 and 1Q09. The Office decided to effectively exclude these periods to avoid the distortion in the estimation of seasonal factors. On the other hand, the 3Q growth was revised down to 0.0% from 1.3% with a large downward revision in private consumption (from 3.8% to 2.4%) and upward revision in imports (from 13.9% to 23.3%). The large swing in growth rate after the 12.3% plunge in 1Q09 (5.2% in 2Q, 0.0% in 3Q, 4.6% in 4Q) made difficult to judge the trend, but the average of these three quarters (3.3%) looks reasonable rate of growth, which is decisively higher than the 0.5% potential growth rate, but definitely soft recovery after the record downturn in 4Q08 and 1Q09

JPMorgan Securities Japan Co., Ltd

Storm Clouds Gathering in Washington Threaten to Rain on Wall Street’s Parade

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The political climate in Washington has become progressively more hostile. President
Obama unveiled plans to impose a special tax on big banks two weeks ago, and last week
he proposed an overhaul of financial regulations with new restrictions on the size and
scope of activity for large banks. Ronald Reagan, our 40th President and famous political
philosopher, may have captured the White House’s attitude best when he said,
“Government’s view of the economy could be summed up in a few short phrases: If it
moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.”

It appears to us that President Obama’s proposals would intensify the financial sector’s
problems because they would lower profits, increase uncertainty and lessen credit
availability without benefiting economic growth. The wave of anti-Wall Street sentiment
sweeping through the White House and the halls of Congress is deeply distressing to
investors. As detailed in this report, stocks have traditionally reacted violently to the type
of anti-business rhetoric flowing from Washington and the odds of a politically driven bear
market are rising.

Although erratic stock market performance is likely to continue as a result of this political
uncertainty, we maintain our positive perspective. Profit trends seem to support our
optimistic strategy. Fourth quarter earnings reports have exceeded elevated expectations by
a huge margin, corporations are raising guidance for the second straight reporting season
(see chart below) and we believe S&P 500 profits could increase an additional 20% in the
next four quarters. As a consequence of strong profit performance, companies are
generating extraordinary amounts of surplus cash, which is increasingly being used to
repurchase shares and to make acquisitions. MORE RESEARCH
Storm Clouds Gathering in Washington Threaten to Rain on Wall Street s Parade