China's FX reserve accumulation slowed substantially in Q1

If needed this could be additional ammunition for the Chinese leadership's defence of the "USD peg." However, some of the slower reserve accumulation is due to the valuation impact from the stronger USD and we expect reserve accumulation to increase again in Q2.Despite the slower growth in reserves for Q1 as a whole, "hot money" inflows appear to have accelerated sharply in late Q1. This underlines that the expected gradual appreciation of CNY could prove extremely difficult to manage without tighter capital controls.

The Dust Hasn’t Settled Just Yet

The Dust Hasn’t Settled Just Yet

Despite robust economic growth in the second half of last year and a more upbeat assessment for economic activity during the first part of 2010, the outlook for commercial real estate has not materially improved. Credit quality is still deteriorating as delinquencies and defaults increase. Operating fundamentals continue to decline. Vacancy rates across all property types have either already risen to record highs or appear set to. Lending standards remain exceptionally tight, and there has been very little progress made at clearing up the logjam of properties with maturing loans in the next few years, many of which are underwater or have seen loan-to-value (LTV) ratios skyrocket to levels that are difficult to refinance.

Federal Reserve Exit Strategy
Another important dynamic is the Federal Reserve’s exit strategy. The Fed is removing much of the quantitative easing that it put in place following the onset of the financial crisis. Quantitative measures, including direct purchases of $1.25 trillion in mortgage-backed securities helped contribute to a tightening in credit spreads.2 In addition, Fed Chairman Ben Bernanke stated the Federal Open Market Committee would soon raise the discount, rate returning it to its one-percentage point pre-crisis spread versus the Federal Funds rate.3 Higher interest rates look increasingly likely over the next few months, even if the Federal Funds rate remains unchanged. Higher rates may cause construction loan problems to surface sooner than they would otherwise and may place some additional downward pressure on property values, making it more difficult to refinance maturing loans.

Given the uncertainty surrounding what awaits the financial markets, investors and lenders are more likely to treat any glimmer of light as an approaching freight train rather than the light at the end of the tunnel. We expect vacancy rates, operating fundamentals and prices to deteriorate in coming months and look for sales to gradually increase as investors become more comfortable and accustomed to the new economic and regulatory environment.

FULL REPORT HERE

Today’s Top Stories & Catalysts 02.15.10

Today’s Top Stories & Catalysts

· Europe being led higher by financials, which are seeing buy interest on back of Barclays’ stronger-than-expected earnings; most of Asia is closed for the Chinese New Year’s Holiday. On the eco data front, in Europe the German ZEW came in better and UK inflation was inline w/St. but above BoE’s target. In Japan, Q4 GDP #s (out Mon morning) came in higher than expected but the details were not as encouraging. Financials are strongest performing group in Europe on back of Barclays. On the downside, L’Oreal is off 5% and Intercontinental is down ~1%+ (both on earnings).

· Greece Update - Greek government bonds fell after Finance Minister George Papaconstantinou said his country is in a “terrible mess” and compared fixing the nation’s deficit to changing “the course of the Titanic”. Papaconstantinou said his country’s public sector “is out of control” as unions planned more strikes (Greek customs officials walked off the job Tuesday for a three-day strike to protest government austerity measures). The European Finance Ministers meeting commenced Mon and continues through Tues and will probably spend a lot of time discussing Greece although they aren’t expected to make specific announcements on precise aid mechanisms and procedures (similar to the EU Summit statement from last week); the next major event will prob. be mid-Mar, at which time the Greek gov’t’s progress towards achieving its budget goals will be evaluated. Eurogroup chairman Jean-Claude Juncker said Greece must do more to cut its budget and warned that other Eurozone citizens aren’t prepared to pay for its gov’t’s mistakes. ECB president Trichet said promises made last week by Greece and the 26 other European Union governments on finances and the stability of the euro area are “enough” for the time being. The NYT had a big pg 1 article this weekend discussing how “Wall Street”, inc. Goldman, helped Greece to hid the true extent of its debt accumulation w/currency swaps and other techniques; in response to the article, Brussels has given Greece two weeks to answer allegations in the Times article. London Times article Tues morning – “Bite the bullet. Kick Greece out of the euro”.

· Dubai – speculation of a proposed offering to creditors of Dubai World have spooked global markets and caused Dubai CDS spreads to blow out last week; according to speculation, Dubai World will offer creditors either 60 percent repayment over seven years and a government guarantee, or full repayment with a debt for equity swap for property assets of Nakheel and no guarantee. Dubai said on Sunday it had made no formal restructuring proposals and nothing was expected until March or April. CNBC

· MSFT – the co officially launched its new mobile OS, Windows Mobile 7, Mon morning; overall people seemed pleased w/the actual OS during demonstrations, although there is some concern around hardware partners – the co failed to unveil any major new hardware based on the OS. MSFT hopes to have devices w/Win7 Mobile on shelves for the holiday ’10 season. MSFT could have more to say on Win7 Mobile during its MIX conf in Mar.

Desk Color/Markets Headlines

Desk Color/Markets Headlines

· US PT desk color (from Fri)- Balanced between buys and sells today - Moderate Flow; Large Cap 73% and Mid Cap 21% of total Market Cap; Financials and Industrials better to sell. Information Technology and Consumer Staples better to buy. ETF's 6% of sector flow. All eyes today were on the BRK/a and BRK/b trade for the indexers at the end of the day. We had our fair share of indexers buying their shares on the close, but we also saw some fast money selling long into the close and playing a reversion in the stock near the end of the day.

· Derivatives desk color update - US Indices: Market was unchanged today after some large intraday moves, and vols ended lower. Near dated skew was lower on sellers of variance swaps. Most of the same trends continue: we have seen continued selling of longer dated variance, dividends are creeping higher, and there are better buyers of Russell vol.