Recap 4-9-12

Main Items:

  • Alcoa kicks off earnings season tomorrow after the close. Goldman first quarter earnings preview: Consensus expects SPX will deliver yr/yr EPS growth of 6% in 1Q12 driven by 8% rise in sales and 32 bp decline in margins to 8.5%. Financials & InfoTech expected to generate EPS growth of 18% and 12%, respectively.
  • China CPI increased to 3.6% YoY in March vs 3.4% exp and 3.2% prev

Overseas:

  • Japan Eco Watchers Outlook Survey declined to 49.7 in March vs 50.1 prev
  • Japan Trade Balance improved to 102 bn Yen in Feb vs 104bn exp and -1,382bn prev

Upcoming Data:

  • Mon: RICS House Price Balance, NAB Business Confidence
  • Tues: BoJ, China Trade Data, China Money Supply Data, Swiss UE, EU Sentix Investor Confidence
  • Wed: US Import Price Index, JapanMoney Supply, Australia Employment Data
  • Thurs: French CPI

Commentary:

Data over the past couple weeks appear to support the idea that global economic momentum is slowing for now, particularly in the US and Europe. The Chinese money supply data this week will give us an indication of whether recent policy measure have had any effect, although the odds are not high. The key point for me is that there does not seem to be a strong case for a global reacceleration in the short term, barring surprising upgrades to guidance this earnings season. This suggests that risk assets may be more likely to be broadly range bound for now, with a higher risk for a correction.
Looking at possible scenarios farther out, it is difficult for me to get particularly bullish. The reason is that the major global economies appear to be near their ‘speed limits’ given the secular deleveraging forces at play. And with monetary stimulus globally played out for now, I am struggling to identify a possible catalyst for cyclical reacceleration. Furthermore, given the low rate of growth, it will not take much to kick off recession fears once again, as we have seen the past several years. This suggests that it may be prudent to start looking for tail risk hedges once again if they are of sufficient long duration and are attractively priced. It also suggests that my 2.6% target for 10y yields may be unrealistic. In the near term 1370 on the cash SPX appears to be a key level. It may be a good place to play a bounce, as well as a trigger point for risk shorts.

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