MacroScope

Big five

April 6, 2009

Five things to think about this week:

– IS RATE OF ECONOMIC CONTRACTION SLOWING?
Some economic reports have been pointing to a slowdown in the pace at which economic conditions are deteriorating — eg U.S. home sales data; auto sales data; PMIs; UK lenders seeing improved credit availability in Q2, and PMI data. While job destruction is continuing apace, signs that inventories are being drawn down leave room for hope for those inclined to look for the silver lining, or even seek a bottom to the current downturn.

– REBOUND MOMENTUM
Investors are wondering whether equity markets can extend a solid Q2 start now that major fiscal stimulus announcements, rate cuts, QE  (in most developed economies), the London G20 meeting, and other big milestones are largely behind them. A sustained narrowing of corporate spreads, the VIX clearly breaking out of ranges that have held post-Lehman, and any shift out of defensive stocks are just some of the signals that would suggest that the rebound has legs.

– QE CLUB
The European Central Bank opted to wait another month before deciding on whether to join the QE club and unexpectedly left itself room for a further refi cut. By contrast, curveballs are unlikely from Bank of England and Bank of Japan policy meetings given their quantitative easings are under way. The relative performance of their respective sovereign debt markets is in focus as a result, as are the inflation outlooks being priced in by index-linked paper at a time when some are pondering the longer-term fallout of QE policy. The Reserve Bank of Ausstralia also meets this week week but markets finding it tough to call the outcome.

– EMERGING
The MSCI emerging market index’s year-to-date performance is in positive territory and investors’ willingness to venture further into these waters could rise given the International Monetary Fund is ready for new business with a hefty increase in resources and has found its first client for the new credit line that doesn’t impose conditionality for those strong economic track records. Just knowing such a backstop is there could foster confidence in well-run emerging economies and see their outperformance against less well-thought-of peers become even more pronounced.

– FIXING BANK BALANCE SHEETS
A drive to improve health of financial sector balance sheets is being pursued at regulatory/industry/firm levels. M&A activity, rights issues, and bond buybacks or exchanges are being deployed to improve health of bank capital. Relaxation of mark-to-market rules in the U.S. is expected to flatter Q1 earnings results — and has already helped U.S. financials. Interest in how many U.S. banks plump for the option given not all European banks moved away from market-to-market rules when given the choice in 2008. Stock markets look more inclined to hope for a break in financial sector gloom.

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