Good morning,

Markets are called flat this morning. This is what's happening today:

  • Markets sold off around the world yesterday after Spanish Prime Minister Mariano Rajoy said the nation faces 'extreme difficulty';
  • Spain's bond auction did not go well. Spain sold E2.59b of bonds, just above the minimum amount it planned for the auction and below the E3.5b maximum target. The average yield on the bonds due in October 2016, which act as the five-year benchmark, rose to 4.319% from 3.376$ at last month’s sale;
  • France will sell bonds due from 2017 to 2041 later today;
  • Data may show claims for U.S. unemployment benefits fell to a four-year low;
  • The U.S. Commerce Department is set to release a March jobs report tomorrow;
  • 10-year Italian debt is yielding 5.368%, 10-year Spanish debt is yielding 5.692% and 10-year Portuguese debt is yielding 12.05%;
  • Brent is trading at $123.39

Markets sold off in Europe yesterday after the Spanish Prime minister said that the nation is facing extremely difficult times. The Spanish bond auction yesterday did not do well as demand for the bonds was lower than the maximum target. We saw yields on the 10 year of Italy, Spain and Portugal go up because of contagion fears. Banks were the ones that sold off the most yesterday because of their exposure to Spanish debt. I wouldn't want to think how the auction would have gone and its disastrous effect on the markets had the ECB not injected E1trn into the European banking system. Stay away from European equities and move into US and emerging market equities.

The EURUSD weakened to 1.3158 for three main reasons. One is the continued weakness in the data coming out of Europe, the second is the fact that the Fed will not be carry out QE3 any time soon and the third is that new money is flowing into emerging market constituents and emerging market debt trades in USD. I can't see how an investor wouldn't want to hold dollars in his portfolio. I could easily see the EURUSD go to 1.20 by the end of this year. Things are just not improving in Europe whereas on the other hand although in the US growth is below its long term average, we are still seeing an improving economy unlike in Europe. Tomorrow is a very important day for the markets because the US jobs report is out for March. I am confident the data will be positive and for this reason I am bullish on the US. I like days like yesterday when the markets are down because it gives me an opportunity to get back into the markets. What's not great about buying Apple and $620 when you know it's just a matter of time before this share trades above the $700 level? And what about Priceline? I picked up Priceline at $732 closing at $745.90. Priceline actually closed up in the green when the rest of the market was over 1% down yesterday in the US. Now that tells you something about the stock!

I'd like to end the blog today with an interesting reflection. When the markets are very weak in Europe the trading session in the US starts off weak. But when the European markets close, the US markets start to pick up trading above their lows as the day progresses and at times even close the session positively. We are seeing a decoupling of the US from Europe. Money should flow into US dollar stocks because that is where growth is. As investors sell Euros to buy Dollars, the Dollar will strength and the Euro weaken. Draghi didn't cut rates yesterday and left them on hold at 1%. The ECB is not doing anything to solve the problems and we haven't heard from politicians for quite some time now. The French are more worried about elections now and if Hollande is elected president of France, he already said that he wants to renegotiate the fiscal pact. The European turmoil will take years to sort itself out. On the other hand the US and emerging markets such as China are on the right track and it is there where you will find alpha to add to your portfolio.

Stock to watch: Merck KGaA (Price E84.92, Price Target E102)

We rate Merck Buy as we see the market underestimating not only the earnings and pipeline potential, but also the change process at Merck. We see fundamental changes emerging at Merck, which should result in major cost savings (first restructuring in history about to start in 2012), improved communication and more competitive culture, which is among other reflected in a novel stock option program. With zero pipeline expectations we more upside than downside risk with clinical trial news. The discount to peers appears too high and consensus earnings too low, in our view.

For further information on Merck KGaA or other stocks we follow, contact our offices on 25688688.

Good day and happy trading!

Kristian Camenzuli