Good morning,

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

  • Spain and France will be raising as much as E13b worth of debt today. All eyes are on Spain to see at what rate and how much of the 10-year they will see in the market;
  • Spain’s non- performing loans as a proportion of total lending jumped to 8.16% in February, the highest level since 1994, from less than 1% in 2007, the Bank of Spain said yesterday;
  • French election is 3 days;
  • Data later today may show sales of previously owned US homes increased in March, while the nation’s jobless claims fell last week, according to economists’ surveyed by Bloomberg;
  • 10-year Italian debt is yielding 5.48%, 10-year Spanish debt is yielding 5.822%, and 10-year Portuguese debt is yielding 12.431%;
  • Apple closed the session at $608.34 (0.22% down) and Priceline closed the session at $732.22 (2.36% up);
  • Brent is trading at 118.24/barrel.

Today is going to be another volatile day for the markets. The Spanish sell-off was triggered by Rajoy’s March 2 statement that the nation wouldn’t keep a promise to cut its deficit/GDP to 4.4% this year and would instead post a shortfall of 5.8%. Under pressure from European partners, his government agreed 10 days later to cut the shortfall to 5.3% of GDP. Today, Spain and France plan to raise as much as E13.5b in debt as Prime Minister Mariano Rajoy’s struggles to meet deficit targets and the French presidential elections drive up yields. Spain is issuing as much as E2.5b in two- and 10-year bonds, while France has set a maximum target of E11b for securities including 2017 notes and 2018 inflation-linked debt. France’s benchmark 10-year-bond now yields 3.01%, up from 2.77% on March 1. The yield premium compared with Germany for 10-year borrowing has climbed to 129 basis points from 91 basis points on that date. The yield on Spain’s benchmark 10-year bond jumped above 6% on April 11, approaching levels that drove Greece, Ireland and Portugal into bailouts. It fell back to 5.82% yesterday.

When the markets rallied last Tuesday after Spain managed to raise as much debt as it needed, one must not discount the fact that Spain had raised T-Bills. The real test it today when the country tries to raise 10-year paper.

French elections are going to take place in 3 days time. Socialist candidate Hollande has consistently led President Nicolas Sarkozy in polls for the decisive final ballot. While Hollande has pledged to meet the deficit reduction targets put in place by the current government, his plan forecasts a balanced budget in 2017, a year after Sarkozy. He has suggested raising the minimum wage and promised to tax personal earnings of more than 1 million euros at a rate of 75%.

With all the uncertainty in Euro and the lack of clarity as the where the markets are heading as neither the ECB nor the heads of states are intervening to help the cause, my opinion remains the same. Be overweight the dollar and overweight US corporates and emerging markets. On the other hand I am underweight Europe.

Two interesting shares to watch but not invest at this point in time because is it not yet time to short US treasuries and the Bund are as follows:

  • Proshares Short 20+ Year Treasury (TBF US EQUITY)
  • Lyxor ETF Daily Double Short Bund (LYQK GR EQUITY)
  • db x-trackers II UK Gilts Double Short Daily ETF (XUSS LN EQUITY)

There will come a point when it is time to short US treasuries, the German Bund and the UK Gilt. There is a general consensus in the markets that all three of them are trading on ridiculously low yields. But for the three instruments mentioned above to start rising in price, we need to start seeing the economy improve. The probability is that the Proshares Short 20+ Year Treasury will start increasing in price before the other two. However it is still pre mature to start adding these to a portfolio. However, it is good that you monitor them and know they exist for when it is time to move focus onto these instruments and continue adding alpha to your portfolio.

Bank of America, Nokia, Morgan Stanley, DuPont, Travelers, Verizon, Blackstone, Union Pacific, Peabody Energy, Freeport McMoran and EMC are among the companies reporting ahead of Thursday’s opening bell. Microsoft, Capital One, Advanced Micro and Chipotle Mexican Grill report after the close.

Stock to watch: IBM ($200.13, Price Target $220)

We believe IBM should be a core holding in the IT sector given its diversified and high recurring revenue stream from services and software. In addition, we expect to see strong results due to IBM's increased investment in Software, sales, and infrastructure. Further, we expect IBM's move to lower cost geographies to benefit Services margins and increase investment in Software (acquisitions and SG&A investment) to drive solid growth of this high-margin segment. Maintain Buy.

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

Good day and happy trading!

Kristian Camenzuli