Good morning,

Markets are called lower this morning. This is what's moving the markets today:

  • Bank of Korea cuts its growth forecasts for 2012;
  • Spain is scheduled to sell debt tomorrow and on April 19 as the nation’s borrowing costs approach levels that prompted Greece, Ireland and Portugal to seek bailouts;
  • The yuan dropped 0.17% to 6.3140 per dollar. The People’s Bank of China cut its daily fixing by 0.13% to 6.2960. A more flexible yuan may help central bank Governor Zhou Xiaochuan control inflation and support an economy that the World Bank sees growing 8.2% this year. That would be the slowest since 1999, according to data compiled by Bloomberg;
  • Added to the mix are the looming French presidential elections, with the first round due on April 29. EU officials and investors will be looking to see how the Franco-German partnership could be altered if Socialist candidate Francois Hollande beats President Nicolas Sarkozy in the second-round vote on May 6. Both candidates addressed supporters in Paris yesterday after Hollande extended his advantage in a possible head-to-head race by two points to 56% against 44%, according to a TNS Sofres survey published April 13;
  • 10-year Italian debt is yielding 5.523%, 10-year Spanish debt is yielding 5.977% and 10-year Portuguese debt is yielding 12.55%;
  • Brent is trading at $119.87/barrel;
  • The IMF and the World Bank hold their spring meeting as G-20 finance ministers and central bankers meet in Washington. The European debt crisis, the Middle East and the size of IMF resources to address global financial stress will be discussed;
  • Companies reporting results these week include Intel, Microsoft, Bank of American, Citigroup and Goldman Sachs.

Markets are called to open lower this morning on concerns of higher Spanish yields and the uncertainty of the cost Spain will have to pay for issuing debt later on this week. However, while Spanish bond yields rose last week in a sign that the region’s financial troubles are intensifying, they still were below levels hit last year. The rate at which Spanish and Italian yields dropped at the start of the year was impressive. But in my opinion, they dropped by a large amount in a very short period of time, without anything fundamentally different in the countries. It was the effect of the LTRO money that was dropping the yields and not the fact that the economic situation was improving. So an investor cannot say he didn't see the possibility of a rise in yields come back to haunt him. Having said that the yields are still lower than the highs we have seen at the end of 2011 where the Spanish 10-year hit a high of 6.7% and the 10-year Italian debt hit a high of 7.3%.

European policy makers ultimately may have to show that the financial firewall they’ve put in place to contain the crisis will work with Spain. If the Spanish yield goes closer to the 7% level, the cost of the debt becomes unsustainable and the country would need help in order to pay back its debt.

Things are not looking good in Europe at the moment. There is alot of uncertainty as to what is going to happen in Spain and Portugal. There are the presidential elections in France which Hollande is like to win. This will create further uncertainty in the markets as Hollande has said that if he won the presidential elections, he would want to re-negotiate the fiscal pact. Then there are the Greek elections which will take place in May not to mention German election later on next year.

This uncertainty in the markets was expected. It isn't something that wasn't being forecasted. After the first quarter saw the markets up 20%, investors were worried that a correction of some sort would kick in. However I continue to take a contrarian view to the markets and believe that stock picking the right names in the right sector would be beneficial in the medium term. Picking up cash rich blue chips in both the US and China will bear it fruits as we get through this period of uncertainty in the Eurozone. I remain overweight US stocks, Japanese stocks and emerging market equities. I am bullish on the dollar as opposed to the Euro (for the reasons I have mentioned many times in my blog). I also recommend staying out of European equities at this point in time.

Despite the weakness we are seeing in the markets, US companies are reporting good results. JP Morgan, the first Wall Street bank to report results in this closely watched earnings season, has revealed a surprise increase in revenue to $27.4bn even as legal bills and debt pinched first quarter earnings. Wells Fargo followed JP Morgan by reporting record net income of $4.2bn for the first quarter of 2012, compared with $3.8bn for the first quarter of 2011.

The US looks unlikely to suffer the same faith this year as the one in 2011. Household, bank and company balance sheets are stronger, and the shocks hitting the economy so far are weaker, with gasoline prices even showing signs of slipping after an early-year rise. Consumer-loan delinquencies fell across the board in the Q411, the first time that’s happened in eight years.

Banks have reduced leverage, with financial-institution debt as share of the economy at its lowest level in a decade. And corporations are flush with cash. The ratio of liquid assets to short-term liabilities is the highest since 1954. It feels similar to last year, but fundamentally it’s quite different.

BlackRock, the world’s biggest asset manager, remains bullish on the U.S. stock market in spite of lower-than-forecast March payroll growth. Blackrock do not believe that fundamental macro conditions have changed enough, or at all, to warrant a downgrade of our view toward equities. They see double-digit gain for the Dow Jones Industrial Average in 2012.

Japanese growth, in contrast to the Eurozone, is also picking up as the nation recovers from last year’s earthquake and tsunami that left almost 20,000 people dead or missing, disrupted global supply chains and curbed U.S. growth. The world’s third largest economy will expand 2% this year, said David Hensley, director of global economics at JPMorgan Chase in New York. GDP contracted 0.75% in 2011.

Stock to watch: JP Morgan (Price $43.20, Price Target $50)

We remain positive on JPM, given: 1) strong capital markets revenues, 2) more market share gains in areas such as capital markets, commercial, and credit card, 3) capital deployment could be meaningful, and 4) better execution long-term/strong mgmt. Although mortgage hits and macro remain drags, capital remains high. BUY.

For further information on JP Morgan or other stocks we follow, contact our offices of 25688688.

Good day and happy trading!

Kristian Camenzuli