Good morning,

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

  • China’s growth slowed more than forecast last quarter to the least in almost three years, prompting economists to predict a rebound as Premier Wen Jiabao loosens policy to counter weak domestic and European demand. GDP in the world’s second-biggest economy expanded 8.1% from a year earlier after an 8.9% gain in Q411.The median estimate in a Bloomberg News survey of 41 economists was 8.4%;
  • JPMorgan Chase & Co. and Wells Fargo & Co. are scheduled to report earnings today and 91 companies in the S&P 500 will give results next week;
  • The dollar headed for a weekly loss versus most of its major peers before data today forecast to show gains in US consumer prices slowed, fuelling speculation the Federal Reserve will keep an accommodative policy. US consumer prices rose 0.3% last month after climbing 0.4% in February, according to the median estimate of a Bloomberg News survey taken before the Labor Department releases the figure. The Thomson Reuters/University of Michigan’s preliminary index of consumer sentiment probably held at 76.2 in April, the highest since February 2011, projections show;
  • Brent is trading at $121.11/barrel;
  • Yield on the 10-year Italian debt is 5.406%, yield on 10-year Spanish debt is 5.82% and yield on 10-year Portugal debt is 12.533%.

In Q112, the Chinese economy grew at a rate of 8.1% compared to an expected growth rate of 8.4%. The slower growth rate increases the possibility of further quantitative easing in China. This is considered to be a good thing by the markets because every time a central bank announces further quantitative easing, the stock markets rally. Economically this doesn't make sense but the markets are not always rational because of behavioural biases of investors. What's good however is that China has ample ammunition to carry out further monetary easing. If you look at the financials of the country, it is the envy of many European countries. China is expected to grow at a rate of 8.3% this year and this is backed by Morgan Stanley, Nomura and Deutsche Bank despite the Chinese Government forecasting a growth rate of 7.5%. It has an unemployment rate of just 4.1%, a current account surplus of 2.5% and a budget deficit of just 2%. Apart from all of this, the central bank rate is at 6.38% so the Chinese Government can cut rates as one of its attempts to stimulate the economy and boost growth. The central bank may lower the ratio, currently 20.5% for large lenders, by another 100 basis points this quarter after two cuts since November, according to the median forecast in a Bloomberg survey last month. Seven out of 20 economists expect a cut in the benchmark lending rate, which has stood at 6.56% since the last increase in July. I remain a bull of the Chinese economy and my advice is for a portfolio to get exposure to China through an ETF. Check out Ishares MSCI China Index Fund (MCHI US EQUITY).

Today US consumer price data will come out in the US. The market is expecting weak numbers after the disappointing jobs data out last Friday. If a lower number comes in, the markets' expectations of further quantitative easing in the US will increase. The expectation of further easing in the US is putting downward pressure on the Dollar, increasing the value of the Euro. But if you think about it, the US is expected to grow at 2% this year with an unemployment rate of 8.3% and its inflation rate in line with is long term target of 2%. In the short term we could see a weakening Dollar because the Fed is actual doing something to stimulate the economy. Ironically the situation in Europe is much worse and the European heads of state are doing nothing. Europe is going into recession and the ECB rate is still at 1% compared to the Fed rate of just 0.25%. If the Dollar weakens, the Europeans would just be doing a favor to the Americans as American exports will increase as they become cheaper and European exports will decrease as they become more expansive. Is this really what the Eurozone wants at this point in time? I really don't think so. I remain a Dollar bull for many reasons. Apart from the reason mentioned above, a stronger US economy will see money going into the Dollar as investors allocate their cash to an economy that is growing, rather than hold on to the Euro. Another reason is that emerging market debt is mainly issued in USD. I'm also a bull of emerging markets particularly China. I think that being long the Dollar in the medium term will bear its fruit. Don't worry about short term weakness, the fundamentals of the US economy are much stronger than of the Europeans.

High yield financials and financials stocks have come down from their highs. We have just seen some high yield financials lose as much as 10 points in this week because fears that Spain and Portugal are not doing well and the contagion fear regarding Italy. It is unlikely that Spain and Portugal will follow Greece in a private sector involvement exercise. There isn't anarchy in Spain and Portugal like there was in Greece. Portugal are carrying out a privatisation program to raise cash and Spain although it is finding it hard to cope with the demands of the European Union have still not asked for help. Don't forget that the difference today as opposed to the summer of 2011, is that the European Union now have a firewall of E800bln. Spain and Portugal are covered in the case they are given a flexible credit line to pay the bondholders. Italy would be a problem if it had to default on its payment. But the probability of that happening is close to zero. The financial position of Italy is much stronger than that of Spain and Portugal.

Google reported results yesterday. It announced a 2 for 1 stock split, will initiate a dividend and beat the streets estimates. The company’s cash reserves are now at $50 billion and the dividend will be paid from that pile. The move follows Apple’s similar move earlier this year based on its own swelling reserves which double Google’s at $100 billion. The move will make investors happy and lead them to more easily accept Google’s other move, the dividing of its stock. Analysts are increasing their price target of the stock. This morning Jefferies increased its price target to $850/share and Credit Agricole increased is price target to $785.

Today JP Morgan and Wells Fargo report their results today. Despite the business model of the two companies being totally different, there is a correlation between the share prices. Wells will give a good indication of how the mortgage business did in Q112 and JPM will give an indication of how the investment management businesses did. Next week another 91 companies in the S&P 500 will report results.

Stock to watch: Infineon Technologies (Price E7.54, Price Target E9.7)

We believe the pullback in Infineon shares creates a buying opportunity for a Semi outperformer offering prospective short-term catalysts (likely Q1 earnings trough, expected guidance hike) and exposure to long-term secular growth drivers in Auto & Renewable energy. We believe a return to a 15%+ EPS growth trajectory should drive a re-rating towards global peers, and with the stock currently discounting negative LT growth, we rate Infineon a Buy.

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

Good day and happy trading!

Kristian Camenzuli