Good morning,

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

  • Asian stocks fell for a second day and were headed for the first monthly drop since November as U.S. durable-goods orders and earnings trailed estimates;
  • European governments are preparing for a one-year increase in the ceiling on rescue aid to E940b to keep the debt crisis at bay, according to a draft statement written for finance ministers. The euro-area finance chiefs will probably decide at a meeting in Copenhagen tomorrow to run the E500b permanent European Stability Mechanism alongside the E200b committed by the temporary fund, a European official told reporters in Brussels yesterday;
  • Spain – The new Spanish government will present its first budget Friday, with austerity expected to be the overriding theme;
  • Saudi Arabia’s powerful oil minister, Ali Naimi, made a rare intervention into overheating oil markets on Tuesday, declaring that high oil prices were “unjustified” and vowing that the kingdom would boost its output by as much as 25% if necessary;
  • 10-year Italian bond yielding 5.105%, 10-year Spanish bond yielding 5.327% and 10-year Portuguese bond yielding 11.282%;
  • Brent is trading close to $125/barrel

The markets traded in negative territory yesterday in the US following the European markets and adding more negativity after durable goods data came out worse than expected. Like I've been saying expect some time of consolidation before company earnings start coming out and also the GDP data for countries around the world.

It is very normal to see some hesitation from investors and see money being pulled off the table at this stage. Markets are up close to 20% in Germany, Japan and the US and for alot of people that's more than they were aiming to achieve for the whole of 2012. So expect so negativity to the downside. Expect to see certain companies fall short of expectations and their results will drive down the markets. But it is not all doom and gloom, far from it. If we get to know that many European countries are in a recession, it should not come as a surprise. Analysts have been forecasting this and we know there is a problem of growth in Europe. We also know that the ECB rate is high at 1% and it is only a matter of time before the ECB cuts rates by a further 50 basis points. The Eurozone is taking long to get out of this problem because the ECB is being passive. Many may say how can the ECB be passive if it injected E1trn in the banking system? The E1trn is not quantitative easing because money is not changing hands and it isn't inducing investors to shift to riskier assets. E800b of the E1trn is deposited back within the ECB.

So we have a problem of growth in the Eurozone and the ECB is doing nothing to stimulate it. On the other hand we have the US which is in a much better situation than the Eurozone and is expected to grow more than 2% this year. The Fed addressed the global crisis and said that to maintain this momentum of growth and lower unemployment, further quantitative easing is necessary. It is not imminent though if the need arises, the Fed will intervene. This came as a surprise in election year as it was expected that the Fed will not intervene in the economy not to favor the democrats over the republicans.

So we have the Americans who are pushing towards higher growth and lower unemployment. Then we have the Chinese who have ample ammunition to stimulate growth through expansionary monetary policy and we have other emerging markets like Indonesia who growth rate above 6% is independent of other economies.

My opinion is to stay in the markets and not try to time when the markets will start rallying again because the probability is that you will get caught out of the rally. Despite the negative news we expect to continue hearing from Europe we have other economies doing well and if there is weakness we know that their government will intervene to stimulate the economy. And this is what the market wants to hear at the end of the day.

I think the rally in financials is over. I think the industry in general won't keep up the momentum. At this point it is chery picking the good names that will continue the momentum to the upside. And by good names I mean the like of BNP, JP Morgan, Citigroup, Wells Fargo, HSBC and Barclays. Sectors I like and think should continue performing well in Q212 are technology stocks and industrials. Technology stocks should keep up the momentum we saw in Q112 as margins should continue improving. By technology I mean the likes of Apple, Microsoft, IBM, Intel etc. By industrials I mean the likes of Schneider, Siemens, Bombardier, Caterpillar, Brenntag etc.

Stock to watch: Qualcomm (Price $68.12, Price Target $75)

Our Buy rating of QCOM is based on the fact that Qualcomm continues to be a leader in the WCDMA/HSPA baseband market. The company is now sampling its first HSUPA chipset while its competitors are just sampling their first generation HSDPA products. The company is also far along with its single-chip CDMA and WCDMA phones. We believe these products will be important drivers in bringing down the cost of 2G and 3G handsets.

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

Good day and happy trading!

Kristian Camenzuli