Good morning,

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

  • The Federal Reserve bolstered confidence in the U.S. financial system and raised its economic assessment. The Fed said yesterday that strains in global financial markets have eased and the labor market is gathering strength. Interest rates were kept on hold at 0.25% and there was no mention of further quantitative easing;
  • The U.S. Department of Commerce said on Tuesday that February retail sales in the United States gained 1.1% from January, the biggest monthly gain in five months;
  • In addition to a positive retail report, U.S. stocks were also buoyed by optimism from the small business sector. The National Federation of Independent Business index of small-business optimism gained for the sixth consecutive month, data shows, to its highest point since late 2007;
  • The Fed said 15 of the nation’s largest 19 banks passed the stress test meaning that they could maintain adequate capital levels even in a recession scenario;
  • The four US banks that didn't pass the stress tests are Citigroup, Ally Financial, MetLife and SunTrust. Citigroup Inc. slumped 3.3% after the close of regular trading in New York;
  • A gauge of inflation expectations based on Treasury yields climbed to a seven-month high before U.S. data today that may show import prices rose the most in three months;
  • Apple closed the session after hours at $568.45!!!

The US markets rallied before the closing bell for three main reasons. The first is February's retail sales figures which came in at the highest level in 5 months. This means that despite the Eurozone crisis, US consumers are still spending. In fact The growth in GDP for 2012 which is expected to come on somewhere close to the level of 2.3% is all attributable to consumer spending. The second reason why the markets rallied is the positive comments Bernanke had to say about the US economy and the improvement in jobs being created. The third reason is the US bank stress tests. The Fed also had to announce the results of the banks stress test 2 days before schedule because JP Morgan told investors it had passed the test. It was quite a shock to the market to find out that Citigroup was one of the four banks that didn't pass the stress test.

JPMorgan Chase & Co. and Wells Fargo joined banks raising dividends and authorizing share repurchases after passing the stress tests. Citigroup Inc., the lender that took the most government aid during the financial crisis, said it will resubmit its capital plan to regulators after failing to meet some minimum standards in the tests. Citigroup has repaid $45 billion in TARP money.

There was no mention of further quantitative easing at the FOMC meeting. This was expected after the positive data which came out from retail sales. Consumers are spending and jobs are being created. However the Fed did reconfirm that interest rates are likely to remain at record low levels till at least 2014. I think the Fed found itself in a lucky situation with an improvement in the data issued. Since the elections are coming up in November in the US, the Republicans wouldn't want the Fed to stimulate growth and help Obama win the election. This in my opinion is one of the reasons why we haven't heard anything about further QE.

The Dow is back above the 13,000 level. The Dow reached 13,177 points, a gain of 1.7%. The S&P 500 Index jumped 1.8%, and the Nasdaq Composite Index gained 1.9%.

I continue to put forward my argument that the US and emerging markets particularly China are the best exposures you can have in your portfolio. The US economy is doing well without the Fed adopting further quantitative easing. My argument for being long emerging markets is the new money coming into the market is going towards emerging markets investments plus it is just a matter of time before China starts adopting expansionary monetary policy to boost growth in the economy. In yesterday's blog I mentioned that both Deutsche Bank and Nomura have increased their growth forecasts for China to above 8%. This is on the back of further easing in China.

US companies are cash rich and give a healthy dividend. Government yields are so low they don't even cover the increase in inflation. I can't understand why anyone would want to be exposed to US Trasuries, Gilts or German bunds! Apple Inc., the world’s most valuable business, led U.S. corporations in amassing a record $1.24 trillion of cash last year as memories of the 2008 credit crisis linger, according to Moody’s Investors Service.

I recommend that a portfolio is exposed to Ishares MSCI Emerging Markets Index Fund (EEM US EQUITY) for exposure to Emerging markets and SPDR S&P 500 ETF Trust (SPY US EQUITY) for exposure to the US markets. I also am bullish on the Dollar and bearish on the Euro and you can take advantage of a weakening Euro by being exposed to Lyxor ETF DAX (DAX FP EQUITY). Germany is a net exporter with a trade surplus. A weakening Euro will increase exports and strengthen the country's trade surplus.

By being exposed to these markets I am confident that by year end you will beat the global index because you are exposed to the countries that are expected to perform best. However it doesn't stop there. Your portfolio need to be exposed to individual constituents which for part of these indices and add exposure to create alpha to your portfolio. Please contact your adviser to get a copy of our CC Equity List to see how you can create alpha in your portfolio.

EURUSD @ 1.3044

I remain bullish on the Dollar and bearish on the Euro. The Euro has to weaken. Its written on the cards. There is no way the Eurozone can recover from its 'no growth' scenario if the Euro doesn't weaken. We aren't seeing additional bond buying from the Fed or any form of quantitative easing. And for those of you who are scratching their heads when they read this, the E1trn pumped into the banks by the ECB is not a form of QE because the ECB has cE800bln in deposits. So the money is not being circulated in the economy to generate growth. I see the EURUSD at 1.20 towards to end of 2012.

Interest observation on Italy

Although Italian yields have come down alot, the Italians haven't issued debt above 10-years maturity. It has increased offerings of debt maturing in less than two years to take advantage of demand bolstered by three-year loans from the European Central Bank to help quell the European sovereign-debt crisis. The yield difference between two-year notes and 30-year bonds widened last week to a more than 2.5-year high of 392 basis points. It can be a risky game in the medium term. Next quarter they will need to come back to longer issuance.

Bond to watch: 10.25% MHP SA 2015 (USD)

This is the same company I mentioned in yesterday's blog. Same reasoning goes for their debt. If I'm a buyer of its equity, I sure am a buyer of their debt if there is value. And I see value in this company.

Company Name: MHP SA

Currency: USD

Coupon: 10.25%

Price: 100

Yield to Maturity: 10.25%

Min Piece/Increment: 100k+1k

Rating by Moody's: B3

Maturity: 29/04/2015

For further information on this bond or other stocks and bonds we follow, contact our offices on 25688688.

Good day and happy trading!

Kristian Camenzuli