Corporate earnings helped keep markets buoyant for most of the week as the latest quarterly earnings season began. The DJIA opened above the 11,000 level on Monday morning and gained steadily through Thursday as strong results from JP Morgan, Intel and CSX, plus a very bullish guidance call from UPS drove investor appetite for risk. Although the NBER refrained from calling a bottom to the recession last week, the Fed Beige Book reported on Wednesday that 11 of 12 Fed districts were seeing economic improvement, with consumer spending and manufacturing activity increasing. The April Empire Manufacturing survey came in only a bit lower than the five-year high seen last October, with particular strength seen in the employment and prices paid sub components. But all the positive sentiment fell apart Friday morning when the SEC filed fraud charges against Goldman Sachs over the way it marketed a synthetic CDO made up of mostly subprime mortgage-backed securities. The SEC complaint alleged that after participating in building the CDO Paulson & Co. shorted the portfolio, a fact that Goldman concealed from long-side investors, who lost up to $1B on the deal. The DJIA and S&P500 gave up nearly all of their gains for the week in heavy trading on Friday, with the financials leading the way downwards. Goldman alone fell around 13%, propelling the the VIX volatility index up 15%. For the week the the DJIA rose 0.2%, the Nasdaq gained 1.1% and the S&P500, after hitting an 18 month high on Wednesday, shed 0.2%

JP Morgan and Bank of America both reported very strong Q1 results this week, with JP Morgan's top line outperforming thanks to investment banking revenues that were more than one third higher than last quarter. Provisions for credit losses continue to fall at both institutions, although investors fretted over certain credit metrics out of BoA, where allowances for loan losses were seen still growing by hefty amounts and non-performing assets remained stubbornly high. Note that monthly data released by the major US credit-card issuers this week hinted at a turnaround in losses. The March Master Trust numbers indicate that while credit losses remain at elevated levels, the pace of increases is tempering for issuers and delinquency rates are slowing.

Among industrial stocks top-line revenue performance was lacking. General Electric beat profit targets in its Q1 report, although revenue was disappointing and there was no large increase in the order backlog. GE Capital continues to stabilize, and executives insisted that losses at the firm's credit arm "seem to have peaked." Railroad major CSX beat earnings expectations, although revenue was in line with expectations. CSX said it has begun recalling furloughed workers, thanks to "stabilizing demand and improving global trade." Alcoa met earnings expectations (ex-charges) and missed revenue targets a bit. Alcoa executives continue to predict very strong aluminum demand growth this year.

Google modestly exceeded expectations in its Q1 report on Thursday, growing earnings and revenue in double digits over last year's Q1. However, shares of the search behemoth fell 5% in after-market trading as commentators focused on a small decline in average ad prices. Chip rivals Intel and AMD both reported very strong results. Intel came in well ahead of expectations and guided above par for next quarter. AMD surprised investors with quarterly profits, beating expectations for yet another loss. Note that this is the firm's first quarter in the black since late 2006, due mainly to accounting footwork, namely excluding numbers from its spun off manufacturing operations. Executives from both firms discussed tight supplies and growing demand for their chips.

Currency trading got off on the right foot on Sunday after EU members put a price tag of €30B on their backstop loan package for Greece, plus an additional $10B in funding from the IMF. The euro gapped higher from its 1.3490 Friday close to test 1.3690 area on Monday, with better risk appetite underpinning commodities and equity markets as well. However, EUR/USD succumbed to profit taking after it fell just short of 1.3700, which was cited as a 23.6% fib retracement level of recent cycle range of 1.5143 to 1.3267. Initially, the 10-year spread between Greek and German bonds narrowed to below 330bps after hitting a post-euro launch record of over 440bps last week. Credit-default swaps on Greek sovereign debt also tumbled almost 70 bps to move below 360 bps. Greece used the news to sell short-term paper with the bills yielding below 5% level. However, dealers pointed out that the response of bond investors moving forward would ultimately determine whether or not Greece needs to activate the aid backstop.

There was plenty of speculation among dealing desks whether Fed Chair Bernanke might fine tune his language on the US interest rate outlook in a mid-week speech, but softer CPI data and nagging initial jobless claims data re-enforced the view that it might be some time before the Fed changes its thinking on rates. The US 2-year yield was probing under 0.95% by Friday, well off Monday highs near 1.10%.

Fears about contagion from Greece continued throughout the week. An EU assessment of Portugal labeled the country's stability program "ambitious" and warned that Portugal might need additional measures this year. The EU added that the country's economic assumptions were "somewhat favorable" after 2010. By the end of the week, spreads on the European peripherals widened further as speculation surfaced that Greece might cancel its dollar-denominated bond issue if interest in the issue waned.

Rising risk appetite and comments from government officials kept the yen softer early in the week. Japanese Finance Minister Kan commented that currency rates and JGB yields should be set by market forces and that a weakening JPY trend was desirable for companies, sending USD/JPY to the 93.50 area. A ruling party panel said that efforts should be made to maintain appropriate currency levels of around 120 yen per dollar, helping USD/JPY test 93.40 a few times. However, the pair continued to find its direction via the interest rate outlook.

Illustrating the unevenness of the global economic recovery, China posted robust economic data this week: Q1 GDP was 11.9%, the country's highest rate of growth in three years, the March industrial production came in line just above 18% y/y and March CPI was 2.4%. China's Cabinet Stats Bureau pledged to keep a "moderately easy" monetary policy and a proactive fiscal policy, but also warned it may have difficulty reaching its annual 3% CPI target. Additionally, the Stats Bureau said economic recovery still faces difficulties even though the Q1 GDP figure provided a solid footing for the 8% annual GDP target. The data and commentary threw cold water on recent speculation that the PBoC would be raising interest rates sooner rather than later.

The Chinese Commerce Ministry further diminished the case for yuan revaluation and tighter policy, suggesting monthly trade deficits may be frequent in the first half while also noting the US should not blame the yuan for its economic problems. Up until these comments, the monthly trade deficit reported in March had been treated as a "blip" by Chinese officials, blamed on seasonality and rising domestic demand. Meanwhile, President Obama met with President Hu as part of the nuclear security talks in Washington DC, securing China support for a tougher stance on Iran and urging his counterpart to move on the yuan.

The shockingly high preliminary Q1 GDP data out of Singapore on Tuesday jolted the city-state's central bank into a surprise tightening action. Following the release of data, the Monetary Authority of Singapore revalued its currency by adjusting the exchange rate band from zero to "modest and gradual" appreciation. Policymakers also offered a more upbeat outlook for the rest of the year, raising 2010 GDP to +7-9% from +4.5-6.5% and CPI to +2.5-3.5% from +2.0-3.0%. The Singapore Dollar was the notable gainer among the emerging Asian currencies as USD/SGD fell below 1.3750, its lowest level since August 2008.

Trade The News Staff
Trade The News, Inc.

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