Market Outlook | April 5, 2010

“Make no little plans; they have no magic to stir men's blood. Make big plans Aim high in hope and work.” - Daniel H. Burnham (1846 - 1912)

April was greeted warmly with new highs across global assets. This behavior is proving skeptics wrong once again, and a much feared market decline is not materializing. Importantly, the resilience of a cycle recovery is too powerful, and ignoring these publicized worries has been fruitful for buyers. A synchronized pattern in asset classes is a trend that is becoming too familiar. This time, interest rates are rising along with commodity prices. Once again, this is a subtle reminder for investors to maintain an open mind. Of course, rising markets, with low volume at this junction, are puzzling, especially when attempting to make the next move. Similarly, corporate debt issuance and demand for collateralized loans remain strong. This is a sign of confidence restoration in credit markets. Basically, there is willingness to borrow among companies, and inflow data supports these points, especially in the first quarter. Therefore, risk appetite is generally healthy along with sentiment. Nonetheless, making a differentiated call is an ongoing challenge that haunts managers into this second quarter.

At this point, fighting the interconnected trend has been costly. Specifically, investors are gaining comfort in rising rates and improving economic data. However, recent movements will require further confirmation ahead, especially at the start of the second quarter. At the same time, volatility has remained low enough to create an encouraging atmosphere, which results in less impactful surprises. Now, Gold related stocks have not outperformed on a relative basis since the start of the year. Therefore, some investors might consider reentering with hopes of a Gold recovery. Meanwhile, Crude is making multi-month highs, but stocks related to China are cooling off, unlike the emerging market run-up of last decade. This point to some disconnect of previous correlations, and those gaps are worth tracking for profitable pursuits.


Article Quotes:

"Global steel prices are set to leap by up to a third, pushing up the cost of everyday goods from cars to domestic appliances, after miners and steelmakers on Tuesday agreed on a ground-breaking change in the iron ore price system. The deal by Vale of Brazil and Anglo-Australian BHP Billiton with Japanese and Chinese mills marks the end of the 40-year-old benchmark system of annual contracts and lengthy price negotiations. The industry instead agreed to move to quarterly contracts linked to the nascent iron ore spot market. The benchmark system has ended.” (Financial Times, March 30, 2010)

“Businesses have also become less reliable defenders of China, rankled by measures, such as an edict last autumn, which, according to American technology companies, virtually shuts them out of Chinese government procurement. The hacking attacks on Google and the trial of Rio Tinto executives have hardly helped. ‘A whole slew of multinationals I’ve talked to are increasingly fed up with how they are being dealt with on micro, industry, product-specific stuff,’ says Fred Bergsten, director of the Peterson Institute for International Economics, a think-tank.” (Economist, March 31, 2010)

Levels:

S&P 500 [1178.10] is strengthening since mid-March by holding above 1160 and reaching intra-day highs of 1181.43 by Thursday’s market behavior.

Crude [$84.87] is breaking out above $84, which showcases positive momentum and new highs for the year.

Gold [$1123.50] is mostly trading between 1100 and 1120 in the past few days. Last week, it witnessed an early resurgence yet far removed from previous highs.

DXY– US Dollar Index [80.70] has had early pauses after a sharp multi-week run. March 25th marked a top in the near-term. The index is normalizing around a familiar territory of 80.

US 10 Year Treasury Yields [3.86%] is stabilizing in a new range between 3.80% and 3.90%. These levels confirm further technical strength.

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