Bottoming Out?

by Trade The News Staff

Markets across the board showed stomach churning volatility last month, activity that some analysts call one of the signs of a bottoming process. Meanwhile, as US interest rates were cut sharply and inflationary data crept in, the US dollar hit further historic lows, before rebounding modestly. The question for this month is have we seen a bottoming out in the stock market and in the dollar or is there more down legs waiting?

Equity Markets/Fixed Income

Earnings season returns in April, with results expected to be lackluster in a quarter that is seasonally slow for many businesses even as and the US teeters on the edge of recession. As usual, about two-thirds of the Dow 30 will issues earnings reports. Big names to watch include the stalwarts of the tech sector: Research in Motion (4/2), Intel (4/15), IBM (4/16), Google (4/18 estimated), Amazon.com (4/22), and Microsoft (4/24). Cracks in tech could upset the equity market. Among financials, watch for the results of industry darling JP Morgan (4/16) and Merrill Lynch (4/17 est.)-Merrill may have more write down confessions to get off its chest.

As is often the case, U.S. Treasury markets benefitted from the elevated pessimism that gripped the stock market throughout March. Investors moved money away from equity markets dominated by the collapse of stock prices at some of the largest U.S. financial institutions. Much of that money found a home in the relative safety of shorter-term government bonds. Fears that an overly aggressive Fed could be stoking future inflation kept a relative floor on the amount that longer dated yields would fall; it was this dynamic that has produced a dramatically steeper curve which at one point saw more than a 200 basis point spread between the 10 and the 2-year. Heading into April traders are sure to look at a variety of factors, including currency, commodity and equity markets, for signs of a beginning of the mass exodus from the "steepner'' trades that dominated March.

Geopolitical Events

The Pennsylvania primary on April 22 may be the last stand for Hillary Clinton as a candidate, although a strong result would likely prolong her candidacy, lessening the chances of cohesive Democratic party strolling to victory in the general election. If McCain is able to build a credible chance of winning, it could begin shifting forecasters' predictions for the next four years. International events could also affect McCain's chances, particularly the unsteady truce in Iraq which was broken in late March when fighting broke out in Basra leading to an oil trunk being damaged, and sending crude oil up $5.

Commodities
Commodity futures sold off sharply last month as hedge funds deleveraged their bets. Grain futures came off of frothy levels after the USDA prospective plantings report on March 31, and Gold has plummeted back below $900 after racing above $1,000 just a few weeks ago. Crude has held up better, supported by the still weak dollar and a verbal floor of $100 set by oil guru Boone Pickens. OPEC is expected to hold an informal meeting in Rome April 20-23, on the sidelines of the IEF conference, which could lead to speculation that the cartel will bow to pressure and at least consider a production target increase.
Asian Markets

Inflation data on April 22 will be the main Australian economic release this month. Recent numbers have shown that Aussie inflation pressure remains strong, driven by solid price rises for some basic household items. The RBA will remain concerned with the run of inflation results confirming inflation above its target and showing few if any signs of topping out. Recent Aussie data has shown that the central bank's tightening is starting to bite, and analysts expect to see more evidence of a slowdown in April data.

China will report Q1 real GDP mid-month (no set date yet). This data could have considerable impact on the future of the global economy. Any signs of Chinese GDP cooling off after maintaining a sizzling 10%+ rate of the last eight quarters, could fuel fear that a US recession will crimp the world economy.

April marks the start of the Japanese fiscal year, and the launch of new Toushin funds will initially weight upon the JPY sentiment. However, the continued turbulence in the financial markets has limited JPY weakness as risk aversion weighs upon the carry-related pairs.

Forex
In currencies, the main event will be the G7 meeting in Washington DC on April 11th. As the USD continues to encounter record lows against the Euro and Swiss Franc, the currency community is awaiting word of whether the major powers will alter their Forex stance. In the most likely scenario, the G7 will reiterate that currencies should reflect fundamentals and that excessive volatility is undesirable. The G7 has yet to address the USD weakness directly in recent communiqués and dealers are pondering whether this stance will be amended. Verbal intervention has increased in recent weeks as the USD approached the 1.60 level, but hopes of a coordinated intervention have dwindled as ECB members continued to praise the anti-inflationary effects of a strong Euro. So far, the ECB's strongest statement has been to note more frequently that it is appreciative that US authorities believe that a strong USD remains in their interest.

Central Banks Actions

Most analysts have moved up expectations of a BOE rate cut to April from prior expectations of a May cut-the BOE is now expected to lower their key rate by 25bps to 5.00% at its April 10th meeting. The Fed is seen lowering its funds rate by another 25bps at its FOMC scheduled for April 30th, though Fed funds futures are still showing a chance of 50bps. The Canadian central bank (BOC) is expected to lower rates by 25bp to 3.25% on April 22nd. With its peers continuing to take rates lower, the ECB may begin to feel more pressure to consider future rate actions.

The most anticipated data this month may be US Nonfarm Payrolls on April 4. The last two payrolls readings were negative in back to back months for the first time since June 2003. Another drop in payrolls could be confirmation enough of an impending recession for many market watchers.




Notable Events for April:
April 4: Nonfarm Payrolls and Unemployment April 8: FOMC minutes

April 10: ECB and BOE rate decisions

April 11: G7 meeting in Washington DC

April 14-17?: China Q1 Real GDP (y/y)

April 22: Penn. Primary; Australian CPI data

April 20-23: OPEC informal meeting in Rome

April 30: FOMC meeting