Just Another Manic Monday

The futures are so bright we've gotta wear shades this morning!

The Hang Seng came back from holiday to a 5.5% gain, the Shanghai is up 3.3%, Korea is up 2% and India is up 6.2% while Japan is on extended holiday through Thursday.  I already sent out a morning alrert to members reminding them not to get too excited about these moves as the Nikkei dwarfs the others in market cap so money funneling into Asia with the Nikkei shut has an outsized effect on the other markets.  A rise in Asia, of course, gives Europe (and the FTSE is closed over there) a strong open and that gooses the US futures and viola – here we are.

We're not getting the big moves in copper, gold or the Baltic Dry Index that should accompany a global rally so we remain suspicious/cautious but we will continue to watch our levels as well as the dollar, which is bouncing back against the European currencies after some very weak overnight trading.  There is no particular news driving the markets' exuberance and we'll get a clue as to how rational it is at 10am when we get Construction Spending and Pending Home Sales for March.  It's a big data week and the futures traders are very brave ahead of tomorrow's ISM Services, Wednesday's ADP report and Thursday's Non-Farm Payrolls.  Of course we still have plenty of earnings to work our way through but, about 2/3 through the season, we have much less to worry about on that front.

While still not quite a pandemic, the A/H1N1 flu has now spread to 18 countries and China has responded by quarantining Mexicans in what the Mexican foreign minister calls "unacceptable conditions" even though they show no sign of actually being sick.  Mexico, in turn, is advising travelers to avoid China. More than 70 Mexicans are in isolation around China, according to Mexican officials, and that number is rising as Mexican travelers call in to their embassy to report their plight.  Among them is a family of five, including three young children, who transited to Beijing. They were roused from their hotel room in the Chinese capital in the early hours of Saturday and whisked to an infectious diseases hospital.

Asian markets were boosted by yet again more stimulus this morning as Ministers from across Asia announced a$120Bn liquidity fund called the Chiang Mai Initiative. Japan, South Korea and China will provide 80% of the $120 billion currency pool and Asian members the remaining 20%. Japan will contribute $38.4 billion, while China, including Hong Kong, will also offer $38.4 billion. South Korea will provide $19.2 billion.  Under terms of the program, smaller Asian economies will be able to borrow larger amounts in proportion to their contributions than the more-developed economies.  The ministers also unveiled a $500 million credit-guarantee and investment mechanism, which will be used to enhance the credit ratings of companies that want to issue debt.  Japan is separately providing an additional $60Bn in emergency swap agreements. 

So massive, MASSIVE stimulus boosts the Asian markets that are open this morning should be the headlines.  Europe has already (9 am) calmed down a bit off their excited open but that's pretty good considering the EU is slashing it's outlook for the year to -4% from -1.8% in January. "The European economy is in the midst of its deepest and most widespread recession in the post-war era," European Commissioner for Economic and Monetary Affairs Joaquin Almunia said in a statement.  Ireland and Germany are expected to be the worst-performing economies in the Euro zone. The commission expects Ireland's economy to shrink 9% this year, while Germany's will contract 5.4%. The Baltic states, Estonia, Latvia and Lithuania are the hardest-hit economies in the whole EU, with each expected to contract more than 10% this year.

Efforts to reverse the slide, including fiscal stimulus spending, interest-rate cuts and plans to clean up banks' balance sheets, should help the EU and euro-zone economies to recover next year, the commission said.  But optimism about next year's prospects is fading. The commission cut its outlook for EU economic growth in 2010 to a 0.1% contraction from the 0.5% expansion it had predicted in January. For the euro zone, the commission cut its forecast to a 0.1% contraction from a 0.4% expansion.  Unemployment will be worse than expected this year and slip even further in 2010, according to the commission. It raised its 2009 outlook for euro-zone unemployment to 9.9% from the 9.3% it had predicted in January. For the whole EU, the forecast was raised to 9.4% from 8.7%. In 2010, the Euro zone will report an 11.5% jobless rate, while the EU unemployment rate will hit 10.9%, according to the commission's forecasts.

So happy Monday to you!  I know I keep saying we need to switch our brains off and trade our levels but sometimes I accidentally finish the weekend with my brain stuck in the "on" position and this is one of those days.  A lot is being made of the improving ISM numbers in America along with the huge drawdowns in inventories but I am concerned that the bullish premise that this is a positive may not hold water.  We all anticipated an economic disaster and the markets gave us a big slap in the face way back in October and companies wasted no time cutting back production.  THAT led to a drawdown in inventory and maybe we are underproducing slightly but the auto sales and retail sales indicate we are not leaping back to anything close to our old demand levels and the bulls may be overplaying their hand with this rally.

Don't forget we have the stress test results this week (Thursday if they don't delay them again) so that's a wildcard but my theory was that they delayed the tests BECAUSE they were good and they wanted to wait until the Nikkei was open again so the full force of global investment money could fly back into the US markets.  I'll be setting up some bullish (but hedged) financial plays to take advantage of the possibility and I will do my very best to switch my brain back off and just go with the flow of this rally (I find a few shots with a large brick quickly takes the edge off).  We need to be mindful of the possibility of a collapse but as I said in the weekend wrap-up, where we reviewed last week's very choppy trading:  We are just as likely to test 9,100 as we are 7,600 at the moment so it doesn't pay to try to outgess the markets – we just have to ride the waves.

We're walking a very high tightrope here – make sure you have a net!