There seems to be a calming of nerves and a slight change in the atmosphere surrounding those active in financial markets.
Better volumes would have been the icing on the cake for the bulls on Friday, although it must be said that this was an issue for the US but certainly not in Europe where volumes are excellent. The backbone for a continued equity rally has to come from oil, given the exposure that developed market financial institutions have to this space on the loan books. This in itself is a big ‘if’. The rally has to come from the banks themselves and the fact Commerzbank (DE:CBKG) detailed on Friday that it exceeds its regulatory requirements three years early, assisted by positive moves from Deutsche suggest there is not a solvency crisis in the European banking industry. Buying select European and US banks looks like a compelling short-term trade and one can’t look past Jamie Dimon’s $26 million purchase of JPM’s stock last week as a guide. Keep in mind that if you had followed Mr Dimon’s lead in January 2009 when he bought 500,000 shares (when price was $22.92) and again July 2012 when he purchased 235,000 shares (at $34.42), you’d be doing rather nicely.
Asia has also found its mojo. There is nothing like poor data to get the equity bulls excited. Japanese Q4 GDP fell 1.4% quarter-on-quarter annualised, 60 basis points worse than forecasts, with nominal faring slightly better. Consumption remains poor, although if you break down the facts, the shining light is that CAPEX gained for a second quarter. For those looking at the demand story, China’s January trade data would be particular worrying with exports (in USD terms) falling 11.2% in January and imports falling 18.8% in January.
The China trade data hasn’t hurt sentiment too much with Japanese, Hong Kong and Australian stocks rallying strongly. Chinese equities have played catch up with the mainland CSI 300 down 1.6%, although the real focal points should be the 196 pips stronger CNY ‘fix’. My base case is that we’ll see a stable CNY this week which should provide risk sentiment with a tailwind. Something mirrored by our flows, which have actually been quite balanced with some short covering and organic buying, and material, energy and financials all getting good attention. Japan especially has seen big upside, helped by a strong USD/JPY. AUD/JPY has performed well here (+1.1% today) and as long as risk sentiment improves then I would expect AUD/JPY to be a good short-term buy at these levels.
Looking ahead to European and US trade, we are already seeing follow through buying of S&P 500 futures (+0.9%), while perversely oil futures are down 0.8% but copper futures up 1.7%. Our European and UK equity calls are looking constructive. For those long in energy names, it is certainly worth considering that WTI futures have rallied for 12 consecutive February’s in a row, while March has been even more impressive rallying for 19 straight March’s in a row! The question I will be asking is whether the equity and credit markets rally this week on the idea that things are not as bad as feared, or whether these improved levels give fresh incentive and better levels for the short sellers to express a bearish view. It promises to be a telling week, but I suspect the risk-on feel will last a few more days.
Ahead of the open we are calling FTSE 100 5775 +68, DAX 9078 +111 and CAC 40 4045 +50