Pre-US Market Open: The Bear Market Rally Will Probably Remain In Hiatus Until Later In The Week

Unadulterated risk aversion returned on Monday. The day started with the news the US had rejected proposals for auto industry rehab, moved on to a vicious fall in Japanese industrial production but then the mood was briefly lifted by an increase in UK mortgage approvals. However, markets descended back into gloom as Ireland was downgraded by S&P (it was a case of when not if), then focused on the woes of the US auto industry with GM (GM), now equated with Gimmie Money or Government Motors, and finished by looking at the ever-deeper quagmire that AIG (AIG) are in.

Somewhere in the middle of all this, ECB President Trichet failed to rule out buying corporate bonds, though helicopter Jean Claude doesn’t sound quite right. But any dim hope of a meaningful policy move by this week’s G20 faded away. There is even chat that the ever-excitable Mr Sarkozy may walk out of the G20 love-in if he doesn’t get his way on regulatory reform.

Quarter end profit taking of course added to the markets woes as dealers think that the market ran up too fast and got way ahead of itself.

Today’s (Tuesday) Market Moving Stories

• Japanese unemployment jumped from 4.1% to 4.4% in February (a three year high), while the sharp drop in vacancies suggests that more pain is on the way. Meanwhile, the Japanese government looks set to announce a third stimulus package designed to boost the economy. Perhaps most importantly, this would include setting up a fund or a similar entity to purchase stocks using public funds. Despite opening lower this morning, Asian equities quickly picked up steam on notice of this plan. Car markers in Korea and Japan both gained ground despite further uncertainty over the fate of GM and Chrysler.
• The Asian Development Bank cut its 2009 growth forecast for developing Asia to 3.4% from 5.8%, which would mark the slowest pace since the 1997-98 financial crisis.
• Your bill, Sir - adding up the cost of the US economic rescue.
• A nice graphic on the relative pecking order in world banking 1999 versus 2009. Oh, how the mighty have fallen. Note the diminishing number of Stars and Stripes flags and the rise of the Maple Leaf, Oz and, of course, China.
• I initially thought that this was a joke - this guide provides practical advice on how to deal with the effects financial difficulties can have on your physical and mental health.

Looking Ahead To Thursday’s Cutfest
There’s a growing, but still minority, view that the ECB will ease again (to 1%) on Thursday AND pave the way for bond purchases. I’m not usually big on taking a stand on something as binary as policy decisions, but sooner or later, the ECB is going to follow the Fed down the bond buying path, and other central banks have consistently acted earlier than expected. Buying corporates is easier than buying government debt in Europe, so that’s the path of least resistance. Europe’s woes are clear. Germany, as the world’s biggest exporter, is terribly exposed to collapsing trade. Spain’s economy is at the heart of asset/housing deflation and is the worst-placed for 2010. Almost-zero rates, ECB bond-buying, lower yields and a softer euro, remain core views.

The equity/risk bear market rally will probably remain in hiatus until later in the week, pricing in auto-disaster and G20 disappointment, and leaving the way open for the rally to resume if payrolls/ISM/G20 are less awful than our worst nightmare.

Equities Briefs

• Porsche’s profits ($7.3bn) are up due to the massive money made on their options foray into VW. But their shares are off as they were not able to produce a reliable forecast.
• Other auto makers though are stronger early doors today with Fiat up 7% and even Renault and Peugeot up marginally. Regarding the perky performance of Fiat this morning, President Obama yesterday confirmed that the Fiat alliance was the only viable path for Chrysler, and without a deal within 30 days, the funding taps to Chrysler would be turned off effectively pushing it towards Chapter 11. Whilst a deal is not yet finalised, it appears that the terms have changed slightly, with Fiat now potentially only taking an initial 20% stake instead of 35%.They will also now commit to maintaining a stake lower than 49% until government funds are repaid. However, the risks for Fiat remain low with the Group not taking on any additional debt nor making any up front capital investment.
• Marks and Sparks also came in with numbers that beat analysts’ downbeat estimates. The new women’s clothes lines and cheaper prepared food lines seem to be going down well with consumers. The stock us up about 10%. Given M&S’ position as a keystone food retailer in the UK market its performance is critical to the large-scale Irish ready meal and sandwich producers such as Greencore and Kerry. The messages are now clear: (1) hyper efficient manufacturing is key to managing the crisis, (2) consumption continues albeit at lower price points and (3) UK retailers are likely to compete savagely on price in the downturn.
• Miner Anglo American is also stronger today on the rise in copper prices on the London Mercantile Exchange (LME).

Data Today
US S&P/CS composite 20 house price for January is out at 14:00 GMT. Housing stats have been less awful lately, but house prices should still be down 18.6% on last year. March’s Chicago PMI is then released 45 minutes later and the suggestion is that the index will slip back to 33 as conditions remain tough. At 15:00, US consumer confidence for March is out. Confidence is still scraping the bottom of the barrel, but other series point to a modest rebound to 28.

Q1 Japan Tankan survey is released tonight at 00:50. Data suggest the Tankan will plunge to 50, matching the 1975 low when Japan was reeling from the first OPEC shock.

And Finally… AIG Squeezed Me

Disclosures: None

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