US Market Outlook
EDITOR’S OVERVIEW…The G20 meet in London amid much
protest but no breakthrough stimulus plans are expected. The good
news is the Fed will buy Treasuries 3 times this week without new
issuance. More depressing Labor news is forecast for March.
SPARK PLUG PLAN…The Treasury PPIP plan hopes to
generate USD 1trn in purchasing power to remove “toxic” assets from
banks’ balance sheets. It could potentially jump-start price discovery
in the asset-backed securities markets and unfreeze trading and credit
creation. If banks were to incur further write-downs, the Treasury plan
offers no details as to whether a capital injection would be provided.
HOUSING HAS A LONG WAY TO GO…Warmer than normal
weather in February produced some green shoots in housing, but it is
too soon to tell if they will survive. New starts and sales bounced off
extremely low bottoms, price to income ratios have fallen, fixed rate
mortgage rates are lowest in 50 years, and affordability increased to a
record, but there is a huge overhang of new and existing inventory.
Assuming demand rises back to its demographics-driven trend, it
will take up to 2 years to work through inventories. The big constraint
is credit. Banks are labouring under tight capital and stringent lending
standards, thus credit availability will lengthen the time to recovery.
INSURANCE TRADE AGAINST A JUMP IN LIBOR… We
explore a way to gain exposure to a possible liquidity crunch, with the
added benefit of positive carry which rarely accompanies a ‘long vol’
type of position. STRATEGY: Buy EDM9 98.75 puts vs selling a riskweighted
amount of forward 1y payers starting on 15 June.
FREDDIE MBS PURCHASE AND IMPLICATIONS…Debenture
spreads are still wide. STRATEGY: Expect the GSEs, especially
Freddie, to pay in the 7-10yr sector.
MEXICO: BOP ON EGGSHELLS…The sharp fall of imports will
prevent the current account deficit from rising this year. The capital
account is well supported by the oil hedge and multilateral assistance.
The BoP’s vulnerability is the private sector’s capacity to roll its debt.
BRAZIL: CURRENT ACCOUNT ADJUSTMENT…The BCB has
revised its 2009 current account deficit forecast to USD 16bn from a
shortfall of USD 25bn. We expect an even lower deficit of USD 13bn.
BENEFITING FROM COMMODITY FINANCIALISATION…
Quantitative easing seen in Japan, Switzerland, the UK and the US
initially weakened the related currencies. The USD will stay pressured
for now and a general out performance of banks and commodities
suggests sterling will rally. GBPUSD is set to break higher.
“TECH”-NICALLY, LONG GAMMA CAN BE BULLISH…The
SPX roared back and we view this rally as a good opportunity to
hedge. We see attractive long volatility/gamma opportunities in the
technology sector. We suggest short-dated option purchases (May or
June) on our suggested technology names.