Market Commentary

Equities advanced handsomely yesterday
March 24, 2010

Equities advanced handsomely yesterday as Federal Reserve Bank of Chicago President Charles Evans stated the US Central Bank is likely to keep an “accommodative” interest rate stance for at least six months.  Stocks were also buoyed with a perceived resolution regarding Greece and optimistic profit expectations.

Commenting briefly about interest rates, an accommodative stance for fed funds is up to around 3%.  Was Evans hinting of a possible change in monetary policy?  The markets think not as prevailing wisdom remains a 0.00%-0.25% overnight rate.

Regarding Greece, it has been reported that Germany and France have agreed to back IMF aid for Greece.  For some time Germany maintained standalone EU aid without substantial contribution from the IMF as unacceptable.  I ask has the unthinkable just occurred…an EMZ country taking bailout monies from the IMF?

And then there are profits.  Will earnings again exceed analyst expectations of a 29% first quarter increase?  I think yes as I believe economic activity is considerably stronger than the consensus view.  This view is reflected in the swap market.

Yesterday for the first time on record the 10 year US swap spread turned negative as demand is great for more risky higher yielding assets such as corporate and emerging market securities.  The gap between the rates to exchange floating for fixed interest rate for 10 years is a negative 0.44%.

Moreover the extra yield investors demand to own corporate bonds rather than government debt is 1.54%, the narrowest since November 2007 as per Bloomberg.  Last year at this time spreads were at a record high.

And then there was the data.  The existing home sales statistics and the reading for the Richmond Fed were at first disregarded.  However both data points offered further evidence the economy is perhaps recovering at a pace faster than first suggested.

Last night the foreign markets were mixed. London was down 0.23%, Paris down 0.56% and Frankfurt down 0.07%.  Japan was up 0.38% and Hang Sang up 0.10%.

The Dow should open moderately lower on fears that the US deficit will hamper growth.  Portugal’s debt was cut by Fitch is also weighing on equities as is UBS’s report that Greece will default on its debt sometime in the future.  The 10-year is off 4/32 to yield 3.70%.