Monthly Insight

April 2011 Edition

As we head into April, we at GEF remain cautiously optimistic about the performance of the global markets given the mix of some positive numbers amid the two global crises - the continuing unrest in the Middle East and the tsunami/nuclear disaster in Japan. The markets could change directions depending on the intensity and outcomes of these two global crises.

American economy continued its upward momentum adding positive job numbers for the second straight month in March. Private sector added 230,000 jobs in March, after adding 240,000 jobs in February while the government cut 14,000 jobs in March, after cutting 46,000 in February, mostly at the local government level. While the early stages of the expansion were driven by exports and business, we now see an increase in consumer demand with retail sector adding 18,000 jobs and the hospitality sector adding 40,000 jobs in March. Despite these positive numbers, the unemployment rate changed little at 8.8% with increasing size of the workforce and income levels remained stagnant. Home prices continue to be depressed in 2011, confirming that the housing market recession is not over yet and that we not in the path of sustained recovery. This would be one of the key areas to watch in April, as any signs of the double dip in housing would be detrimental to the markets. So far S&P 500 has been quite resilient brushing aside the negative news and gaining 5.6% off it low from mid-March. We expect the S&P 500 to be flat to slightly positive by the end of April with a target of 1340.

The conditions in Eurozone continue to remain poor. While the overall unemployment rate decreased for Eurozone (17 countries) to 9.9%, unemployment in Spain, Portugal, Greece continued to stayed depressed in the double-digits. Debt-stressed Portugal successfully raised $2.3 billion from a bond auction, escaping the need for a bailout, but the situation looks increasingly dicey as the country prepares itself to elect a new government that can battle the debt woes. Portugal faces a key test later in April when it has to pay 4.5 billion euros on debts that are due, with another such payment of 4.96 billion euros due in June. Meanwhile, four Irish Banks were stress tested and the results revealed that a total of 24 billion euros will need to be pumped into the system to restore market confidence, and ensure banks have enough capital.

We see positive growth and recovery in the emerging markets (EM), but inflation fears still continue to haunt these markets. Capital inflows has slowed over the past few months but are still showing positive accumulation, pushing down interbank rates lower, while also feeding credit growth and overheating fears. To counter this, central banks in India, China, Brazil, Russia and Turkey have used a common set of quantitative tightening tools to deal with the problem of excess liquidity. Most of the EM including India, Russia, South Korea, China and Brazil, have inflation concerns. South Korea’s inflation rate rose to its highest level in 29 months in March compelling its central bank to raise rates in two of the past three months through March. Meanwhile, China’s state-affiliated agency reported that the country’s manufacturing regained momentum in March, easing fears of a sharp slowdown. China’s PMI (Purchasing Manager’s Index) rose to 53.4 last month, ending the three-month decline.

The tsunami/earthquake in March disrupted many supply chains and ports in the east coast of Japan and the nuclear disaster is still in a sensitive state. Auto exports are hampered as also are other key electronics and the recovery would take some time. Thanks to the coordinated intervention by the Group of Seven industrialized nations in helping weaken yen to support exports.

Oil continues to rally in the current market with U.S crude futures touching the September 2008 high. As the Middle East and North African unrest unfolds, sustained supply concerns are on the rise. Crude oil supply has been disrupted in Libya and further supply disruption came from Gambon, a central African country, between 220,000 and 240,000 bpd. We expect the oil prices to rise sharply if the disruptions continue and expect oil futures to trade above $110 in April. Silver futures are at a 31 year high rising by 12% in March and 22% for the quarter. We expect the commodities to remain high due to the high volatility and uncertainty in the global markets.

Ravi Ganesan (Technology Analyst)