Capital Markets: "Nervousness Ahead of the Weekend"

From Marc to Market:

Overview: Officials appear to have persuaded investors that they have put into place measures that will cushion the economic blow and ensure that the financial system continues to function. After seemingly goading officials into action, investors are choosing not to resist. Moreover, there is a recognition that many programs are scalable.

Risk assets dipped initially yesterday and came roaring back. Good follow-through buying was seen in the Asia Pacific region. Australia and Taiwan were exceptions to the general move. Australia's benchmark had begun off with around 2% gains before slumping and finished off more than 5%. European bourses are paring this week's gains.

The Dow Jones Stoxx 600 is down 2%, leaving it up around 6.8% on the week. The benchmark fell 2% last week. US shares are also more than 2% lower after the S&P 500 staged its biggest three-day advance in nearly a century. It was up 14% for the week coming into today after tumbling 15% last week. Core bond yields are softer in Europe by 2-3 bp, though the peripheral yields are a bit firmer after the ECB-induced decline that saw Greek bonds bought by officials and yields are off 90 bp this week. Italy, Spain, and Portugal's 10-year yields are off 20-30 bp this week.

 The 10-year US Treasury yield is flat for the week with today's seven basis point decline (to 78 bp). The dollar is paring this week's decline. It is firmer today against all the major currencies, but the Japanese yen. The Norwegian krone is the strongest currency this week, recouping 11%, even after today 1.2% pullback. None of the major currencies rose less than 1.75% against the dollar this week. JP Morgan's Emerging Market Currency Index is off about 0.5% today, but it snapping a five-week 11%+ slide with a 1.8% advance. Gold is trimming this week's gains a bit, but its 8% rise is its largest weekly advance since 2008. Light sweet oil for May delivery is flat on the week coming into today, having given up the week's gains with a 7.8% slide yesterday.

Asia Pacific
With the help of US swap lines, the three-month cross-currency basis dollar-yen swaps snapped a nine-week drop and halved the dollar premium to about 41 bp this week, which is near the 200-day moving average. The dollar had stalled through mid-week near JPY111.60 before pulling back yesterday and today, reaching a six-day low today near JPY108.25. The surge in the yen is seen as a function of fiscal year-end related flows.

India's central bank slashed the repo rate by 75 bp (to 4.40%) and cut the reverse repo rate by 90 bp (to 4.0%) ahead of next week's meeting. It cut rates five times last year, and this is the first cut this year. Required reserves were cut by 100 bp (to 3%). The move reflects an escalation of India's response to the crisis in which the country has been shut down. Yesterday, the government unveiled near measures of support worth an estimated INR1.7 trillion. The central bank estimates that its liquidity provision since last month's review is worth about 3.2% of GDP.....

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