Rates of contraction for global manufacturing moderated almost universally in April, with the JP Morgan global PMI continuing to improve to 41.8 from a bottom of 34 in December 2008. While YoY contract is still large, this is now the fourth month where this moderation is evident. Thus, while the contraction is far from over, it is reasonable to say the it has stabilised, and the big issue is at what rate it will hold in the months to come. Japan's PMI bottomed a month after the global average, and saw a significant improvement from 33.8 in March to 41.8. Other good news was that Japan's Industrial Production rose 1.6% in March even though production levels remain down over 35% YoY. Survey reports in Germany and the U.S. also rebounded from rock-bottom levels.
Following the eruption of a global financial crisis after the bankruptcy of Lehman Brothers, the Fed announced on December 12, 2007 that it had authorized dollar liquidity swap lines with the European Central Bank and the Swiss National Bank to provide liquidity in U.S. dollars to overseas markets and keep the global banking system afloat. Subsequently, the FOMC authorized dollar liquidity swap lines with additional central banks, including the Reserve Bank of Australia, the Banco Central do Brasil, the Bank of Canada, Danmarks Nationalbank, the Bank of England, the European Central Bank, the Bank of Japan, the Bank of Korea, the Banco de Mexico, the Reserve Bank of New Zealand, the Norges Bank, the Monetary Authority of Singapore, the Sveriges Riksbank, and the Swiss National Bank.
Consequently, the following chart from the Alea blog shows the amount of liquidity swaps soaring by over five-fold by December 2008. Since the onset of 2009, however, the balance of these liquidity swaps is plunging, indicating that liquidity is being restored in the global banking system. This is of course reflected in other indicators such as interest rate spreads.
Thus it appears that global stocks are recovering from a drastically oversold position in March and are discounting the rate of recovery in various economic indicators.
Approaching Rendezvous With S&P 500 And its 200-day MA Will Be The Acid Test
While Japan was on holiday (Golden Week), the S&P 500 was rallying, to 919.53 at latest close. The rally has run longer than the bears and even cautious optimists first would have assumed, but this is because the March low represented an extremely oversold position vis-a-vis the market's 40-week moving average. The real test is whether the S&P 500 (and global stocks) can break up through their 200-day MAs and hold. The S&P 500 200-day MA is still higher than the latest close, at 958.20, and the market has yet to reclaim the December high of 943.85. Volume however remains strong, suggesting continued fund inflows.
By major sector (S&P sector SPDRs), the financials have led the recovery, surging 114.4% from the March low, followed by the industrials (+54.3%), consumer discretionary (+53.4%) and materials (+53.4%)--all economically sensitive sectors. While the financials SPDR is still trading below its 200-day MA, major banks like Wells Fargo (WFC) are solidly above their 200-day MAs in surging 244% from lows. In addition, global economically sensitive indices like JJC (copper ETF, up 74% from a December low) and FXI (FTSE/Xinhua China majors ETF, up 56.1% from its low) have now recovered their respective 200-day MAs and look to hold.
Thus while the S&P 500 is unlikely to break up through and hold its 200-day MA on the first try (partially because its 200-day MA is still declining), the probability of another serious test of March lows is decreasing daily.