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University of Michigan Confidence to move above average recessionary reading?

We expect the S&P500 cash to open lower compared to the close of yesterdays US session. Concern over European debt situation is increasing and credit spreads between Irish, Italian, Portuguese, Greek and Spanish governments bonds vs. German government bonds is widening, clearly indicating bond markets are not happy at all about what is going on in the PIIGS countries in general, and Ireland in particular.

Further, the G20 has announced that it was impossible to reach an agreement on how to deal with the imbalances of trade and this could, given the vague statement in the communiqué on this topic, provide fuel for another round in the currency war. However, as we have stated several times, most recently in our piece on G20, the important negotiations are never going on at summits, but between summits. A policy framework has been put in place to deal with the disagreement between China and US, meaning that the US and China will sit and negotiate on how to deal with their disagreement over trade imbalances and currency levels. In not so many words: The currency war has been institutionalized and within that institutional framework a trade war is unlikely.

The most important single event into the US trading session today is the release of University of Michigan Confidence number. Market consensus is an expectation of 69 vs. a prior reading of 67.7. A stronger number in this measure should be sufficient to offset some of the negative sentiment coming from the European mainland, but unlikely to revert the trend. The average of University of Michigan Confidence during the recession was at 68.9 and a reading at this or below will add to the already negative sentiment and probably lead S&P 500 below the psychological important boundary of 1200. It would clearly indicate that, at the current stage in the economy, we are not faced with an average expansion - this would require a reading of 89.2 - but rather that we are only marginally moving out of recessionary territory.

Christian Blaabjerg, Chief Equity Strategist



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