Reassurances over the health of the U.S. banking industry have sparked something of a recovery in investors’ appetite for risk and Wall Street looked set to join Asia and Europe with strong gains at the open.

Executives from Citigroup , Bank of America and JPMorgan Chase said last week their banks had been profitable for the first two months of the year.

Federal Reserve Chairman Ben Bernanke also said on Sunday that he sees the U.S. economic decline moderating and recovery beginning in 2010, though he said risks remain that politicians will lack the will to do everything needed to fix the fractured financial system.

Global stocks as measured by MSCI rose more than 1.3 percent, bringing gains to more than 11.5 percent since hitting a low a week ago.

“The eternal battle between the bulls and the bears will intensify this week,” said Chris Hossain, senior sales manager at ODL Securities.

“Whilst it is hard to say if we have seen the worst, we certainly haven’t seen a week like last week in a long time.”

European shares also rose for a fifth straight session, led higher by financial stocks.

The pan-European FTSEurofirst 300 and 14 percent this year after plunging 45 percent in 2008.

Earlier, Japan’s Nikkei average gained 1.8 percent to post its highest close in a month, with banks such as Mitsubishi UFJ Financial Group  jumping amid the easing fears about the health of U.S. lenders.

The benchmark rose 134.87 points to 7,704.15, its highest finish since Feb. 16. The broader Topix  climbed 2.4 percent to 741.69.

BONDS FOR SALE

The equity charge undermined demand for government bonds with June Bond futures down 73 ticks, two-year Schatz yields rising 5 basis points to 1.381 percent, and 10-year Bond yielding 3.127 percent, up 8 basis points.

“At least risk aversion is decreasing and there was no disappointment on the back of the G20,” said Patrick Jacq, interest rate strategist at BNP Paribas in Paris.

“Clearly, as financial stocks still remain the driving force, this is helping stock markets to rebound further.”

Over the weekend, finance ministers and central bankers from Group of 20 countries pledged to use their full fiscal and monetary firepower to combat the economic crisis, but the decisions taken focused more on funds for the IMF and regulating hedge funds.

The dollar fell broadly, reversing earlier gains made in the Asian session, as stock markets rallied.

The currency market was also looking ahead to policy meetings by the Federal Reserve and the Bank of Japan later in the week.

The dollar fell 0.65 percent against a basket of currencies to 86.687, while the euro rose 0.8 percent from U.S. trade on Friday to $1.3022 .

The U.S. currency, however, gained 0.49 percent to 98.43 yen .

March 16 (Reuters)

Well, front and center this morning, the euro and other currencies are still reeling from that shot to their mid section by George Soros at the World Economic Forum, in Davos Switzerland. The dollar has flexed its muscles a bit more and taken the euro to just above 1.27… Not that euro holders want to hear this, but this IS what I was talking about all last month with the talk of an Obama bounce. The stock market hasn’t caught on yet though…

Friday’s print of 4th QTR GDP didn’t, on the outside, look as bad as forecast, printing at a negative -3.8% (forecast was -5.5%). But, like I said, and you what you would fully expect me to find, on the inside, this is not a good number folks… Here’s the skinny…

OK, first of all, the print of -3.8% was the worst print / performance in almost 27 years! And it could have been worse… Let me explain… You see, business inventories, the goods that retailers could not sell to consumers and manufacturers, goosed up the GDP number. Inventories moved from a $30 Billion reduction in the 3rd QTR to a buildup of nearly $6 Billion in the 4th QTR. In the strange computation that’s used for GDP, the growth numbers get credit for inventory buildup… However, that’s going to be a HUGE drain on the 1st QTR growth numbers for 2009. When inventories are subtracted from the equation, the negative growth falls to -5.1%, almost at the forecast number.

You have to wonder now, just how long this recession is going to last, as I’m already marking down a negative -5% GDP for the 1st QTR of 2009… If it lasts past May, and I would almost bet the farm that it will, this recession will turn out to be the longest and perhaps the deepest period of economic decline in the U.S. since the Great Depression…

I recall last year at the Orlando Money Show, telling the crowd that we were already in a recession, and hearing some of the snickers… I had a brief conversation with an old colleague, that’s a big shot now in other markets, that we had gone into a recession, and he laughed at me… Well…

So… If the trading theme remains in place during this quarter, the dollar is sure to be on an upswing, as you may recall… The Trading Theme rewards the dollar any time the economic data shows a deeper, darker, more dangerous economy / recession… And… Unfortunately, that’s what we now have!

We also have a recession going on in the European Union… But, folks, let me tell you something… This falls under Chuck’s reasons for a Positive Balance of Payments…

When all this started going down, I mentioned that stimulus packages, or bailouts come a little easier when a country is dealing from a position of strength, and by that, I mean if a country has a surplus. And isn’t adding to deficits that already exist.

One day, this will matter… I may not today, tomorrow, next week, or next month… But eventually, you have to pay the piper… And the only way the U.S. can pay the piper right now is by printing more dollars to pay for the debts… And so, therefore, they would love to pay for them with “cheaper dollars”…

Here’s another reason to strive for a surplus… On Friday, it was announced that Japan had made a loan of $100 Billion to the IMF. Better to have that $100 Billion in the checking account, eh? OH! And the IMF said it wasn’t in danger of running out of money… They said the needed the loan because they Expect to be dealing with BIGGER problems in the future…

Now that gives you a nice warm and fuzzy, eh? NOT! I would rather the IMF say they needed the cash, because they’ve already helped everyone that needed help, rather than to say they EXPECT BIGGER PROBLEMS!

Down under in Australia, where it’s getting to late summer, it looks like the global slowdown is beginning to take its toll here. Kevin Rudd, the prime minister, said the slowing down of global growth was forcing the government into a budget deficit for the first time since 2001-02… The Reserve Bank of Australia (RBA) meets tonight, and will announce afterwards that they cut interest rates again… Probably by 1% or 100 BPS…

There are quite a few Central Banks meeting this week to discuss rates… Here’s a preview…
Sweden’s Riksbank meets on Wednesday and I’m looking for a 50 BPS cut. Thursday sees both the Bank of England (BOE) and European Central Bank (ECB) announce their decisions. ECB President, Trichet, was quite hawkish last week, and has me believing that that ECB will skip a rate cut this month. However, I fully expect the BOE to cut rates by 100 BPS. The “experts” are calling for 50 BPS cut… But as I’ve said all along, the BOE is following the Fed down the road to ZIRP (zero interest rates), so why wait? Go ahead and cut 100 BPS now to .50%, and get it over with!

I understand that London was smacked by the worst snow storm in years this morning, and that the transport system is in disarray, causing many markets people to stay home, thus causing some real thin volume in the morning session…

But… Even as much as I would like to… I can’t blame the snow and lack of volume for the dollar’s strength this morning… No… As I said at the top of the page, I blame it on the pasting that George Soros laid on the euro last week… And now the euro and other currencies have to pull themselves up by the bootstraps if they want to get back into “the game”…

Well… On Friday, (our little Christine’s birthday, I might add) I mentioned to the boys and girls on the trading desk that Gold was outperforming just about everything! On Friday, Gold ran up to $927… That level looked too good to some holders this morning though, as profit taking has brought Gold back to $914…

You know… My friend, Bill Bonner of The Daily Reckoning fame (www.dailyreckoning.com) has been telling people for 9 years now, that his “trade of the decade” is to sell the DOW and buy Gold… Sure has been one heck of a trade, eh?

With all the countries in the world racing to zero, it makes even more sense to hold Gold, as the Gold is a non-interest bearing investment, but neither is just about anything else these days! And while the news from China scared Treasury holders a bit a couple of weeks ago, the fear is waning, and yields are on their way back down again. OH BOY! You can get about 2.5% for a 10-year Treasury! Like I said, Gold compares with other holdings now that there’s a race to zero… And… There certainly isn’t the same amount of Gold in the markets as there is Treasuries! HA!

Well… Last week, we had a data cupboard that was chock-full-o-data, and none of it was good! We follow up that week of bad data with one that starts off strong and then has an even stronger finish! That’s right, we finish this week up with the January Jobs Jamboree, which I’m afraid will show another 1/2 million unemployed were added during the month. In between now and Friday, we’ll see Personal Income and Spending for Dec. ISM Manufacturing, which has fallen into the abyss in recent months, and with the dollar stronger, has no chance of improving. Pending Home Sales tomorrow, and Vehicle Sales on Wednesday.

With all the dollar strength, you have to make the assumption that the Risk Takers are no where to be found… And with no risk takers, guess what currency is also booking gains? That’s right, Japanese yen… And the beat goes on…

Currencies today 2/2/09 (Groundhog Day): A$.6285, kiwi .50, C$ .8075, euro 1.2770, sterling 1.4110, Swiss .86, rand 10.225, krone 6.9920, SEK 8.3410, forint 233.15, zloty 3.4790, koruna 22.10, yen 89, sing 1.5140, HKD 7.7550, INR 48.93, China 6.8478, pesos 14.49, BRL 2.3575, dollar index 86.27, Oil $40.46, Silver $12.43, and Gold… $912

Source: Groundhog Day 2009

The dollar fell against other major currencies apart from the yen while demand for government bonds dropped.

European shares jumped, led by banks and oils, tracking gains in the United States and Asia.

The FTSEurofirst 300 index of top European shares traded 5.8 percent higher. Earlier, Japan’s Nikkei  climbed 5.2 percent to its highest close in a week.

U.S. president-elect Barack Obama said on Saturday that his plan to create at least 2.5 million new jobs included the largest infrastructure investment since the 1950s and a huge effort to reduce U.S. government energy use.

Lawmakers in the U.S. Congress are also working on draft legislation to help out the embattled auto industry.

“The central banks have done their job and now the focus is on governments — in addition to Obama’s plan we have stimulus packages from India, Australia and China,” said Thierry Lacraz, strategist at Pictet in Geneva. “While this will not avoid a recession, investors at least have the feeling that the people in charge are doing the right thing.”

Global stocks as measured by MSCI were up more than three percent. For the year to date, however, they remain down more than 46 percent.

HIGHER YIELDS

The dollar fell broadly, hitting its lowest against the euro and a basket of major currencies in more than a week as the steep rally in European shares indicated renewed risk appetite and boosted higher-yielding currencies.

The euro rose 1.1 percent to $1.2877 while the dollar index fell 1.1 percent.

However, the yen tumbled, hitting its lowest level against higher-yielding currencies including the Australian dollar, the euro and sterling in roughly a week due to the slight pullback in risk aversion which boosted European shares.

The dollar rose roughly 1 percent to 93.91 yen.

“Higher stocks are driving everything at the moment and currencies are trading in line with this, with higher yielders gaining and lower yielders on the defensive,” said Adam Cole, global head of FX Strategy at RBC Capital Markets in London.

Euro zone government bond yields rose sharply.

The interest rate-sensitive two-year Schatz yield was up 14.6 basis points at 2.226 percent. The Schatz is also sensitive to gains by equities as the short-end of the yield curve is more liquid and a gateway for equity investors to return to the stock market.

The 10-year Bund yield was up 13.2 basis points at 3.160 percent, as the yield curve flattened.

Jeremy Gaunt, Sitaraman Shankar, David Stamp
LONDON, Dec 8 (Reuters)