• In the US, the key non-farm payroll survey published on Friday confirmed an improvement in the US labour market. Net job creation in March came in above expectations at 216k (consensus: 190k) and February’s figures were revised upwards. The more indicative private sector job creation numbers were up sharply for the second month running at 230k and the unemployment rate dropped by 0.1 point to a 2-year low of 8.8%. Also, noteworthy is that the bulk of the jobs came from services (199k) while manufacturing slowed slightly. These strong figures corroborate the robust readings in the ISM manufacturing and non-manufacturing indexes of late. We feel the mix of strong economic momentum with still accommodative policies supports our tactical overweight stance in US equities. 
• In China, manufacturing growth accelerated for the first time in 4 months easing concerns that China’s tightening policy may lead to a hard landing. The Purchasing Managers’ Index (PMI) rose to 53.4 in March, 0.6 point lower than consensus but higher than February’s 52.2. This is evident that government policies are at least gaining some traction. But with consumer inflation still topping the government’s 4% target in the first 2 months, we see no change in PBOC’s tightening stance as inflationary pressures remain high with prices of commodities still moving up, especially energy. There is a higher than even chance that interest rates will be raised again this quarter. 
• Speaking of commodities, the S&P GSCI index of 24 raw materials continued to climb for the week rising to 725 on Friday which is just a touch below the 2-year intraday high of 731 reached on 7-Mar-11. Food prices are now 15% above the 2008 high. We feel the market is underestimating the risks stemming from climbing commodity and food prices. As food and energy accounts for a much larger share of the consumer baskets in emerging markets (EM) than in the developed markets (DM), headline inflation rates have been rising strongly across the EM over the past few months. This, in turn, has led to EM equities underperforming DM on concerns of policy risks and higher rates.  
• But with ever higher prices, we are now seeing the same headline effect in the DM. Inflation in euro zone unexpectedly rose in March to 2.6%, the fastest in more than 2 years. It looks quite likely that the ECB, whose president had been prepping the markets for it, will raise interest rates by 0.25 point from a record low of 1% on 7-April. According to market watchers, this will be the first time since the 1970s that Europe would lead in a tightening cycle. The EUR had been on a tear since a month ago when the central bank dropped hints of their impending move. How can this be good for Europe we just cannot fathom. The stronger currency and higher rates will further retard the efforts by peripheral countries to rein in their fiscal problems. 
• The failure of the euro zone summit on March 24-25 to resolve a funding issue for a permanent rescue mechanism to be introduced in 2013 strangely had little impact on the EUR. It barely dented the currency recent inexorable ascent. The Brussels gathering did little to help Greece, Ireland and Portugal, the zone’s most troubled economies. Their situation is getting worse—and Europe’s leaders bear much of the blame. No wonder Portugal’s 2-year bond yields briefly surged beyond 10% during the week on its continuing debt woes and credit rating downgrades before trading back to the 8% level. In fact both Portugal and Greece had to suffer ratings downgrade during the week. We believe a restructuring is inevitable for Greece and Ireland and maybe even Portugal and the earlier the better. These economies are on an unsustainable course, but not for lack of effort by their governments. Greece and Ireland have made aggressive budget cuts. Greece is trying hard to free up its rigid economy. Portugal has lagged in scrapping stifling rules, but its fiscal tightening is commendable. In all three places the outlook is darkening in large part because of strict policy prescriptions at the core’s insistence to slash budgets regardless of consequences to growth. And you’d have thought they had learned a thing or two from the Asian Crisis in the late 90s. 
• Finally, while Japan’s nuclear crisis continues to hog the headlines, markets have seemed to regard the situation as contained and localised judging by the speed of the global equity market rebound. We are a bit less sanguine not least because the nuclear situation hasn’t improved but also the impact on global supply chain especially in the auto and IT sectors may be underestimated and underappreciated at this early stage.

EQUITY

• The current uptrend is intact supported by fundamentals and valuations. We believe equities should continue to grind higher over a 12-18 month horizon. But trading would be volatile as markets try to scale the ongoing concerns highlighted above including the MENA revolt and uprising which continued to push oil prices higher.

FIXED INCOME 

• Policy normalisation in the DM may come earlier than expected. We remain underweight global bonds and underweight duration. Where we are more neutral is in EM hard and local currency debt.

FOREIGN EXCHANGE 

• The recent EU summit failed to dent the enthusiasm for the EUR as the market is pricing in at least 75 bps rate hike for EUR by end 2011 following hawkish ECB tone on inflation. The Fed meanwhile is still keeping its USD600 billion quantitative easing intact. Such diverging policy paths should provide support for EUR, which is testing resistance at 1.4282, despite continuing woes in the periphery. Perhaps the EUR may take a breather and retest 1.40 after the any rate decision by the ECB on 7-April. Meanwhile, the JPY should remain ranged at 83-86 as the forces of repatriation and intervention play out over the next months.