KNIGHT MACRO BULL / BEAR TEAR SHEET

Because The Stock Market Shouldnt Be About Physics

Ioan Smith, Managing Director. T. 44.20.7997.2061 | F. 44.20.7997.2220 | ismith@knight.com |

MACRO COMMENT:
- Record highs baby! <<HIGH FIVE>> has the old wealth effect kicked in yet?! I suppose it hasn't for the 50 million Americans on food stamps. But HEY! ...the US economy is almost in escape velocity (according to the Fed) and Japan is bringing the drinks to the party! But don't forget your hangover cures. - We are getting daily headlines about new highs for U.S. stocks because data just isnt important and the market no longer reflects in any way true global economic health. QE has done little to address the issue of falling global demand, but it has certainly defibrillated stocks. Remain mindful that trade and consumption is weak. - The market seems to be in good shape and doing well, but when I look below the surface, I think short squeezes are playing a far more important role than indiscriminate "close your eyes-style" buying of the market. {SPA Index CSUSSQWZ Index GR <go>} There have also been reports that stock loan desks are seeing large covering. Is this translating into risk appetite? Well it may in some instances but why has the long bond outperformed the SPY on a normalised basis over the last couple of months? {SPY US Equity TLT US Equity GR <GO>} - The same can be said of the S&P economic sectors. If this really is risk on why are defensives (utilities) continuing to outperform tech? In such an environment shouldn't beta be the play of choice over yield? The market internals feel like it is being dictated to, in the main, by weak hands. We are possibly in a squeeze phase that has many of the hallmarks of capitulation. Now is not the time to be getting into risk on mode: (CSUSSQWZ Index - Short-interest weighted S&P 500 basket) - After last week's non-farms it looked like economic data would matter again, but now the market is on earnings watch and more reliant than ever on QE so it could be more susceptible to shocks. This earnings season isnt as cut and dry as previous quarters. Expectations are being reined in somewhat, which may explain to some extent the continued demand for volatility. Given the increasingly uncertain macro environment, then there is a genuine concern that earnings beats may not be as frequent. - To those outside of the US, April 15 is the deadline for retirement account contribution deductibility. As long as you put the money in your retirement account before the tax filing deadline you can claim this credit on the previous years tax form. In other words, you can file your taxes in February, claim the credit, and get a refund and then turn around and deposit that refund into an IRA in order to take the credit. - The theory in this instance is that markets go higher based on individual investors contributing to their taxdeferred retirement accounts and that cash inflow moving into equities and funds.

- The individual investor is conspicuously absent from the stock market (see ICI data) except through 401Ks. That is witnessed in the decreasing average daily volume, now about half of what it was last year: {NYSEVOL index <go>} - You've seen about 750M shares/day on the NYSE. That's 150M in the first half hour, 150M at the close leaving 450M for the rest of the session (based on averages). Broken down that is 20% from 0930-1000, 20% between 1600-1602 and 40% between 10001600. Even when there has been high volume selling, it dries up the very next day as low volume buying returns. - All these things may or may not ultimately affect the market but I believe it is always worth knowing what is out there.

CHART OF THE DAY: SPX vs. Short-interest weighted S&P 500 basket

Source: Bloomberg

KNIGHT MACRO BULL / BEAR TEAR SHEET

Because The Stock Market Shouldnt Be About Physics
Ioan Smith, Managing Director. T. 44.20.7997.2061 | F. 44.20.7997.2220 | ismith@knight.com |

GERMANY MAR FINAL CONSUMER PRICE INDEX M/M: 0.5% V 0.5%E; Y/Y: 1.4% V 1.4%E CHINA MAR NEW YUAN LOANS (CNY): 1.06T V 900.0BE CHINA MAR MONEY SUPPLY M2 Y/Y: 15.7% V 14.6%E; MONEY SUPPLY M1: Y/Y: 11.9% V 9.4%EM0: Y/Y: 12.4% V 12.7%E CHINA MAR AGGREGATE FINANCING (CNY): 2.54T V 1.8TE; YTD: 6.16T JAPAN FEB MACHINE ORDERS M/M: 7.5% V 6.9%E; Y/Y: -11.3% V -7.6%E

JAPAN: BANK OF JAPAN TO CONDUCT BOND BUYING OPERATION TOMORROW JAPANESE INVESTORS SOLD NET 1.14T IN FOREIGN BONDS LAST WEEK VS SOLD NET 117.4B PRIOR WEEK; FOREIGN INVESTORS BOUGHT NET 868.6B IN JAPAN STOCKS LAST WEEK VS BOUGHT NET 228.1B IN PRIOR WEEK

EUROPE OIL DEMAND TO BE WEAKEST SINCE 1980S - IEA SAYS CYPRUS: CYPRUS CENTRAL BANK SAID TO HAVE DENIED SPECULATION OF PLANS TO SELL GOLD RESERVES VALUED AT $400M UK: BOE MILES SAYS UK IS IN A DIFFICULT SITUATION, INFLATION IS UNCOMFORTABLY HIGH AND GROWTH OUTLOOK IS WEAK; HARD TO DETERMINE WHETHER QE IS HAVING THE SAME IMPACT AS IN 2009 DJ ECB DATA SHOW WED DEPOSIT FACILITY USE BELOW EUR100B FOR 1ST TIME SINCE NOV 2011 CHINA: CITY OF GUANGZHOU MAY INCREASE DOWN PAYMENT REQUIREMENT FOR SECOND HOMES JAPAN MAR DOMESTIC CGPI M/M: 0.1% V 0.2%E (FOURTH STRAIGHT INCREASE); Y/Y: -0.5% V 0.4%E (12TH STRAIGHT DECLINE) AUSTRALIA MAR EMPLOYMENT CHANGE: -36.1K V -7.5KE; UNEMPLOYMENT RATE: 5.6% V 5.4%E; PARTICIPATION RATE: 65.1% V 65.2%E AUSTRALIA APR CONSUMER INFLATION EXPECTATION: 2.2% V 2.3% PRIOR NEW ZEALAND MAR BUSINESS NZ PMI: 53.4 V 56.0 PRIOR NORTH KOREA: CHINESE PROFESSOR OF NORTH KOREA SEES 70-80% CHANCE OF CONFLICT NORTH KOREA: JAPAN DEFENCE MINISTRY: NORTH KOREA SAID TO BE POSITIONING LAUNCHPAD IN POSSIBLE PREPARATION PLANS BRAZIL: BRAZIL SUPREME COURT DECLARES TAXATION OF FOREIGN PROFITS FROM BRAZILIAN COMPANY'S SUBSIDIARIES BASED IN TAX HAVENS AS CONSTITUTIONAL

KNIGHT MACRO BULL / BEAR TEAR SHEET

Because The Stock Market Shouldnt Be About Physics
Ioan Smith, Managing Director. T. 44.20.7997.2061 | F. 44.20.7997.2220 | ismith@knight.com |

GERMANY MAR FINAL CONSUMER PRICE INDEX M/M: 0.5% V 0.5%E; Y/Y: 1.4% V 1.4%E
- German March harmonised inflation was confirmed at 1.8% y/y, national CPI at 1.4% y/y, boringly in line with expectations and the preliminary readings. Prices were up 0.5% m/m and 0.4% m/m respectively. - There was a sharp decline in petrol prices, which dropped 3.4% m/m, while prices for heating oil declined 3.1% m/m (why doesn't that happen in the UK?!). Negative base effects from energy prices are keeping the headline rate low, but this should also help the ECB to see through the period of undershooting inflation as long as growth data stabilises. - By contrast electricity prices have climbed higher in recent months and are up 12.4% y/y in March. Food price inflation also remains relatively high at 3.2% y/y, although the early timing of Easter is a potential reason.

EUROPE OIL DEMAND TO BE WEAKEST SINCE 1980S - IEA SAYS

- DJ IEA Cuts Estimates for 1Q 2013 Oil Demand by 115,000 B/D to 89.9M B/D - DJ IEA: Recent Easing of Oil Prices Could be Short-Lived - IEA FORECASTS 795,000 B/D GAIN IN GLOBAL OIL DEMAND IN 2013 - Because the economic recovery worldwide is only expected to be moderate, the lower growth will keep gains in oil demand lower than projected a month earlier. - The IEA has revised down its estimates for European oil demand for a second consecutive month and warned that Cyprus is weighing on demand. - They said that oil demand remains "subdued" although it may be too early to call a bear market [in crude] given "elevated" from crude supply risks. - The lack of demand of course highly indicative of the current state of the economy. Crude though remains elevated and higher fuel costs (which are still hovering around record levels - see ECOBAT25 Index) further endangers the return to growth, heaping burdens on already struggling consumers.

JAPAN FEB MACHINE ORDERS M/M: 7.5% V 6.9%E; Y/Y: -11.3% V -7.6%E
- Meanwhile, Japan core machinery orders (excludes electricity and shipbuilding) rose 7.5% in February from the previous month, an expected rebound after the 13.2% m/m decline in January. - The print will be of concern to those who had thought that corporate capital spending had bottomed out and the country is heading towards a recovery from JanuaryMarch. - Growth is seen gradually accelerating to just over 2% by the end of 2013, supported by stimulus spending and accommodative rates. However, it is difficult to see a self-sustaining recovery emerging this year, despite the efforts of government and monetary authorities.

CYPRUS: CYPRUS CENTRAL BANK SAID TO HAVE DENIED SPECULATION OF PLANS TO SELL GOLD RESERVES VALUED AT $400M DJ ECB DATA SHOW WED DEPOSIT FACILITY USE BELOW EUR100B FOR 1ST TIME SINCE NOV 2011
- This is related to the maintenance period^ as opposed to a dramatic improvement in conditions. - The ECB of course cut the rate on excess reserves in the current account to zero back in July last year hence there is no incentive to switch to the deposit facility. - ^Eurozone banks all have reserve requirements which they have to fulfil with their local central banks for every 21 to 42-day maintenance period. The reserve requirement is an average across the maintenance period, but banks often have a tendency to front-load their requirements to avoid coming up short at the end of that time. http://www.ecb.int/press/pr/date/2011/html/pr110520. en.html

CHINA MAR NEW YUAN LOANS (CNY): 1.06T V 900.0BE

- YTD New Yuan Loans CNY2.76T

CHINA MAR MONEY SUPPLY M2 Y/Y: 15.7% V 14.6%E; MONEY SUPPLY M1: Y/Y: 11.9% V 9.4%EM0: Y/Y: 12.4% V 12.7%E
- M0: Y/Y: 12.4% v 12.7%e

KNIGHT MACRO BULL / BEAR TEAR SHEET

Because The Stock Market Shouldnt Be About Physics
Ioan Smith, Managing Director. T. 44.20.7997.2061 | F. 44.20.7997.2220 | ismith@knight.com |

CHINA MAR AGGREGATE FINANCING (CNY): 2.54T V 1.8TE; YTD: 6.16T

- China's March new loans came in above expectations. As a result rate swaps have been rising and China offshore 5Y interest-rate swap rise to 3.52%. - This perhaps reflects concerns about the PBOC tightening. We have consistently suggested that the main focus of inflationary pressure has been property, not CPI, as hot money flows is the major concern with money going into speculative investment and not a consumption boom. China's 7D repo rate fell 6bps to 3.15% (lowest level since March 27th) confirming that PBOC operations have eased near-term liquidity concerns. - The PBOC has flagged growing inflation and financial risks since December and the government stepped up efforts to curb property speculation on March 1, ordering higher down payments and interest rates for some mortgages and implementation of a 20% capital gains tax. The pace of economic recovery may slow after Q1 because of these forces. Thus policymakers face a dilemma as growth is weakening yet inflationary pressures continue to build. The PBOC will eventually have to tighten policy to contain inflation but in the short term the government may put policy on hold to observe how growth and inflation move and fine-tune accordingly. - Recent M2 and bank loan data reflect some impact from the recent restraint by the central bank. Yuan loans continue to represent healthy money & credit growth, though the pace of growth has moderated from its peak in 2009, when Beijing was using monetary stimulus to counter the drag from the global downturn. But with evidence suggesting that money is going into speculative investment and not a consumption boom will be of concern to the PBOC.

UK: BOE MILES SAYS UK IS IN A DIFFICULT SITUATION, INFLATION IS UNCOMFORTABLY HIGH AND GROWTH OUTLOOK IS WEAK;
- Hard to determine whether QE is having the same impact as in 2009 - Reiterates more stimulus is the right policy; 25B in additional QE would have an impact - Do see inflation on a downward trajectory, headed in the right direction.

AUSTRALIA MAR EMPLOYMENT CHANGE: 36.1K V -7.5KE; UNEMPLOYMENT RATE: 5.6% V 5.4%E; PARTICIPATION RATE: 65.1% V 65.2%E
- Full Time Employment Change: -7.4K v +19.3K prior - Part Time Employment Change: -28.7K v +54.7K prior - You may recall the massive 74.0K surge in last month's number which the RBA said was subject to some "statistical error". The Australia Bureau of Stats suggested the February employment data was overstated due to adjustment in household survey metrics. The overstatement was due to regular rotation of about an eighth in households surveyed. This happens every 1-2 years, and subsequent month reports show very different numbers (as we've seen today). - Furthermore, the new jobs data are derived from population estimate and Australia's population rose by more than usual at the start of this year as a greater than usual number of foreign students arrived. A more accurate Feb employment new jobs additions were estimated to be somewhere around 11.6K. - For March Australia employment fell 36.1k, giving back half the jobs created from the February surge. Part time jobs declined 28.7k after a 54.7k rise in February. Full time employment also fell, though a smaller 7.4k decline in March, reversing some of the 19.3k rise in February. The unemployment rate was rose to 5.6% in March after spending three consecutive months at 5.4%. The participation rate dipped to 65.1% in March, down from the 65.3% rate in February. - Overall, a 17k average rise for Q1 is a modest improvement over the 6k Q4 gain and 10k Q3 improvement. The validity of the data will continue to be questioned until there is some sort of normalisation.

KNIGHT MACRO BULL / BEAR TEAR SHEET

Because The Stock Market Shouldnt Be About Physics
Ioan Smith, Managing Director. T. 44.20.7997.2061 | F. 44.20.7997.2220 | ismith@knight.com |

JAPAN: BANK OF JAPAN TO CONDUCT BOND BUYING OPERATION TOMORROW

- Offers to buy JGB's with maturity of 5-10 years, more than 10 years, less than 1 year and 1-5 years. - On April 4th, the BoJ said that it would buy 6.2T of bonds over the rest of April and that May bond purchases would total about 7.44T. - Earlier in the week, to begin its new easing program the BoJ offered to buy 1T of JGBs with maturities of 510 years and 200B of JGBs with maturities over 10 years.

AUSTRALIA APR CONSUMER EXPECTATION: 2.2% V 2.3% PRIOR

INFLATION

CHINA: CITY OF GUANGZHOU MAY INCREASE DOWN PAYMENT REQUIREMENT FOR SECOND HOMES JAPAN MAR DOMESTIC CGPI M/M: 0.1% V 0.2%E; Y/Y: -0.5% V -0.4%E
- The domestic corporate goods price index (CGPI) contracted at a 0.5% annual rate in March after a 0.1% decline in February. If an increase in the CGPI is followed by a rise in the CPI then ABE will have managed to conjure up inflation. - At the last reading Japan's core CPI is running at annual rate of -0.3% underscoring the challenge facing the BOJ in trying to achieve it's 2% inflation target in 2 years.

JAPANESE INVESTORS SOLD NET 1.14T IN FOREIGN BONDS LAST WEEK VS SOLD NET 117.4B PRIOR WEEK;
- Foreign investors bought net 868.6b in japan stocks last week vs. bought net 228.1b in prior week - Japanese investors sold a net 1.14T worth of foreign bonds last week, the biggest selling in a year. Thus Japanese investors appear to have booked profits at the start of Japan's financial year. - According to MoF data, they repatriated a total of 1.063T in the week through April 6 after deducting net buying in foreign equities and money market instruments. - The market still expects Mr & Mrs Watanabe to reinvest their money abroad to seek higher yield, rather than ploughing it into Japanese government bonds after the BOJ's announcement last week. But it's not happened yet. - It is worth caveating it is weekly data and Japanese investors move notoriously slow but still suggests that recent moves across a multitude of markets and asset classes may have been those canny traders out there front-running the expected avalanche of bityen... sorry meant yen.

NEW ZEALAND MAR BUSINESS NZ PMI: 53.4 V 56.0 PRIOR NORTH KOREA: JAPAN DEFENCE MINISTRY: NORTH KOREA SAID TO BE POSITIONING LAUNCHPAD IN POSSIBLE PREPARATION PLANS NORTH KOREA: CHINESE PROFESSOR OF NORTH KOREA SEES 70-80% CHANCE OF CONFLICT
- Speculates leaders of North Korea may want to create a crisis that would force reunification.

BRAZIL: BRAZIL SUPREME COURT DECLARES TAXATION OF FOREIGN PROFITS FROM BRAZILIAN COMPANY'S SUBSIDIARIES BASED IN TAX HAVENS AS CONSTITUTIONAL

KNIGHT MACRO BULL / BEAR TEAR SHEET

Because The Stock Market Shouldnt Be About Physics
Ioan Smith, Managing Director. T. 44.20.7997.2061 | F. 44.20.7997.2220 | ismith@knight.com |
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