FOREX, COMMODITIES, STOCKS OUTLOOK May 12th: Cliff’s 2 Minute Drill 11:30 GMT

Stocks: Prior day: Asia, Europe, down US Mixed. Today: Asia, Europe upon a reaction bounce as Asian and European markets see modest bargain hunting despite significant lingering questions about the feasibility and enforcement of the latest EU/IMF bailout package, further China tightening, damage from the BP oil spill, and another major US bank investigation-this time of Morgan Stanley (MS)

- US Bonds: Up Tuesday, yields down from 3.54% Monday to 3.5350% Tuesday. NB: risk asset markets are up as of this writing, suggesting US bonds prices should be lower today and yields higher.

- FX: slight bias against safety currencies [JPY, USD, CHF in order
of safety appeal] vs. risk currencies [AUD, NZD, CAD, EUR, GB in order of risk
appetite appeal], as market uncertainty and currency specific issues dominate rather than position of a given currency on the risk spectrum.

- Main events: MON: USD Fed Announcement, AUD ANZ Job Ads, CNY Trade Balance, GBP: MPC Rate Statement, EUR Trichet Speaks and other follow up on latest EU/IMF plan TUES: CNY CPI, GBP Mfg Production, WED: AUD Home Loans, EUR German Prelim GDP, GBP Claimant Count Change, EUR Flash GDP, Industrial Prod, GVP Gov. King Speaks, Inflation Report, CAD Trade Bal. THUR: AUD Employment Change, GBP Trade Bal: USD Unemployment Change NZD Retail FRI: USD Retail, Core Retail, UoM Consumer Sentiment

Big Theme: Risk Appetite ON again?: Modest risk asset gains show market resilience despite ongoing concerns about the feasibility and enforcement of the latest EU/IMF rescue plan, China tightening, BP oil spill still flowing, and now an investigation into possible fraud by US investment bank Morgan Stanley. Oh yes, UK gets a warning from Fitch to reduce its deficit or risk losing its AAA rating.

STOCKS:

US: Mixed- Early gains faded as a listless session ended mixed, reflecting market uncertainty about the effectiveness and ramifications of the latest EU/IMF rescue plan for Greece and other PIIGS in danger of default.

The relatively low losses stocks worldwide yesterday, even after Monday’s gains, showed that the plan had succeeded in removing the panic of late last week because it had pushed off impending threats of sovereign defaults and banking system collapse.

Following down sessions in Asia and Europe, US trade opened roughly 1% lower as global reflected concerns grew over the feasibility of the latest EU/IMF rescue plan for Greece and other nations on tenuous financial footing. There are also concerns related to how efficiently funds pledged for euro zone countries by the European Union and International Monetary Fund can be dispensed. The regional German electoral defeat for the pro-bailout ruling party raised further concerns about political hurdles to implementing the aid program.

US Bonds: Predictably, the safe-haven benchmark 10-year Note finished a couple of ticks higher after it oscillated along the neutral line for the better part of the session with yield down from 3.54% Monday to 3.5350%. It showed little response to the day’s $38 billion auction of 3-Year Notes that produced a yield of 1.41% and a bid-to-cover of strong 3.3, which was well above recent averages. Indirect bidders accounted for 50.7%, which was below recent averages.

Asia Stock Outlook: Up at the close early Wednesday GMT as stocks struggled to eke out gains as markets weighed a stabilizing trend in European and US stock markets yesterday versus concerns about:

· The euro zone’s debt woes

· Signs of growing inflationary pressure in China, which is likely to bring further policy tightening by Beijing that would restrict China’s growth.

· A Wall Street Journal report that U.S. federal prosecutors are investigating Morgan Stanley (MS)

European Stock Outlook: Up –At the open early Wednesday GMT, European shares extended gains in Asia in morning trade on Wednesday with financial higher as bargain hunters enter on a near term bottoming occurring in the US and Asian markets, strong banking results and tough austerity measures announced by Spain.

Commodities Outlook: Up in early Wednesday trade GMT: Up as risk appetite stabilizes with US stocks flat, Asian and European equities higher as bargain hunters step in.

Crude Oil Daily Outlook: Down– Futures rising Wednesday, recovering most of yesterday’s losses but still not all, leaving oil slightly down over the past day but recovering thus far Wednesday

Gold Daily Outlook: Up- Futures surging to new all time high of $1242 as gold’s safe haven appeal sparkles amid doubts about the Euro, China tightening, damage from the BP oil spill, and a new US banking investigation aimed at possible fraud by Morgan Stanley.

Gold’s gain came together with a stronger dollar, which advanced 0.4% against a basket of foreign currencies. This indicated the high level of fear, as both are sought in times of great fear, particularly regarding the value of currency given gold’s historical status as a store of value.

FOREX Daily Outlook: In Tuesday and early Wednesday trade GMT: No clear bias to SAFETY or RISK fx as market uncertainty and currency specific issues dominate rather than position of a given currency on the risk spectrum

US Dollar Daily Outlook: Almost recovered vs. the JPY after yesterday’s loss, up vs. the EUR, AUD, NZD, down vs. the CHF, CAD, GBP. Most of yesterday’s trends reversing as risk appetite makes a modest recovery but still losing ground to the CAD on CAD rate increase expectations.

Euro Daily Outlook: Down vs. the JPY, USD, CHF, GBP, CAD, up vs. the AUD, NZD. Recovering against most to varying degrees (except the surging CAD and GBP)on easing fears and rising risk appetite for now, fed by a new Spanish austerity plan.

Yen Daily Outlook: Up vs. USD, EUR, NZD, , down vs. the GBP, AUD,CHF CAD

British Pound Daily Outlook: Down vs. the CAD, Up vs. all others- the JPY, AUD, USD, EUR, CHF, NZD as cloud of political uncertainty lifts with Conservatives and Liberal Democrats forming core of coalition. However in mid-day GMT trading the GBP is retreating following dovish BoE comments and inflation report.

A Fitch warning that the UK needs a strong credible plan to maintain its AAA credit rating also weighs on midday GBP gains.

Australian Dollar Daily Outlook: Down vs. ALL- the CHF, NZD, CAD, GBP, EUR, JPY, USD, as bad home loans data, exhausted interest rate expectations, and China tightening concerns weigh in.

New Zealand Dollar Daily Outlook: Down vs. the JPY, USD, CAD, GBP, EUR. CHF (but recovering Wednesday) up vs. the AUD

Canadian Dollar Daily Outlook: Up vs. all no idea why because on a daily basis the CAD trades as a risk currency following oil and stocks in particular, both of which are down. No special news on it either. We suspect speculative buying on rate increase hopes.

Swiss Franc Daily Outlook: Steady vs. the JPY, down vs. the CAD, GBP, NZD, CHF up vs. the USD, EUR,

CONCLUSIONS & Big Picture: Markets stabilizing – modest risk asset gains show market resilience despite ongoing concerns about the feasibility and enforcement of the latest EU/IMF rescue plan, China tightening, BP oil spill still flowing, and now an investigation into possible fraud by US investment bank Morgan Stanley. Oh yes, UK gets a warning from Fitch to reduce its deficit or risk losing its AAA rating.

Unlike the other plans, this one finally dealt with the immediate problem of being large enough and comprehensive enough to calm markets not just about a Greek default but also assure that ALL PIIGS were now too big to fail.

However, similar to the others, many details remain unclear, and ambiguity ultimately killed off the other plans. Biggest current questions that need answering:

· Will leaders and voters accept the burdens imposed by this rescue, especially those not in the EZ, like those of the UK and US?

· Can the economically weak PIIGS nations afford to contribute to the plan, especially the smaller ones which bear a higher per capita burden (over $1000/ household in Ireland for the prior plan that was 1/10th the size – more than Germany or any of the PIIGS nations)?

· Will the Germans accept paying their share of the bill, especially after yesterday’s regional election protests German funding and may cost Merkel her job. The current plan has largely abandoned the ‘sound-currency’ principles of the EU, something the Germans may ultimately find unacceptable. Expect rigorous, possibly violent domestic German opposition.

· Will Greece and other PIIGS nations, now freed of need for bond markets and likely to come calling for EU aid, truly enact the sustained austerity measures, now that they know they are too big to fail? Opposition in Greece, both in the Parliament and streets, is not an encouraging sign.

· THE BIGGEST QUESTION: What is the enforcement mechanism to ensure we don’t have a similar crisis later, especially now that even the smallest EZ members appear to be deemed too big to fail? Default is no longer a threat, so what is? Economic/military takeover?

Market concerns over these and other issues will determine if markets continue to rally, stall out, or resume their slide. Expect doubts and backtracking as voters and leaders realize the size of the bill they are being asked to pay with no clear guarantees of repayment.

DISCLOSURE AND DISCLAIMER: OPINIONS EXPRESSED ARE NOT NECESSARILY THOSE OF AVAFX, AUTHOR HAS NO POSITIONS IN ABOVE INSTRUMENTS.