A major industrials corporation kicked off US earnings season after the close. Our equity strategists are expecting strong Q4 earnings, with a preponderance of positive surprises and 2010 EPS estimates rising for many companies. Their bottom-up estimate for the S&P 500 is at the high end of consensus and their confidence in the estimate has increased as incremental news flow on global GDP growth, ISM manufacturing, commodity prices, auto sales, stock prices, and U.S. employment have been positive. (for more details please see UBS Equity Strategy Q4 Earnings: Sneak Peek, dated 11 Jan 2010).

Should earnings do as well as expected, it appears the dollar could continue to start the new year on rough footing, at least until the next labor report. Investors have remained focused on the labor data as they view it as a guide for Fed policymakers despite recent comments by Fed officials that the Fed could move regardless of unemployment remaining in double digit territory. But even if earnings do well, investors will also be watching to see if resulting equity gains are accompanied by a pick-up in equity volumes. The S&P 500 price and volume diverged significantly into the end of 2009 and it will be interesting to see if a good earnings season is enough to bridge the gap and bolster investor conviction.

The dollar was pressured once again as investors continued to digest the better Chinese trade data and Friday's US labor data. US equities closed relatively flat and oil and gold are $82.06 and $1151.52, respectively, at the time of writing. EURUSD traded 1.4409-1.4557 and USDJPY 91.82-92.68.

Kansas City Fed President Hoenig said the recent employment data does not change his growth outlook for 2010 and said the Fed could consider raising the Fed Funds target even with unemployment at 10%. He also said the FOMC should discuss altering the "extended period" comment regarding their low rate pledge. Hoenig is a 2010 FOMC voter. Meanwhile, Atlanta Fed President Lockhart said the slow US recovery warrants low rates and defended the Fed's independence, saying the Fed "must have the capacity to make unpopular decisions."

The EU's Olli Rehn, a nominee to be the EU's next monetary chief, commented in his confirmation hearing that the situation in Greece is very serious, particularly as it could have spillover effects for the Eurozone. Rehn was also worried about the deficit trend in other areas in the EU and called unemployment the area's biggest challenge. On the FX side, Rehn commented that dollar and yuan FX rates posed a potential risk for the European recovery.The Financial Times reported that Portugal now faces a credit-rating downgrade unless its government takes firm measures to cut its budget deficit, citing a senior analyst from a major ratings agency. Increasing debt problems of Eurozone nations and their role in ECB's liquidity measures may increasingly impact exit strategy timing ahead.

SNB President Hildebrand said the SNB will start raising policy rates once the economy is past recession and said the SNB has already begun to reduce its balance sheet. He also said leaving the current policy rate unchanged for too long could create new problems for the economy.


We believe the current band of 1.48-1.50 will remain in place, while the SNB may choose to keep a lid on CHF strength when necessary. I recommend buying USD/CHF on dips.

The Bank of Canada's Senior Loan Officer Survey and the Business Outlook Survey showed credit conditions are easing and that corporate confidence in the economic recovery grew in Q4 2009. The survey respondents also reported that they plan to boost investment and hiring and a record low number of firms had labor shortages.

Following the release, Finance Minister Flaherty said that while Canada's policies are on the right path, he remains concerned on the employment figures and still has concerns about establishing a firm recovery. Flaherty also said Asian currencies would be discussed at the upcoming G7 meeting as he would like to see more movement in those currencies. Meanwhile, BoC Adviser David Wolf said it is premature to talk about a housing bubble in Canada and said the housing market requires "vigilance, but not alarm." Wolf said a rate hike now may hider the recovery and reiterated that the strong CAD and weak US economy are a drag on Canada's economic growth.

Source: UBS, Bloomberg,

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