London markets are closed today for May Day while Japanese Markets are closed for Greenery Day.

The most recent IMM Commitment of Traders report shows that USD longs were cut back substantially. This suggests that traders are starting to turn dollar bearish which is in line with the recent improvements in risk appetite.

source: Deutsche Bank

source: Deutsche Bank

There is also an article in today’s NY Times that suggest better than expected results from stress tests based upon quotes from a “senior official.” Tests of Banks May Bring Hope More Than Fear

The central question in the financial markets right now is whether the global recession is nearing an end. In addition to the U.S., improvements were also seen in the Chinese and the U.K. manufacturing sectors. The price action of the currency, equity and bond markets suggest investors believe that the worst is over. The U.S. Treasury yield curve is steepening, which means that longer term rates are rising. This is a reflection of the market’s optimistic outlook for the U.S. economy. However we are only cautiously optimistic because it is far too early to label the recent improvements a new trend.

Wad of Cash

One of the primary arguments for a recovery and further gains in equities is the wad of cash sitting on sidelines. According to JPMorgan, close to $700 billion is parked in bank accounts and money market funds in the U.S. alone and therefore deployment of these funds could pave the way for a stronger recovery in currencies and equities. If you remember, the recession was triggered by a crisis of confidence and if confidence is restored, the money sitting on the sidelines may move back into the markets. We will be watching closely to see if the recent stability can turn into sustainability here in the U.S. and abroad. In the meantime, it is encouraging to see currency, equity, commodities and bond traders all price in a greater chance of a recovery.