Here is what happened in Europe overnight, and why the market sentiment is already negative in advance of an NFP number which many are watching closely as a miss of expectations will cement the thesis that the US economy has now rolled over and will likely need more nominally dilutive aid from central planners to regain its upward slope:
- Spain Services PMI for April 42.1 – lower than expected. Consensus 45.4. Previous 46.3.
- Italian Services PMI for April 42.3 – lower than expected. Consensus 43.7. Previous 44.3.
- France Services PMI for April 45.2 – lower than expected. Consensus 46.4. Previous 46.4.
- Germany Service PMI for April 52.2 – lower than expected. Consensus 52.6. Previous 52.6.
- Euro-area Service PMI for April 46.9 – lower than expected. Consensus 47.9. Previous 47.9.
And while the data was bad enough to send European stocks and US stock futures lower, the latest meme spreading as the first US traders walk in, is one of reNEWed QE expectations already, if a very weak one for now.
Looking at your screens and seeing nothing but black? Don't worry, your internet feed did not get cut - it is just that virtually everyone else in the world is taking today off (although judging by recent volumes one could be forgiven to assume that it is "just another day"). Which is not to say that nothing is happening, with a surprising bigger than expected rate cut (50 bps to 3.75%) by the RBA crushing AUD longs overnight, and a Manufacturing ISM on deck which is far shakier now than it was before yesterday's major PMI miss. Compounding the concerns was a UK PMI print just barely above contraction territory at 50.5, below expectations of 51.5, down from 52.1. Finally, expect another record bout of GM channel stuffing which continues to be the only "shining" aspect of the now inflecting US recovery. To summarize with DB's Jim Reid: "Ahead of an important day, it has been a fairly quiet session for markets overnight. Most Asian markets (include Hong Kong, Singapore, Shanghai, and South Korea) are closed for Labour Day. Indeed much of Europe will be closed today. In terms of what's open overnight, the Nikkei is -1.2% but the ASX 200 is up +0.9%. China’s official PMI manufacturing inched a little higher in April to 53.3 from 53.1 in March but slightly below market consensus (53.6). For such a huge economy the Chinese official PMI series does seem to have been remarkably smooth of late as the reading has been gradually on the rise since hitting a recent low of 49.0 in November (50.3 in Dec, 50.5 in Jan, 51.0 in Feb, 53.1 in Mar, 53.3 in April). As we go to print the Reserve Bank of Australia has unexpectedly cut its key benchmark rate by 50bps to 3.75%. Indeed only 2 out of 29 economists polled by Bloomberg saw this coming. The market reacted aggressively post the announcement taking the front end bills 15-18bp lower in yields."
Another day of ugly news out of Europe, with both macroeconomic and monetary data coming in to confirm that downward slope of the European forward trajectory (not to mention funny: below is a chart of Greek retail sales. Hardly any commentary is necessary). Yet despite some recently gravity in the EURUSD, for the time being the futures are trending flat to slightly down, perfectly ambivalent as to how will ease first as long as someone eases. Will this sustain, or will a disappointing Chicago PMI at 9:45 am once again send stocks first plunging then soaring on hope of imminent NEW QE? We will find out shortly. In the meantime, here is a recap of the overnight market action.
After rising in the overnight session following the overbought momentum chasing yesterday's hawkish tone by the Fed (don't ask), futures, European stocks, and sovereign spreads took a turn for the worse following the big miss in European confidence and sentiment, all of which posted material declines, and slid to two and a half year lows. And while the traditional upward stock levitation will resume once the European market close is in sight, only one thing can spoil the party and derail the most recent pseudo-hawkish statement out of the Fed: initial claims, which are expected to decline to 375-380,000 from 386,000 last week. Instead what will most likely happen is a print in the mid to upper 380,000s, while last week's number will be revised to a 390K+ print, allowing the media to once again declare that the number was an improvement week over week. In other words, SSDD.
Following a blistering two days of upside activity in Europe and a manic depressive turn in the US in the past 48 hours, the rally is now be running on fumes, and may be in danger of flopping once again, especially in Spain where the IBEX is tumbling by over 3% to a fresh 3 year low. Still, the Spanish 10 year has managed to stay under 6% and is in fact tighter on the day in the aftermath of the repeatedly irrelevant Bill auctions from yesterday, when the only thing that matters is tomorrow's 10 Year auction. Probably even more important is that the BOE now appears to have also checked to Bernanke and no more QE out of the BOE is imminent. As BofA summarizes, "The BoE voted 8-1 to leave QE on hold at their April meeting: a more hawkish outturn than market expectations of an unchanged 7-2 vote from March. Adam Posen - the most dovish member of the BoE over the last few quarters - took off his vote for £25bn QE, while David Miles judged that his vote for £25bn more QE was finely balanced (less dovish than his views in March)." Even the BOE no longer know what Schrodinger "reality" is real: "The BoE judged that developments over the month had been relatively mixed, with a lower near-term growth outlook, but a higher near-term inflation outlook. However, they thought that the official data suggesting very weak construction output and soft manufacturing output of late were “perplexing”, and they were not “minded to place much weight on them”." Naturally, this explains why Goldman's Carney may be next in line to head the BOE - after all to Goldman there is no such thing as a blunt "firehose" to deal with any "perplexing" issue. Finally, the housing market schizophrenia in the US continues to rule: MBA mortgage applications rose by 6.9% entirely on the back of one of the only positive refinancing prints in the past 3 months, which rose by 13.5% after a 3.1% drop last week. As for purchases - they slammed lower by 11.2%, the second week in a row. Hardly the basis for a solid "recovery."
And like that, Europe is broken again. Following a spate of negative European data (what else is there), including a miss in German industrial production as well as a miss in UK manufacturing output, all eyes are again on Spain, especially those of the bond vigilantes, who have sold off the sovereign European bond market, sending the Spanish-Bund spread to over 400 bps for the first time since December 2011. The main reason today: a Goldman report saying Spain will unlikely meet its 2012 and 2013 budget targets, as well as JPM Chief Economist David Mackie saying Spanish government "missteps" have raised questions about its credibility, making investors reluctant to purchase Spanish debt. Stress has returned to periphery, if it broadened into bank funding markets more LTROs would be forthcoming; if that “failed to hold yields at an appropriate level” Spain may need assistance from the EFSF/ESM and the IMF. Euro area unlikely to return to stability in sovereigns without some burden sharing; nominal growth likely to stay below borrowing costs, making fiscal targets “all but impossible to achieve”. UBS piles in saying Spanish banking stresses still haven't been addressed. Finally, a big red flag is that market liquidity is once again starting to disappear, and as Peter Tchir points out, Main is now being quoted with 3/4 bps bid/ask spread, all the way up to 1 bps spread. In other words, as we have been warning for weeks, the period of fake LTRO-induced calm is over, and the market is demanding more central planner liquid heroin. The question becomes whether Europe has even more worthless collateral in exchange for which the ECB will continue handing out discount window money in sterilized sheep's clothing. Yet nowhere is the resumption in risk flaring more evident than in the Swiss Franc, where the EURCHF all of a sudden broke through the critical 1.20 SNB floor, which was set back in September 2011, the day gold was trading at its all time high. Said otherwise, everyone is once again scrambling for safety. And since they can't get it in the CHF, it is only a matter of time, before gold resumes its ascent as the paper currency alternative that sent it to its all time highs late last summer.
Yesterday we discussed extensively how the narrative of US decoupling, which has so far trumped everything else, is finally fading, is coming to an abrupt end, and with no other "plotline" to take its place, as China, Europe and corporate profits are all in the dumps, the only option is for more easy money to come soon. However, with crude sticky this will be a problem in an election year. Today, this sentiment has become even more acute as new Greek 2023 bonds have for the first time trade over 20%, with weakness spreading to all the other PIIGS, and talk of yet another LTRO already picking up pace. The question of what if any assets European banks is luckily ignored for now. So as futures turned red once more, here is Bank of America summarizing the bearish market sentiment this morning.
There are two main news updates dominating early newsflow: the first comes from BHP Billiton, after the world's largest miner raised concerns about the possibility of a sharp slowdown in demand from top metals consumer China. Per Reuters: "There is a slowing trend in China ... moving increasingly away from the growth model that they have had, which may be a little less metals intensive. This is not new, but recognition by big mining companies would have had an effect." Australian iron ore miners, key beneficiaries of China's modern-day industrial revolution, signaled on Tuesday demand growth was finally slowing in response to Beijing's moves to cool its economy. BHP Billiton said it was seeing signs of "flattening" iron ore demand from China, though for now it was pushing ahead with ambitious plans to expand production." That this comes just on the tail of JP Morgan warning of a hard landing in China is curious, and one wonder if the Federal Reserve Bank of JP Morgan is not fully intent on telegraphing that the next big center of QE will be the PBOC. The other news is that the perpetual crude "upside capacity" strawman Saudi Arabia 'has pledged to take action to lower the high price of oil, which has risen to around $125 a barrel, with laden supertankers set to arrive in the US in the coming weeks. ... Saudi Arabia said yesterday it will work "individually" and with the other petrol-rich Gulf states to return prices to "fair" levels. The country indicated earlier this year that $100 a barrel was the ideal oil price." There is one problem with this as expected Saudi attempt to help Obama's reelection campaign: as pointed out yesterday, it is very unlikely that Saudi Arabia has any realistic ability to do much if anything to push the price of crude lower, especially if and when the middle east hostilities flare up.
With a economic calendar devoid of virtually any events, the only two events worth of note this morning are the Greek CDS auction (where RBS appears to once again be confusing price and discount), and the Apple cash announcement due in just over an hour. The result is Apple stock which in the premarket session has traded as high as a new record high og $606, even as concerns emerge that the growth phase is over as the company transitions into a MSFT-type, post-Steve Jobs existence. Details of the 9 am call can be found here. Aside from that risk is broadly flat as hungover American traders take their seats.
Consumer Price Index – July Time: 8:30 am Forecast: 0.0% overall, 0.2% core
Industrial Production & Capacity Utilization – July Time: 9:15 am Forecast: 0.1% industrial production, 68.1%
University of Michigan Consumer Confidence – August Preliminary Time: 10:00 am Forecast: 68.5