Overnight Sentiment: Calm Before The Storm... With A Surprise Twist
If yesterday's global intervention rumor was a feeler of market response to the next latest and greatest intervention then we may have big problems: the EURUSD is now unchanged, Spanish bond yields are now unchanged, stocks are doing their quad witching thing which means all stops will be taken out before the day is done, but most importantly the euphoria such an announcement would have created before is now completely gone (as per The Diminishing Returns Of Central Planning). What is actually worse, and how the G-20 rumor may have backfired, is that as we pointed out, suddenly there has been a significant shift in expectations: if Syriza does not have an outright win on Sunday then there will be no immediate central bank response, which was predicted to be "if needed". Remember: for this market, when all that matters is the next 10 minutes of trading, this is the only relevant metric. Which means that suddenly from a Risk On event, Syriza's loss has become Risk Off! Of course, the reality is that Sunday will almost certainly be a replay of the last election, where the parliament continues to be empty, and Greece continues to be "Belgium" - recall from May 3, "Previewing The First Of Many Greek Elections." In either case, as others have suggested holding on to positions over the weekend may not be the most prudent thing.
Full summary of overnight sentiment from BofA:
Asian equity markets finished mostly higher; the one exception was the Korean Kospi which fell 0.7%. Investors' optimism increased as many now expect central banks to take action to help stimulate economic growth. That should help counter some of the softness in the global economic backdrop due to the recession & debt crisis in Europe and the looming slowdown due to the fiscal cliff in the US. The MSCI Asia Pacific Index advanced 0.8%. This week the index advanced the most in five months.
Looking at the individual markets, the best performer was the Hang Seng up 2.3%. That was followed by the Indian Sensex up 1.6%. The Shanghai Composite managed to finish 0.5% higher while the Japanese Nikkei finished flat.
In Europe, equities are climbing for the first time in three days due to the Bank of England announcement of credit easing measures. See overseas data wrap up for more info. In the aggregate, European equities are up 0.8%. Blue chips are outperforming up 1.6%. Surprisingly, shares listed in London are underperforming the broader market up only 0.6%. At home, futures are pointing to another risk in the S&P 500. The index is set to open 0.3% higher building on yesterday's 1.1% increase.
The risk-on mood in the equity world has not trickled into bondland, Treasuries are actually bid suggesting bond investors are cautious about the global economic backdrop. In particular, they are likely worried about the upcoming Greek elections on Sunday. Late Sunday night we will likely know the outcome of the Greek elections. The 10-year Treasury is 3bp lower at 1.61%. In Europe, we continue to keep a close eye on yields on Spain's 10-year which are down 6bp to 6.79%.
The dollar is weakening against a basket of other major currencies. The DXY index is 0.2% lower. Commodities are higher. WTI crude oil is trading at $84.48 a barrel while gold is selling for $1,625 an ounce.
Overseas data wrap-up
The UK is preparing for the worst. Yesterday, the UK unveiled a series of measures that it will take to help insulate the British financial system and economy from the recession and ongoing sovereign debt crisis. As the UK's largest trading partner, the recession or worse (Grexit) in the Eurozone has the potential to drag the UK economy down with it. For more on the measures taken by the UK take a look at this piece by our UK economist.
The BoJ left its monetary policy rate unchanged at today's monetary policy meeting. The BoJ also left the size of its asset purchase program (ie QE) unchanged. Like many other central banks it is monitoring the global economic backdrop very closely. In particular, it is very worried about the ongoing situation in Europe.
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