Overnight Sentiment: Europe Is Open

Tyler Durden's picture

For those who follow the overnight session and know very well that the only factor there is whether Europe is open or closed (like yesterday), we have three words: Europe was open. As BofA summarizes: "Yesterday's stronger than expected ISM manufacturing sparked a solid rally in the S&P 500. Around mid-day the index was up about 1.2%; however, the markets slowly faded throughout the rest of the day ending up 0.6%. Our equity strategy team things that the S&P is roughly at its fair value given the macroeconomic backdrop and the continued troubles in the Euro area." It is hardly rocket science that Europe will continue to drag on the world. The only question is how long before this nexus of global trade drags everyone else down, because as hard as they try the US and the BRICs simply can not pull away from the tractor beam of the European black hole.

Visually:

More from BofA:

Market Action:

Overnight in Asia, equity markets followed the S&P 500 higher. The region's best performer was the Shanghai Composite up 1.8%. Rounding out the top three was the Hang Seng up 1.0% and the Korean Kospi finishing 0.9% higher. The Japanese Nikkei also enjoyed a rally up 0.3% while the Indian Sensex fell 0.1%.

The strong US ISM manufacturing index which is bullish for Europe as it provides a potential source of growth for the region is being offset by the regionally weak PMI reports that came out earlier today. In the aggregate European equities are up 0.2%. Meanwhile at home, futures are pointing to a slightly lower opening in the S&P 500.

In bondland, Treasuries are bid in the long end of the curve. Both the 10-year Treasury and long bond are 1bp richer at 1.94% and 3.13% respectively. European govies are mixed. The UK gilt and German bund are bid while the Italian and Spanish notes are selling off. Investors are in general the most worried about Spain where yield are hovering around 5.80%.

The dollar is enjoying a very solid rally. The DXY index is up 0.5%. That is putting downward pressure on commodity prices. WTI crude oil is down 43 cents to $105.73 and gold is off $8.66 an ounce to $1,653.68.

Overseas data wrap-up

May day holidays across the globe impacted the release of the manufacturing PMI reports which are normally released on the first of a new month. Today a majority of the PMI reports were released and the general tone is that manufacturing slowed in April. Out of the 24 countries reporting 18 showed reported a weaker PMI in April relative to March's level. Out of the 13 countries with PMIs in contraction territory 12 of those are in the Europe. Even the relatively healthy country of Germany reported a bigger contraction in its manufacturing sector. The country's PMI fell from 48.4 from 46.2 in the prior month. Overall, outside of the US manufacturing activity was very weak. Yesterday's US PMI manufacturing report surprised the markets sharply to the upside causing a 0.6% rally in the S&P 500.

The German economy lost momentum in April as unemployment in the country unexpectedly rose. In Germany, in April there were 19,000 more unemployed people than in March. That is an increase of 0.6%. The unemployment rate however remained unchanged at 6.8% where it has been since December. Consensus had actually expected a decline in the unemployment rate to 6.7%.

Investors need to keep an eye on a few overseas events occurring over this up coming weekend. In France, this Sunday is the final round of the Presidential election between Francois Hollande and Nicholas Sarkozy. Polls place Hollande in the lead.

Also this Sunday, Greek citizens go to the polls to elect a new parliament. Our FX Strategist Athanasios Vamvakidis wrote a report called Risks From The May 6 Elections discussing the upcoming elections and implications of the event. The base case scenario is that a weak coalition government is formed; however, there are tail risks that could cause market events for the Euro area.

Today's events

At 8:30 am, we expect the ADP measure of private employment to expand 165,000 in April after a 209,000 increase in March. Over the past few months, ADP has been outperforming relative to the BLS measure of private employment. Our ADP forecast compares to our private payroll forecast of 155,000.