Overnight Sentiment: European Economic Implosion Sends Risk Soaring

Tyler Durden's picture

If there was one catalyst for the market to be "convinced" of an imminent coordinated liquidity injection, as Zero Hedge first hinted yesterday, or simply a 25-50 bps rate cut from the ECB as some other banks are suggesting and Spain's ever more desperate Rajoy is now demanding, it was the overnight battery of European Flash PMI, all of which came abysmal, throughout Europe, the consolidated Eurozone PMI posting the worst monthly downturn since mid-2009, the PMI Composite Output and Manufacturing Index printing at a 35 month low of 45.9 and 44.7 respectively. PMIs by core country were atrocious: France Mfg PMI at 44.4 on Exp of 47.0 and down from 46.9, a 36 month low; German Mfg PMI at 45.0 on Exp. of 47.0 and down from 46.2. The implication, as the charts below show, is that GDP in Europe is now negative virtually across the board. Adding insult to injury was the UK whose GDP fell 0.3%, more than the 0.2% drop initially expected. The cherry on top was German IFO business climate, which tumbled from 109.9 to 106.9 on Expectations of 109.4 print, as the European crisis is finally starting to drag the German economy down, or as Goldman classifies it, "a clear loss in momentum." What does it all add up to? Why nothing but a massive surge in risk, as the market's entire future is now once again in the hands of the #POMOList, pardon, the central banks: unless the ECB steps up, Europe will implode due to not only political but economic tensions at this point. Sadly, as in the US, by frontrunning this event, the markets make it more improbable, thus setting itself up for an even bigger drop the next time there is no validation of an intervention rumor: after all recall what sent stocks up 1.5% yesterday - a completely false rumor of a deposit insurance proposal to come out of the European Summit. It didn't, but that didn't prevent markets to not only keep their massive end of day gains, but to add to them. it is officially: we have entered the summer doldrums, when bad is good, and horrible is miraculous.

More on the overnight action from BofA:

Market action

Asian equity markets finished mixed with the Hang Seng falling 0.6% and the Shanghai Composite sliding 0.5% due to weak economic data in China. In particular, the HSBC manufacturing PMI hit a seven month low in China. On the flip side, the Indian Sensex managed to finish 1.7% higher, the Korean Kospi rose 0.3% and the Japanese Nikkei rose 0.1%. 

One would think that the lack of clear resolve or concrete details on how to improve the economic and fiscal situation in the Euro area at last night's informal EU summit, along with very weak May flash PMI reports and a weaker than expected German ifo business climate report would send equity markets swooning. But that is not the case as equity markets in the aggregate are enjoying a solid rally of 0.9% in Europe. Meanwhile at home, futures are pointing to a 0.4% rally in the S&P 500 later today. 

Earlier today, Treasuries were rallying across the curve with yields down roughly 2bp in both the long and 10-year Treasury. However, that rally started to unwind around dawn in NY. Now the 10-year Treasury is up 2bp to 1.75% and the long bond is 1bp higher at 2.83%. In Europe, gilts and bunds are also backing up while yields among the region's periphery countries are falling but Spain's 10-year yield is still trading above 6%. 

The dollar is selling off modestly against a basket of currencies with the DXY index trading 0.1% lower. The euro continues to weaken against the dollar hitting its lowest exchange rate since the summer of 2010. In the commodities space, crude is trading at $90.33 a barrel up 0.46% while gold is off 0.3% to $1,557 an ounce.

Overseas data wrap-up

As expected the informal EU summit last night was not a game changer for the Euro area. The summit focused on ways to use existing tools for supporting growth in the Euro area but in our view they will not be sufficient to help the Euro area avoid a recession this year. The press conference statement suggested an intense debate on the road to further integration, with strong disagreement between France and Germany. 

On Greece, there was a repeat of support for Greece but that Greece must respect the reform agenda; in our view, it is unlikely Euro area leaders will agree to any changes to Greece's bailout package before the June 17 elections. Meanwhile according to a leading German newspaper Die Zeit, the ECB and the Bundesbank have set up working groups which are exploring the consequences of a Greek exit and Reuters reports that the European Working Group agreed that each member state should have contingency plans for a Greek exit in place. Also take a look at today's Wall Street Journal, "Europe Girds For Greek Exit." 

The final release of first quarter GDP in Germany confirmed that the country grew at a 0.5% qoq pace. This report contains the underlying details and we learned that the primary driver of the strength of 1Q GDP was due to an uptick in exports which rose 1.7% qoq which was 0.8pp more than expected. Private consumption was also stronger than expected rising 0.4% while on the flip side investment spending was much weaker than expected falling 1.1% due to a slowdown in the construction sector. 

The German ifo business climate index fell for the first time in seven months to 106.9 in May from 109.9 in the prior month. Consensus was looking for a slightly smaller slide to 109.4. Looking at the details of the report both the current index and the expectations index fell. In other words, the business climate turned lower in May and businesses expect it to worsen over the next several months. 

Absent a Greek exit that sends Euro area GDP into a nosedive (-4% yoy in 2012) our European economists expect Germany to avoid a recession this year and grow 0.6% yoy as private consumption and exports drive the economy. However, both the increased uncertainty surrounding Greece and the ifo survey point to downside risks to the economic outlook. 

First quarter GDP growth in the UK was revised 0.1pp lower to 0.3% qoq. Looking at the details, consumer spending was weaker than expected as consumers continue to struggle with high unemployment and weak growth. Our UK economist expects the UK economy to remain flat this year as the recession in the Euro area acts as a drag on the UK's growth. 

The flash Euro area composite PMI showed further deterioration for May, with activity dropping below its trough last fall. The index fell from 46.7 to 45.9 - the lowest level since the summer of 2009. The decline was driven by the manufacturing sector, where conditions in both Germany and France reportedly softened over the month. Services PMIs were broadly flat in May, with Germany continuing to outperform significantly. These reports are consistent with a material softening in the economic backdrop for the second quarter. Growth could potential contract 0.5% qoq after zero growth in the first quarter. 

The HSBC flash Chinese manufacturing index fell to 48.7 in May down from 49.3 in the prior month. In our opinion, markets tend to pay less attention to the HSBC flash Chinese manufacturing index and put more weight on the official Chinese PMI mfg. index which is released on the first of each month. Lately the HSBC measure has been understating the official measure. 

Today's events

At 8:30 am the US economics team will be sorting through the initial jobless claims and durable good orders reports. Initial jobless claims are expected to rise marginally to 372,000 for the week ending May 19 from 370,000 the week prior. Durable goods orders are expected to contract 1.5% mom in April after a 4.0% drop in March. Boeing orders slowed markedly over the month. We expect this to translate into a 40% drop in nondefense aircraft orders. Outside of transportation, durable goods orders are expect to rise just 0.3%, which is a fairly tepid bounce after a 0.8% drop in March. Under our forecast, core durable goods orders are flat in April after a 0.1% drop in March, leaving us on track for 6% CapEx growth in Q2. 

French PMI vs GDP:

German PMI vs GDP:

European Composite PMI vs GDP:

Comments on German IFO from Goldman:

Germany : Big decline in "current conditions", signaling clear loss of momentum in Q2


Bottom line: A sharp decline in the assessment of current conditions signals a clear loss of momentum during Q2.


The Ifo index showed a surprisingly big decline in May to a level of 106.9 after 109.9 in April. We and consensus had expected a more moderate decline. The sub-index of "current conditions" recorded a decline to 113.3 after 117.5, while "expectations" declined to 100.9 after 102.7.


After moving sideways over the last three months, the Ifo index is now back to the level seen in Q4 last year. It is noteworthy that the assessment of current conditions declined even more strongly than the "expectations" component. Given that there is less "judgment" involved in the "conditions" part of the survey - companies are much better informed about their current order books and production level than what the situation will be in six months time - the drop in "conditions" is a credible signal that the German economy lost quite a bit of momentum during Q2.


The relative high starting level, GDP was up +0.5%qoq at the beginning of the year, is probably part of the explanation of the relative decline in momentum. That said, the decline looks too steep to be just a normalisation. Moreover, the PMIs, as this morning's release showed, are also pointing to a genuine weakening in the underlying trend.


The fundamental picture for the German economy remains strong: no fiscal tightening, rising domestic demand on the back of very favourable financial conditions, and no private sector de-leveraging. This does not mean, however, that the German economy will be immune to cyclical swings in external demand or a potential "confidence shock" from the rising tensions in the Euro area. Today's Ifo report shows that these risks are indeed real.

And the MarkIt PMI European Composite release


Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
OnTheWaterfront's picture

The problem with Greece is that its full of Greeks, Merkel should institute Prima-Nocta.

Colombian Gringo's picture

Better yet, round up the Greek Politicians and  implement the Final Solution.

WmMcK's picture

And the problem with engineering firms is that engineers work there. Anyone with any number sense knows this Ponzi can't go on.
Can't say when but I'm long and going longer popcorn and some other "essentials".

firstdivision's picture

Putting in a short for open.  It's the good ol' gap up for open and fade all day trend.

HomeBrewPrepper's picture

I can't wait for the revised jobless claims from last week

Same old same old crap

spinone's picture

What?  Europe is in economic trouble?  Why wasn't I told about this?

HD's picture

The super geniuses on the Street are not smart enough to get out of their own way. Instead of building a cash position and letting the markets drop like a stone, only to wait for a mountain of free cash from central bank helicopters - they front run the QE for a half a percent gain here and there if their lucky.

Picking up nickels in front of a steamroller.

ATM's picture

That steamroller will flatten cash. Risk assets not so much. If your plan is to sit on cash and wait for the right moment, good luck to you. That steamroller comes up faster than you think.

LULZBank's picture

Well said!! Exactly my thoughts.

Why not do the same for Gold and Silver. Rather than BTFD, lets all short them to near Zero and then buy shit loads and wait for the markets to implosively explode.

sudzee's picture

The street has abandoned the market. Very few little guys left to fleece. CB/PD participation is required to hold up markets so pension funds and insurance companies don't have to bail on bonds. The gig is up if stocks fall.

HD's picture

Gig is already up. There is no growth anywhere, yet inflation continues to rise. The next massive liquidity dump is the final nail in the coffin - you'll have zombie banks and zombie consumers. Deflation in stuff you own, inflation in stuff you need.

jus_lite_reading's picture

BINGO was his name-oh!

I was chatting with some idiot (who claims to be a pro "analyst"... isn't eveyone there LMAO) on a yahoo message board about this. He asked the same question every other imbecile who is asleep at the wheel asks "if things are so bad why is the stock market up?" I almost feel like reaching through the monitor and beating him. He then said I was wrong about my stock market collapse preditions because they only went up. I then asked him how much he pays per year in gas now versus say 5-6 years ago and asked him what the price of the ponzi stock market is PRICED IN GOLD... no answer from the "analyst" on that one.

I explained that this is a ponzi. And TPTB will pump all the fiat money they need to keep the smoke screen and illusion going, which in turn means inflation for the consumer and higher prices in ponzi stocks and real estate (which tells you how bad things really are if housing is already inflated!!). Except that unlike during other times of inflation or if you lived in Zimbabwe in 2006, you should own real assets and things you need to survive the global collapse. You won't be able to "cash out" your paper stock or any paper asset. But talking to imbeciles like that is like talking to a tree. That said, I did it for the sake of the others who joined the conversation and "get it"...

The GAME IS OVER! This is not some off the wall mountainman's dream come true... this is based on math. Simple math. And despite Wall Street's Enron accounting math where 2 - 8 = +600, in the real world, inflation is a real exponent and 16 squared = 256.

chinaguy's picture

Yup, FTSE & Euro bourses are soaring.

Quinvarius's picture

I have zero doubt the Fed started their secret loan program already.  JPM going under was not something they wanted to see while they were supposed to be regulating them, or in general.  The Fed doesn't have to tell anyone or ask permission.  They just do what they want.  That is why people who keep insisting there will be no QE3 will keep getting run over by the bus.  It is very arrogant to assume anyone is going to tell you anything about a massive ongoing QE program that never stopped while they are trying to cover up the fact it is still happening.  And it didn't start in 2008-09.  It started long before that.

Paper CRUSHer's picture

Well looky 'ere, the 30 year Bund vs 30 year JGB spread is approaching.........zero


..drehend japanische,wirklich denken so!

LongSoupLine's picture

If market needs QE due to lack of liquidity, how can the market be ramping if there's no liquidity?

Oh, wait...forgot about leveraging nothing into something via HFT.

Yep, just another day of the middle class taking it up the ass.

LULZBank's picture

Just middle classes? What about people who are just on the borderline and just about able to make ends meet for basics?

Poor people just have some more money to lose. Middle classes have not just money but borrowed lifestyle and prestige to lose as well, hence they squeal the loudest.

walcott's picture

Silver bitchez!

junkyardjack's picture

Rip your face off rally...

John Law Lives's picture

What interesting times we live in.  Central Banks clearly do not know how to solve basic economic problems (and often make them worse), yet they continue to print more and more fiat currency and act as if THIS TIME it will do the trick.

100% FUBAR.

LULZBank's picture

There is no solution to the economic system we live in, basic or advanced. It was a ponzi scam to begin with and it will end to the same effect.

Money printing has been there since the inception to give the illusion of growth, while people in the know skim the cream at the top, whiel the masses churn at the bottom.

I could see through it, the first time I studied Economics yearsssss ago, but went along thinking maybe I am missing something or I am not an "expert" yet. Also that the people in power cannot be telling such blatant lies and "people" cannot be that stupid.

People are stupid, as I have come to realise.

Bobportlandor's picture

Boy I could have written this, except I had no econ. schooling. What I did have was common sence. Back in the 70s 80s 90s I thought HOW THE HELL CAN THIS GO ON.

Why is it NOTHING is ever fixed. Why is the simplest thing, the most basic thing a group of people need to do, Voting a problem.

Am I missing something. people cannot be that stupid.

People are stupid, lazy, ignorent, and I came to realise and I had to live with it.

In Construction I had to put up with illegal aliens. People would say "Oh! they just want to work", you don't mind your standard of living going down do yeah? No go right ahead and fuck me over.

I knew this attitude was going to eventually fuck the country over. The last straw and to this day I clearly remember GW Bush and Bill Cliton standing on stage telling me how great it will be to send more jobs oversees.

I can't wait for the shit to hit the government employees pension plans. I will sit back drink a beer and LMAO.




TheGardener's picture

" The fundamental picture for the German economy remains strong : no fiscal tightening , rising domestic demand on the back of very favourable financial conditions"

Those very favorable financial conditions, negative real
interest rates and 4.6 Trillion EURO in supposed savings have yet to translate into a genuine crack up boom .

If they stopped producing things the world needs and converted into a consumer economy, they could run those savings down for a decade and add another on credit, just as the US did.

The world can`t wait for them to catch up because can kicking just ran out of roads. Margin call on
Target 2 ...

EclecticParrot's picture

Rust never sleeps.

Tyler never sleeps . . .

falak pema's picture

the FED has now found an absolute weapon to sell to the fold : watch this !

U.S. - Photos - Catholic Online

If you see the design on the saviour's stomach you know the new FED policy. 

Awesome mix of QE and absolution.