Overnight Sentiment: Lower

After two months of quiet from the old world, Europe is again on the radar, pushing futures in the red, and the EURUSD lower, following a miss in March European Economic and Consumer confidence, printing at 94.4 and -19.1, on expectations of 94.5 and -19.0, as well as an Italian 5 and 10 Year auction which seemingly was weaker than the market had expected, especially at the 10 Year side, confirming the Italian long-end will be a major difficulty as noted here before, and pushing Italian yields higher (more on the market reaction below). The primary driver of bearish European sentiment continues to be a negative Willem Buiter note on Spain, as well as S&P's Kramer saying Greece will need a new restructuring. Lastly, the OECD published its G-7 report and reminded markets that Italian and likely UK GDP will shrink in the short-term. This was offset by better than expected German unemployment data but this is largely being ignored by a prevailing risk off sentiment. In other words, absolutely nothing new, but merely a smokescreen narrative to justify stock declines, which further leads us to believe that next week's NFP will be worse than expected as discussed last night.

A complete rundown of overnight market moves via Bank of America

In focus

European Economic and Finance Ministers (ECOFIN) are meeting today to discuss options for increasing the Euro area's firewall. As outlined in Monday's European Economic daily we see three different options for expanding the firewall and trying to secure an extension of IMF funding, which essentially involve different combinations of the €500bn ESM and the €440bn EFSF. Finance Ministers may give various comments to the press during the day.

Market action

Yesterday's (29th March) sell off continued over night in Asia and is now continuing in Europe. Looking ahead to today's open in the US, futures are pointing to another sell off as well.

In Asia, the MSCI Asia Pacific index fell for the second day in a row dropping 0.6%. The main reason for the sell off in Asia was continued worries by investors that China's economic slowing will be a major drag on company earnings. In addition, investors were not thrilled with the softer than expected durable goods order report in the US. The regions worst performers were the Shanghai Composite (-1.4%), the Hang Seng (-1.3%), and the Korean Kospi (-0.9%). The Japanese Nikkei fell 0.7% and the Indian Sensex fell 0.4%.

In Europe, equities are down 0.6% in the aggregate. The region's blue chips are down 0.8% matching the drop in value of firms listed in London. Companies listed in Germany are off 1.0% while in France the market is down 0.8%. At home, futures are pointing to a 0.4% lower open for the S&P 500 later today.

In the bond markets, Treasuries are beginning to rally. The long bond is 2bp lower to 3.29% while the 10-year is off 1bp to 2.19%. In Europe, both the UK gilt and German bund are rallying following the risk on trade. Both sovereigns are down 1bp to 2.20% and 1.82%, respectively. Investors concerns about Spain have been growing over the last several days so it's not surprising to us to see the yield on the country's note jump 11bp today to 5.39%. For more on the situation in Spain take a look at our European team's viewpoint called: Spain - Growth Challenges.

The dollar is rallying against a basket of other currencies. The DXY index is up 0.1%. That is putting some downward pressure on commodity prices. WTI crude oil is off 46 cents to $104.95 a barrel and gold is down $7.14 an ounce to $1,656.48.

Overseas data wrap-up

Germany's labor market continues to outperform. The German unemployment rate fell to 6.7% in March: down from 6.8% in February and a little firmer than market expectations of no change. The number of people currently out of work and looking for a job fell by 18,000 to 2.84 million. As our European economists noted in their North South Divide report, some Northern European countries such as Germany have benefited from tailwinds - such as strong demand for their exports from emerging markets - that have helped heal their labor markets. In their view, the lower unemployment rates in the North (relative to the South) will help drive firmer real wages, supporting household consumption. Relatively healthy consumer spending is one reason why they expect Germany to expand around 0.6% this year, notably above the Euro area aggregate of -0.5%.

Spain's high unemployment rate coupled with its slide into recession and fiscal tightening are putting downward pressures on the country's inflation rate. As expected, Spain's EU harmonized inflation rate slowed to 1.8% yoy in the preliminary March report. That was down from the 1.9% rate recorded in February and represents the five consecutive monthly slowing, to the lowest since August 2010. Looking ahead the factors listed above should continue to press down on inflation, though the recent rise in oil prices should provide some opposing upward pressure.

Today's events

At 8:30 am, US economics will be sorting through two economic indicators: the final fourth quarter GDP report and the initial jobless claims report for the week ending March 24. We expect GDP to be unrevised at 3.0% in Q4. Retail sales were revised higher in December, suggesting a bit stronger consumer spending. However, we believe this will be offset by small downward revisions to other components. Inventories and trade are typically the sectors that see the biggest revisions in the final release. Looking ahead, we expect 2.0% GDP growth in Q1; averaging between the two quarters leaves a trend of 2.5%. Meanwhile, the market is looking for initial jobless claims to be basically flat at 350,000.

And a summary of views on the Italian bond auction via Reuters:

ALESSANDRO GIANSANTI, RATE STRATEGIST, ING, AMSTERDAM

"The Treasury placed the entire planned BTP amount and almost the entire amount for the CCTeus. This is undoubtedly positive. We had some decent bid-to-cover ratios and yields eased a bit.

"The 10-year auction was somewhat weaker. Prices came out below market ones, signalling Italy is still struggling a bit at this end of the curve and will have to make concessions in terms of yields and prices."

SERGIO CAPALDI, ANALYST, INTESA SANPAOLO, MILAN

"The market does not appear to have reacted that positively in terms of yields, even though the assigned amount for the BTPs was at the top of the planned range, showing demand for BTPs is good. The price movements seen on the secondary market after the auction is within the norm. The auctions went well.

The CCTeu auction did not go badly, even though the amount sold was in the middle of the planned range. This is a relatively new type of bond and suffers from lower liquidity. All in all, however, it has been well received."

MARC OSTWALD, STRATEGIST, MONUMENT SECURITIES, LONDON

"We are in a situation where it is a good cover, the yields are still falling.

"It does emphasise that for the time being the big compare and contrast between Italy and Spain is that Italy does have a sound banking sector, and with yields at much lower levels on the government debt, their financing problems, which were driven by government woes rather than their own balance sheet woes have been largely put to one side."

"(Demand) is largely domestic, both banks and fund managers. There is some interest from abroad but what I would call proper long-term fund managers aren't involved in the periphery."

ANNALISA PIAZZA, MARKET ECONOMIST, NEWEDGE STRATEGY, LONDON

"Both lines were priced at an average yield that is lower than their previous tap. Both lines were easily absorbed as they both looked relatively attractive versus the Italian curve. Despite the good auction, Italian BTPs seem to be under pressure today.

"Volatility might be explained by uncertainties surrounding the complicated development of the labour market reforms. However, we suspect part of the movement is also due to some profit taking."

MICHAEL LEISTER, STRATEGIST, DZ BANK, FRANKFURT

"Overall it looks like a decent auction. They sold 8 billion in total, a bit short of the maximum target but nevertheless, given the sector of the curve they targeted, total size is fine. Also, the bid covers for both bonds are above average

"Nothing spectacular though, but keeping in mind the overall environment it's pretty decent. Taken together it confirms the story that there's still domestic support, which is most likely the key driver here."

MARKET REACTION:

- Bund future up 27 ticks at 138.13 vs 137.90 before auction.

- BTP future down 55 ticks at 104.08 vs 104.47 before auction.

- Italian/German 10-yr bond yield spread 337 bps vs 329 bps before auction

Table: See for full auction details.

Comments

[EconSammie]

As explained below even good employment numbers pose problems for the Euro. It reminds everyone how can can multi-speed Europe possibly have the same currency with fiscal and political union?

Multi-speed Europe: German unemployment figures

This morning the latest (February 2012) labour market figures for Germany have been rather eloquent in contradicting Senor Monti. From Germany’s statistics agency.

The number of persons in employment was by 550,000 above the level of the previous year.

the number of unemployed was down 9.8% in February 2012 on February 2011. It declined by 270,000 to 2.49 million

The numbers illustrate the divergence between the German economy and virtually every other Euro zone economy. So we see yet again that one of the main causes of the Euro’s problems which is economic divergence between its members has been in operation over the past year. There has been an enormous difference in the performance shown above and that from Greece,Portugal or Spain for example.

http://www.mindfulmoney.co.uk/wp/shaun-richards/why-euro-zone-taxpayers-should-be-afraidbe-very-afraid-of-so-called-cashless-operations/#disqus_thread

[schatzi]

Excellent point. I keep reminding fellow German-speaking investors, that they need to take away their focus from great German numbers when betting/investing on the German DAX. Good German numbers invariably mean poor numbers in the periphery. Sooner or later this will bite Germany in the backside, as their larget export market i.e. the EU, is largely in a debt and deflationary spiral. Even if the big DAX companies are global, they cannot ignore what is happening in Spain, Italy and France. This is what worries me about the Euro: you cannot save Spain without dramatically changing behaviour in Germany: +20% wage increase is needed, a massive increase in consumption etc. and it really isn't going to happen.

[slewie the pi-rat]

two sentences struck me:

1. The main reason for the sell off in Asia was continued worries by investors that China's economic slowing will be a major drag on company earnings.
2. In addition, investors were not thrilled with the softer than expected durable goods order report in the US.

in 1, the propagandist plays one string;  in 2, the propagandist plays another

the MSM and bankster types are very invested in making sure people know the story and they help the audience understand  reactions to reports

in general, i think computers & NWCommunications help to reinforce these conditioned underlayments in people, at least for me, it seems

oddly, a few words like "perhaps" or "seemed indicative that..."  would pretty much clear the prop-wash, but then that requisite certainty and authority would be diminished;  maybe just go with:

1. styooopid asswipes know the main reason for the sell-off was..., and
2. moronic shitheads were not thrilled...