Overnight Sentiment: A Summit Here, A Summit There, A Promise Of Growth And QE Everywhere
In continuing with the 2011 deja vu theme which has become the norm at this point, nearly half way into 2012, the key overnight events driving sentiment and futures higher (if not the EURUSD which despite a record number of shorts appears to have once again decoupled with the US stock market), were a statement following the latest G-8 summit (penned in the brief time when the world leaders were not watching soccer) that Greece should stay in the Eurozone (as opposed to?), and yet another promise from China's Wen Jiabao that the world's fastest growing economy would focus on growth (what a truly radical shift in policy for the country which needs GDP growth over 8% just to avoid riots and civil unrest). And in continuing with the "summit" theme so well exhausted back in 2011, and mocked by David Einhorn (see below), let's recall that there is yet another summit on May 22, this time where the European heads of state will sit down and also decide that, shockingly, they want Greece in Europe, in response to which stocks will surge, then be very confused just why they surged, and promptly tumble. Sadly, by now we have seen it all since 2012 continues to be a carbon copy replica of last year. We can only hope the powers that be infuse at least some originality before we are forced to start recycling headlines from the summer of 2011. In the meantime, futures are green, especially since Dennis Lockhart unleashed the QE bomb hours ago in Tokyo, saying that more easing should not be ruled out amid European risks. Wink wink.
A reminder of Europe's summit mentality courtesy of David Einhorn circa last year:
Full recap of the overnight market action via Bank of America
China's pledge to boost growth - overnight Chinese Premier Wen Jiabao said China will focus more on bolstering economic growth - helped offset concern over Greece's possible exit from the euro-area, helping the markets stage a come-back after last week's market swoon. In addition, this past weekend's G-8 summit helped boost investor sentiment; however, the summit delivered no concrete proposals on Greece.
The Asian bourses started the week on a positive note, except the Hang Seng, which slipped 0.2%. Japan's Nikkei advanced 0.3%, the Shanghai Composite gained 0.2% and the Korean Kospi rallied 0.9%. The Indian Sensex closed 0.2% higher.
In aggregate, European equities are trading up by 0.3%. German markets are up 0.8%, while French equities are 0.3% higher. Spain's market, on the contrary, is taking a beating, with the IBEX 35 down 1.1% European blue chips are down 0.1%. At home, the S&P 500 closed 0.7% down on Friday, but futures are pointing to a 0.6% higher opening today.
US treasuries are selling off across the curve today, with the 10-year bonds trading at 1.76%, up by 3bp. The 30-year is trading at 2.84%, up by 3bp. In Europe, sovereign yields are on the rise. The main focus continues to be on Spain, where the country's 10-year yield is currently trading at 6.24%.
The dollar is weakening against major currencies, with the DXY trading down 0.2%. In the commodities space, crude is trading at $91.89, while the yellow metal is trading at $1,591.
Overseas data wrap-up
In Spain, the revision in the budget deficit of some of the largest regions forced the government to revise the deficit of the general government for 2011 to 8.9% of GDP, from 8.5% of GDP. Our European team believes this is a one-off adjustment, but it clearly underlines the challenges Spain faces for adjusting its public finances, and could further erode market confidence.
As expected the G8 summit did not deliver any concrete proposal on Greece. The next important step will be tomorrow (22 May) at the special EU Summit of Heads of State on Growth. We expect the summit to focus on Greece and Spain.
On Greece, discussions should focus on 1) a possible extension of the implementation framework of the programme and better use of the EU funds to help support growth in the short term, and 2) ring-fencing the union in case of a Greek exit.
On Spain, discussions will likely focus on the banking sector. The discussion will likely be around using the EFSF (or its successor ESM) directly to fund the banking sector. As we mentioned in Spain-Italy the options, the programme should be designed and targeted specifically at the banking system and conditionality-related banking sector reforms. In our view, a solid banking sector across the euro area is the pillar of reduced systemic risk should Greece exit the euro area.
Thailand's economy grew 0.3% yoy in the first quarter of 2012. That was much better than consensus estimates of a 0.5% yoy contraction. Last quarter, the economy shrank 8.9% yoy after the country was hit by major flooding. The biggest contributors to growth were private consumption (+2.7% yoy) and investment spending (+9.2% yoy).
This week brings April's data on both new and existing home sales. We expect the choppy trend in the housing market to continue. We forecast new home sales will increase 5%, to 345,000, in April, keeping with its recent zigzag monthly pattern. Existing home sales are likely to edge up by 2.5%, to 4.590 million saar, nearly reversing the decline in March.
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