Futures continue exhibiting a very surprising and ever brighter shade of ungreen as the morning session progresses, starting with the 5th consecutive contractionary Chinese PMI data, going through disappointing European Manufacturing and Services PMIs which came below expectations (47.7 vs Est. 49.5 for Mfg; 48.7 vs Est. 49.2 for Services), with an emphasis on French and German PMIs, both of which were bad (German Mfg PMI 48.1, Est 51, prior 50.2; Services PMI 51.8, Est. 53.1, Prior 52.8), and concluding with UK sales which printed at -0.8% on expectations of -0.5%. And just like that Europe is "unfixed", prompting economists such as IHS' Howard Archer to speculate that following "worrying and disappointing" Euro PMI data, the ECB may cut rates to 0.75%, as Europe is finding it hard to return to growth after the Q4 contraction. And with that the beneficial impact of the €1 trillion LTROs is now gone, as Spain spread over Bunds has just risen to the widest in over 5 weeks, and the beneficial market inflection point passes - prepare for LTRO 3 demands any minute now.
European PMI chart from Reuters:
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Sentiment summary from Bloomberg:
- First Word Cross Asset Dashboard shows sentiment down significantly on disappointing economic data from China to the U.K., with EU equities, risk FX significantly lower, Bloomberg analyst TJ Marta writes in following note:
- Most Asian equity indexes up moderately despite more contraction in Chinese PMI
- EU markets reacted significantly to disappointing GE, FR, EU PMI’s, as well as worse than expected decline in U.K. retail sales
- EU equity indexes down 1+ std. devs., led by CAC -1.5%; U.S. futures down ~1 std. devs., ~0.5%
- Bund, Treasury yields, curves down moderately to significantly
- JPY, USD outperforming on risk aversion
- Commodities lower, led by WTI -1.2%, copper -1.6%
- In sign that EU debt concerns continue, most EU sovereign yield to Bund spreads wider, with significant moves for Spain, Italy
And from BofA:
Market action
In Asia, financial markets finished mixed after Japan posted an unexpected trade surplus and the HSBC flash manufacturing PMI fell. The later helped boost speculation that the government may introduce further pro-growth policies. In India, the Sensex lost 2.3% while both the Shanghai Composite and the Korean Kospi lost 0.1%. On the flip side, the Hang Seng climbed 0.2% and the Japanese Nikkei increased 0.4%.
Weaker than expected overseas economic data - such as the Euro area flash PMIs - are causing a sell off in Europe and futures are pointing to a sell off in the US later today. In Europe, equities are trading down 1.3% in the aggregate. Blue chips are down even more off 1.6% while shares listed in London are off a smaller 1.0%. German and French listed firms are underperforming the broader market as well off 1.5% and 1.7% respectively. Here in the US, futures are pointing to a 0.6% lower opening for the S&P 500 later today.
In the bond markets, Treasuries are continuing to rally across the curve. The 10-year yield is currently 2.26% after falling 4bp. The risk off trade is sending yields on peripheral debt higher. The Spanish 10-year note is 7bp wider at 5.43%.
The risk off trade is boosting the dollar. The DXY index is up 0.2%. That is causing a sell off in commodities. WTI crude oil is $1.28 a barrel lower to trade at $106.00 and gold is off $13.38 an ounce to $1,637.25.
Overseas data wrap-up
The Chinese HSBC flash manufacturing PMI edged down to 48.1 in March from 49.6 in February. This is the first time in four months that the flash PMI has fallen. In our view, the flash HSBC PMI fell for two reasons. First, the HSBC measure focuses more on small and medium size businesses which are likely hit harder by tighter liquidity. Second, China's export manufacturers tend to be of small scale so the slowing in the global economy could have outsize impact on the flash HSBC PMI. Despite the weak PMI reading today we continue to expect the country's economy to expand by 8.3% to 8.5% yoy in the first quarter.
In Europe, the majority of the flash PMIs for the manufacturing and service sectors came in much weaker than expected in March. Consensus was looking for a pickup across the board but instead the PMIs fell sharply from their prior month's level. The headline Euro area manufacturing index dropped to 47.7 in March down from 49.0 in the prior month. The service sector PMI recorded a much a tiny drop from 48.7 from 48.8. The weakness was broad based with the Euro area's two largest economies Germany and France recording slippages in their PMIs. In particular, the German manufacturing PMI slipped to 48.1 in March from 50.2. The key takeaway from these reports is that the Euro area economy is not only contraction but the pace of contraction picked up in March. Our Euro area economists expect the Euro area's economy to contract by 0.5% yoy this year.
The UK retail sales report was disappointing. Retail sales ex auto fuel fell 0.8% mom in February. That was worse than the expected 0.5% mom drop penciled in by consensus. In addition, to February's weak reading the prior month's growth rate was revised lower by 0.6pp to 0.6%. Including fuel the retail sales dropped 0.8% mom in February and the prior month was also revised lower to show a 0.3% mom expansion instead of the previously reported 0.9% mom increase. The UK consumer is constrained by high unemployment, weak wage growth and a subdued economic backdrop. While retail sales is a volatile sub-component of overall consumer spending, this month's report does highlight the fact that we look for consumption growth to underperform the broader economy and only expand 0.3% yoy in 2012.
Eurozone industrial new orders fell 2.3% mom in January basically in line with market expectations of a 2.2% drop. The prior month's growth rate was revised sharply higher to +3.5% mom against an originally reported 1.9% increase. Looking ahead, we expect weakness in the Euro area's manufacturing sector; however, there will be pockets of strength notably in Germany where the manufacturing sector is geared to exports.