Yesterday we discussed extensively [16]how the narrative of US decoupling, which has so far trumped everything else, is finally fading, is coming to an abrupt end, and with no other "plotline" to take its place, as China, Europe and corporate profits are all in the dumps, the only option is for more easy money to come soon. However, with crude sticky this will be a problem in an election year. Today, this sentiment has become even more acute as new Greek 2023 bonds have for the first time trade over 20%, with weakness spreading to all the other PIIGS, and talk of yet another LTRO already picking up pace. The question of what if any assets European banks is luckily ignored for now. So as futures turned red once more, here is Bank of America summarizing the bearish market sentiment this morning.
Market action
The vast majority of the global equity markets are selling off. In Asia, the Japanese Nikkei, the Hang Seng and the Chinese Shanghai Composite all dropped 1.1%. The sell-off was sparked by a surprise drop in profit at the Agricultural Bank of China - the country's third biggest bank. Not all Asian equity markets finished in the red, the Korean Kospi managed to finish flat, while the Indian Sensex was lifted 1.0%.
For the fifth day in a row, European equities are selling off. In the aggregate, European shares are off 0.3%. If that holds, European markets will post their largest weekly drop so far this year. Blue chip stocks are hit even harder than the broader market, down 0.7%. At home, futures are pointing to a roughly flat opening ahead of this morning's new home sales report.
In bondland, Treasuries continue to rally across the curve, as investors begin to think the recent sell-off was overdone. The sell-off was originally sparked by investors lowering their odds of QE3 later this year and moving forward their expectations of the first Fed hike from late 2014 to late 2013. In our view, the sell-off was overdone and our rates strategy team suggests a trade idea to capitalize on the recent sell-off in Treasuries.
In Europe, peripheral sovereign debts are selling off. Spain's 10-year note is up another 5bp, to yield 5.50%, while Italy's 10-year note is up 6bp, to 5.13%. Meanwhile, the UK gilt and German bund are benefiting from the risk-off trade; both notes are rallying 3bp, to 2.29% and 1.88%, respectively.
In the currency markets, the dollar is selling off, with the DXY index down 0.4%. Not surprisingly the weaker dollar is boosting commodity prices. WTI crude oil is up 41 cents, to $105.76 a barrel, and gold is trading $4.33 an ounce higher, at $1,650.23.
Overseas data wrap-up
Europe is not out of the woods yet. Overnight, our European economists published a piece on the challenges that lie ahead for Spain. In particular, Spain needs to (1) find a new growth model, where construction and real estate play a lesser role and resources move to the tradable sectors, (2) reduce leverage across sectors, including, but not restricted to, real estate-related activities, and (3) bring down the c.25% unemployment rate. The rebalancing exercise will be particularly challenging, as the economy faces contraction this year and subdued growth next year, due to the combination of a large fiscal adjustment and a credit squeeze. A positive force would be recovering exports, but these largely depend on euro-area growth.
With that in mind, our European team revised down its GDP forecast for the country. It expects GDP growth to contract by c.1.5% in 2012 and to be flat next year. Given the relatively benign profile for growth, where the European team forecasts Spain returning to positive growth in 2014, it does not project the deficit-to-GDP ratio to fall below 3% before 2014, while the debt-to-GDP ratio peaks at just below 80% of GDP before receding from 2014 onwards. To read the full report: European Macro Viewpoint, 23 March 2012
Today's events
The only thing on the economic calendar today is the release of the February new home sales report at 10:00 am. We expect new home sales to decline 3.0% in February, to 310,000. Mortgage purchase applications fell 7.3% in the month, which suggests a decline in contract signings.