And like that, Europe is broken again. Following a spate of negative European data (what else is there), including a miss in German industrial production as well as a miss in UK manufacturing output, all eyes are again on Spain, especially those of the bond vigilantes, who have sold off the sovereign European bond market, sending the Spanish-Bund spread to over 400 bps for the first time since December 2011. The main reason today: a Goldman report saying Spain will unlikely meet its 2012 and 2013 budget targets, as well as JPM Chief Economist David Mackie saying Spanish government "missteps" have raised questions about its credibility, making investors reluctant to purchase Spanish debt. Stress has returned to periphery, if it broadened into bank funding markets more LTROs would be forthcoming; if that “failed to hold yields at an appropriate level” Spain may need assistance from the EFSF/ESM and the IMF. Euro area unlikely to return to stability in sovereigns without some burden sharing; nominal growth likely to stay below borrowing costs, making fiscal targets “all but impossible to achieve”. UBS piles in saying Spanish banking stresses still haven't been addressed. Finally, a big red flag is that market liquidity is once again starting to disappear, and as Peter Tchir points out, Main is now being quoted with 3/4 bps bid/ask spread, all the way up to 1 bps spread. In other words, as we have been warning for weeks, the period of fake LTRO-induced calm is over, and the market is demanding more central planner liquid heroin. The question becomes whether Europe has even more worthless collateral in exchange for which the ECB will continue handing out discount window money in sterilized sheep's clothing. Yet nowhere is the resumption in risk flaring more evident than in the Swiss Franc, where the EURCHF all of a sudden broke through the critical 1.20 SNB floor, which was set back in September 2011, the day gold was trading at its all time high. Said otherwise, everyone is once again scrambling for safety. And since they can't get it in the CHF, it is only a matter of time, before gold resumes its ascent as the paper currency alternative that sent it to its all time highs late last summer.
Oops:
[20]
Needless to say, the FX trading specalists at the SNB, and its bosses, whoever they may be in Hildebrand's absence, have said they will defend the floor with all they have. Keep a close eye on the EURCHF.
Bank of America summarizes the remainder
Market action
Asian equity markets finished mixed. Starting with the markets that finished higher we have the Shanghai Composite up 1.7% and the Korean Kospi climbing 0.5%. On the flip side, the Japanese Nikkei lost 0.5% while the Hang Seng lost 1.0%. The Indian Sensex was closed today.
Spain is in the spotlight after yesterday's government bond auction had less demand than was expected. Investors are nervous about the country's economic growth prospects. Rising fear is helping send European shares down 0.4% in the aggregate. Blue chips are underperforming the broader market, down 0.6%. At home, futures are pointing to the third consecutive sell off in a row. The S&P 500 is set to open down 0.1% after falling 1.0% yesterday.
In bondland, Treasury yields are backing up marginally. The 10-year and the long bond are both up 1bp to 2.23% and 3.37% respectively. In
Europe, the UK gilt is down 2bp to 2.19% and the German bund is flat at 1.78%.
The dollar is up marginally in the currency markets with the DXY index 0.1% higher. Commodities are trading higher. Gold is $4.85 an ounce higher at $1,625.53 and WTI crude oil is up 60 cents to $102.07.
Overseas data wrap-up
Despite the Netherlands officially entering a recession by contracting for two consecutive quarters, inflation remains sticky. Inflation in the Netherlands rose by 2.9% yoy in March, matching the prior month's increase. Normally, a contraction in output should put downward pressure on prices; however, the recent run up in Brent oil prices by $12 a barrel since the end of January is counteracting the normal macroeconomic drivers of inflation.
UK manufacturing output fell 1.0% MoM in February: notably below market expectations of a small 0.1% rise, with declines in output reasonably widespread across industries. The unexpected weakness of this data may pare back sentiment somewhat after all of the manufacturing, services and construction PMIs had surprised on the upside earlier this week.
Today's events
The only thing on the economic calendar today is the release of the initial jobless claims report at 8:30 am. The market is looking for claims to fall marginally to 355,000 for the week ending March 31 from the prior week's level of 359,000.