That economic data out of Europe was disappointing overnight should come as no surprise to anyone. That Spain is broke, and there is no money to bail it out under the existing framework (and that Germany is unwilling to come up with a new bailout scheme), should also be no surprise. And yet they somehow manage to stun the market... each and every day. Which is why overnight action has now boiled down to a simple algorithmic exercise: is there a short covering squeeze: if yes, then rip, aka Risk On. If not, then Risk Off. So far, the squeeze has not been initiated which is also to be expected, following the biggest short covering squeeze in up to two years. This too may change if repo desks decide to pull borrow as they tend to do during regular hours, to give the impression that the latest and greatest bailout plan is "working." And in other news, which is completely irrelevant, here is the actual news.
From Bank of America:
Market action
Equity markets are selling off around the world. Investors were disappointed by Fed Chairman Ben Bernanke yesterday who did not lay out a clear road map for further QE. Instead his speech focused on the risk the Euro area economy poses for the US and also the dangers of the fiscal cliff. Markets are also worried that China's central bank's decision to cut its benchmark interest rates is a sign that the economy is slowing faster than investors originally expected.
The worst performing Asian equity market was the Japanese Nikkei down 2.1% followed by the Hang Seng which fell 1.0%. The Korean Kospi slipped 0.7% while the Shanghai Composite fell 0.5%. On the flip side, the Indian Sensex managed to rise 0.4%.
In Europe, equities are down 0.7% in the aggregate. Blue chips are outperforming down only 0.3% while shares listed in London are down 0.7%. At home, S&P 500 futures are pointing to a 0.4% sell off later today. That would follow the flat close yesterday.
In bondland, Treasuries are bid as the risk on rally from the prior few days begins to fade. The 10-year yield is 9bp lower at 1.56% while the long bond is down 8bp to 2.66%. In Europe, Spain's 10-year yield is on the rise up 11bp to 6.14% while the Italian 10-year is up 7bp to 5.75%. UK gilts are bid down 12bp to 1.60% and the German bund is down 9bp to 1.28%.
Big pop in the dollar with the DXY index up 0.8%. Commodities are selling off with WTI crude oil down $2.32 a barrel to $82.50 and gold down $11 an ounce to $1,578.60.
Overseas data wrap-up
On the central bank front, yesterday the Bank of England leave its benchmark interest rate unchanged at 0.5% and its asset purchase facility, ie QE, unchanged at £325 billion. Looking ahead it is highly likely that the BoE increases its asset purchase program to counter a slowing domestic economy and headwinds posed by the Euro area. In Asia, the Bank of Korea left its benchmark interest rate unchanged at 3.25% for the 12th consecutive month while the PBoC - China's central bank - cut interest rates for the first time since December 2008. The PBoC cut both the lending and deposit rates by 25bp to 6.31% and 3.25%, respectively.
Fitch downgraded Spain's credit rating three notches to BBB yesterday, with outlook negative, due to the cost of recapitalising the country's banking sector. They estimate it will cost €60bn (€100bn in a "severe stress" scenario), in line with our base case and severe bear case- and the country will be in a recession for the rest of the year and through 2013. Our Euro area economists expect the economy to contract further in 2013 by c.0.4%, although with positive qoq growth from Q1 2013, see our current forecast. Also be sure to read our most recent report on Spain here: Spain Economic Viewpoint, 08 June 2012.