Crude

Welcome to another morning which saw weak news out of Asia (Chinese Services PMI declining to lowest level since January), weak news out of the UK (Services PMI down to 53.3 from 55.3 previously), and weak news out of Europe where a Spanish auction once again paid well into the unsustainable levels to give the market the illusion that it is well funded. Completing the picture is the ECB which announced that yesterday banks deposited for the first time since early March a total over €800 billion (primarily as Northern European banks see their holdings of Southern paper mature and not get rolled over), or €803 billion to be precise, a €14 billion increase overnight, as one can make the argument that liquidity is once again starting to freeze up. However, despite all the ugly news, US futures are of course up, with the only question the headline scanning algos care about is whether initial claims will once again miss the consensus of 380K solidly (thus making sure tomorrow's NFP print is QE enabling). Our guess it that last week's print of 388K is revised as usual upward, into the low 390K region, with the number missing Wall Street forecast but posting a "decline" from last week's revised number. After all this scheme has worked for so long, why end now?

In the early hours of the European session, continental markets opened higher, reacting to yesterday’s positive performance in the US. Sentiment quickly turned as continental Europe released its respective Manufacturing PMI figures, with even the core European nations recording declines in the sector and lower-than-expected readings. Despite the poor data, some major cash markets are clinging on to positive territory, as the CAC and DAX indices both trade higher. The Spanish and Italian markets, however, tell a different story. With both their respective PMIs recording significant declines, both now trade lower by around 2% apiece. Against the flow of bad Eurozone news, the UK has released an expectation-beating Construction PMI figure, going somewhat against last week’s breakdown of the official GDP statistics. Markit research cites strength in commercial work and new orders as the main driver for the growth. The downbeat data from Europe has taken its toll on EUR/USD, currently trading lower by over 90 pips, but the pair has come off the lows in recent trade. GBP/USD has mirrored the moves in the EUR and trades lower by over 40 pips, however some support has been gained from the strong Construction PMI.

For those who follow the overnight session and know very well that the only factor there is whether Europe is open or closed (like yesterday), we have three words: Europe was open. As BofA summarizes: "Yesterday's stronger than expected ISM manufacturing sparked a solid rally in the S&P 500. Around mid-day the index was up about 1.2%; however, the markets slowly faded throughout the rest of the day ending up 0.6%. Our equity strategy team things that the S&P is roughly at its fair value given the macroeconomic backdrop and the continued troubles in the Euro area." It is hardly rocket science that Europe will continue to drag on the world. The only question is how long before this nexus of global trade drags everyone else down, because as hard as they try the US and the BRICs simply can not pull away from the tractor beam of the European black hole.

All you need to read and some more.

In late February and early March, gas prices were all the rage with every media outlet quoting them ad nauseum until European distresses reclaimed the headlines and suddenly, gas prices became irrelevant once again in the minds of the politicians and media - despite only a very modest drop from their near-record highs. Retail gas prices have indeed fallen for the last three weeks and some have heralded this 13c drop as the second-coming of tax-rebates for consumers in the US. However, in the last few weeks, Crude oil prices have rallied somewhat smartly from under $101 to over $106 this morning (back to one-month highs). RBOB (wholesale gasoline) prices have also - in the last few days - started to push higher with their 'normal' few-week lag. Given the historical precedent, we would expect to see retail gasoline prices stabilize and turn up once again within the next week or two - just in time for the winter-warmth effects to wear off on the macro-economy and the summer driving season to begin - burning an ever-bigger hole in the household's pocket.

With a Labour Day market holiday across the continent, focus turns to the FTSE-100. The UK market is trading modestly higher with some strong earnings reports overnight lifting the index. Lloyds Group posted stronger than expected profits and reported confidence in the delivery of their financial guidance. The report has boosted Lloyds shares to become one of the top gainers of the day. Despite this, the financials sector is being held back from outperforming as Man Group fail to deliver on their sales figures, pushing their shares lower throughout the session.  The only notable data release of the European session was UK Manufacturing PMI, coming in below expectations with a reading of 50.5 as manufacturing output was dampened across April by Eurozone weakness and contracting new orders. Following the release, GBP weakness was observed, with GBP/USD touching upon session lows.  Pre-market, the RBA cut their cash target rate by 50BPS, a larger cut than expected. The board cited skittish market conditions and below trend output growth as the triggers for the rate cut. As such, AUD weakness is observed across the board and AUD/USD stops just short of breaking through 1.0300 to the downside.  Looking ahead in the session, participants look toward US ISM Manufacturing for March due at 1500BST/0900CDT as the next key data release.

Looking at your screens and seeing nothing but black? Don't worry, your internet feed did not get cut - it is just that virtually everyone else in the world is taking today off (although judging by recent volumes one could be forgiven to assume that it is "just another day"). Which is not to say that nothing is happening, with a surprising bigger than expected rate cut (50 bps to 3.75%) by the RBA crushing AUD longs overnight, and a Manufacturing ISM on deck which is far shakier now than it was before yesterday's major PMI miss. Compounding the concerns was a UK PMI print just barely above contraction territory at 50.5, below expectations of 51.5, down from 52.1. Finally, expect another record bout of GM channel stuffing which continues to be the only "shining" aspect of the now inflecting US recovery. To summarize with DB's Jim Reid: "Ahead of an important day, it has been a fairly quiet session for markets overnight. Most Asian markets (include Hong Kong, Singapore, Shanghai, and South Korea) are closed for Labour Day. Indeed much of Europe will be closed today. In terms of what's open overnight, the Nikkei is -1.2% but the ASX 200 is up +0.9%. China’s official PMI manufacturing inched a little higher in April to 53.3 from 53.1 in March but slightly below market consensus (53.6). For such a huge economy the Chinese official PMI series does seem to have been remarkably smooth of late as the reading has been gradually on the rise since hitting a recent low of 49.0 in November (50.3 in Dec, 50.5 in Jan, 51.0 in Feb, 53.1 in Mar, 53.3 in April). As we go to print the Reserve Bank of Australia has unexpectedly cut its key benchmark rate by 50bps to 3.75%. Indeed only 2 out of 29 economists polled by Bloomberg saw this coming. The market reacted aggressively post the announcement taking the front end bills 15-18bp lower in yields."

April ended on a weak tone (after another set of weak macro data) with a day of risk-asset deterioration amid low ranges and low volumes as the S&P 500 broke its 4-day rally streak. AAPL was a standout having given back over 60% of its post-earnings spike and nearing a break below its 50DMA once again. HY credit outperformed with an afternoon surge (in HYG also) taking it back into the green for the month - even as the S&P 500 remains marginally off March's close and underperformed along with IG credit today. Treasuries leaked lower in yield for most of the day but gave half of it back into the close (after Treasuries' best month in 7 months - perhaps a modestly expected give back on some rebalancing). Gold outperformed Silver once again today as Silver fell back to basically retrace all of its YTD gains relative to stocks - both up just over 11% YTD now (note that Silver was +32% prior to LTRO2). Stocks remain rich relative to Treasuries less-than-stellar implications but financials (which had their worst month since November) dragged the broad market down for its first losing month in the last six, as Utilities and Staples the only sectors with a reasonable gain this month. JPY strength and AUD weakness were evident and implied weakness today but in general the USD did very little on this last day of the month. VIX ended above 17% on the day, up almost 1vol as the term structure bear-flattened a little. Overall, a weak-end to the month with little apparent confidence in extending the QE-hope trend of the last few days as stocks remain hugely rich to broad risk-assets overall and most notably Treasuries.

All major European bourses are trading lower with the exception of the DAX, which holds just above the open by a modest margin. Adidas ranks among the top performers in the German index, following the report of a strong set of sales figures, contributing to the positive trade. Spanish concerns continue to build up as Standard & Poor’s took ratings action on 16 of the country’s banks, downgrading the notable names of Banco Santander and BBVA. Although the move was not a surprise as this is the usual procedure following a sovereign downgrade, both Santander and BBVA, along with the IBEX are in negative territory.  The Bund is seen higher amid a generally risk-off theme to markets this morning. Volumes have been relatively light, however a slight pick-up has been observed in recent trade, grinding the security upwards in the last hour or so.  EUR/USD continues to experience weakness and now trades close to a touted option expiry of 1.3200, as traders seek the safety of the USD across a number of currency crosses.

Another day of ugly news out of Europe, with both macroeconomic and monetary data coming in to confirm that downward slope of the European forward trajectory (not to mention funny: below is a chart of Greek retail sales. Hardly any commentary is necessary). Yet despite some recently gravity in the EURUSD, for the time being the futures are trending flat to slightly down, perfectly ambivalent as to how will ease first as long as someone eases. Will this sustain, or will a disappointing Chicago PMI at 9:45 am once again send stocks first plunging then soaring on hope of imminent NEW QE? We will find out shortly. In the meantime, here is a recap of the overnight market action.

Futures are unchanged after dropping steeply overnight following the Spanish re-downgrade as the Italian 5/10 year bond auction was bad, but still passed (somehow the lack of the European bond market ending is good news). This is ironic with Europe very much on edge following the release of very disappointing EU data, with German confidence, French consumer spending, Spanish unemployment all worse than estimates. Offsetting all of the negativity to some extent is the gross JPY10 trillion and net JPY5 trillion injection by the BOJ, which is a harbinger of what will happen west of Japan when push comes to shove. And so now all eyes turn to US GDP, which, continuing the Constanza bizarroness, better miss for stocks to surge, as a beat of consensus of 2.5% will mean the Chairman was not joking when he told the world he was morphing from a dove to a hawk (if only for theatrical purposes).

After rising in the overnight session following the overbought momentum chasing yesterday's hawkish tone by the Fed (don't ask), futures, European stocks, and sovereign spreads took a turn for the worse following the big miss in European confidence and sentiment, all of which posted material declines, and slid to two and a half year lows. And while the traditional upward stock levitation will resume once the European market close is in sight, only one thing can spoil the party and derail the most recent pseudo-hawkish statement out of the Fed: initial claims, which are expected to decline to 375-380,000 from 386,000 last week. Instead what will most likely happen is a print in the mid to upper 380,000s, while last week's number will be revised to a 390K+ print, allowing the media to once again declare that the number was an improvement week over week. In other words, SSDD.

All you need to read and more.

Yesterday we had Apple sandbagging expectations with yet another round of low guidance, now it's Iran's turn, which through its Russian Ambassador just said the country will consider halting nuclear expansion to avert the EU oil ban. Needless to say, just as the Apple forward guidance so this "promise" is utterly worthless. But at least it punk'd the algos for the time being sending Brent and WTI down over $1 in a hurry.

European equities are seen making modest gains at the midpoint of the European session; however underperformance is observed in the FTSE 100, with the UK economy falling back into a technical recession with an advanced Q1 GDP reading of -0.2%. Data from the ONS has shown that the UK’s weak construction sector weighed down upon the relative strength in services and manufacturing, pushing the economy into contraction during the first three months of the year. Following the UK GDP release, GBP/USD spiked lower by around 40 pips and the Gilt moved around 30 ticks higher, with GBP remaining weak as the US comes to market. Elsewhere, the Bundesbank held a technically uncovered 30-yr Bund auction, with the German Debt Agency commenting that the results reflect volatile and uncertain market conditions. Following the results, the Bund printed session lows and remains in negative territory. Looking ahead in the session, participants look forward to the FOMC rate decision, and the Fed’s projections release.