France

As we approach the US day session open, Europe is on a similar trend to yesterday with broad market weakness. European sovereigns, most notably the fulcrum securities in Italy and Spain - but also France, are at their worst levels in three weeks with Italian 10Y back over 5% yield and Spanish 10Y back over 5.5% (near its worst level since mid January). The LTRO Stigma (the spread between LTRO-encumbered banks and non-LTRO-encumbered banks) has jumped again and is near its worst levels since the initial LTRO at over a 90bps differential. Corporate credit and stocks are also notably weaker as credit decompresses to catch up with stocks weakness as CDS roll technicals unwind.

European cash equity markets are making heavy losses as we head into the midpoint of the European session. Markets got off to a bad start as participants reacted to overnight Chinese HSBC manufacturing PMI recording a steeper contraction than the previous month. The manufacturing outlook has gotten even worse as the session has progressed, with France, Germany and the Eurozone as a collective recording contractions in their respective manufacturing PMI numbers for March. As such, commodity linked currencies are trading lower with AUD/USD down around 85 pips. WTI and Brent crude futures are moving in tandem with other markets as they also record losses going into the US open. In other news, there were reports that the ECB were looking to pull out their covered bond asset purchase program as less than a quarter of the fund has been used so far. A Bundesbank spokesman commented that it will not pressure the ECB into withdrawing the covered bond purchase program as it is the central bank’s decision to make. Looking ahead in the session, the market awaits the weekly US jobs data due at 1230GMT.

• Beijing on edge amid coup rumours (FT) - as predicted two days ago, do not expect any official media update on this critical matter, until after the outcome, whatever it is
• Goldman scours emails for use of word "muppets" (Reuters)
• Germany to Balance Budget Early (WSJ)
• Osborne Gives and Takes From Rich in U.K. Budget Balancing Act (Bloomberg)
• Big Spending at Fannie, Freddie Should End, Watchdog Says (Bloomberg)
• Volcker Says U.S. Needs Reforms in Finance, Government (Bloomberg)
• Chinese Firms, Regulators in Talks on Yuan-Fund Program (FT)
• Ireland Said to Ready Bank-Debt Proposal for ECB Review (Bloomberg)

Following a nearly 2 day long standoff, the suspected Jewish school shooter has died during a 30 hour shoot out with French police, after falling out of a window. Guardian has some more details:"The French interior minister, Claude Guéant, has confirmed that Merah is dead and paid tribute to the police who conducted the raid... "Last night, our last contact with the killer showed us just how dangerous he was. This morning the decision was taken to intervene," said Guéant.... Guéant adds that Merah burst out of the bathroom as video surveillance equipment approached. He began firing with extreme ferocity." And from Fox News: "The suspect in an radical Islam-linked killing spree in southern France was killed after police raided his apartment to end a 30-hour standoff, the AFP reported, citing police sources. Mohamed Merah, holed up in an apartment in the southern city of Toulouse, has not contacted negotiators since Wednesday night. Reuters reported that explosions and gunfire were heard for about four minutes as police special forces moved in on the apartment. Authorities used gas to try and paralyze the suspect, the report said."

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.

Whether it was the truthiness of Willem Buiter's comments this morning, the sad reality of Spanish housing, or more likely the ugly fact that LTRO3 is not coming (as money-good assets evaporate), today was broadly the worst day of the year for European sovereigns. Spanish 10Y spreads jumped their most since the first day of the year, Italian yields broke back above 5% (and spreads broke back over 300bps), and Belgium, France and Austria all leaked notably wider. Since Friday's close, Italian and Spanish bonds have suffered their largest 2-day losses in over 3 months. Notably the CDS markets rolled their contracts into Monday and perhaps this derisking is real money exiting as they unwound their hedges - or more simply profit-taking on front-run LTRO carry trades but notably the LTRO Stigma has exploded in the last few days back to near its highs. European equity markets are now underperforming credit - having ridden the high-beta wave far above credit markets in the last few months (a picture we have seen in the US in Q2 2011 and HY is signaling risk-aversion rising in the US currently in the same way). Just how will the world react to another risk flare in Europe now that supposedly everything is solved?

After a disappointing home sales print in the US (as the shadow overhang remains heavy), some perspective on just how bad it is in Europe is worthwhile. With Spanish yields starting to blow out again, it likely comes as no surprise that, as Goldman notes, the Spanish housing market (and for that matter the periphery in general) is bad and getting worse. However, Ireland remains the worst of the worst and Goldman sees yet another growing divide between the haves and have-nots of Europe as the residential property price performance can essentially be split into four groups: Strong, Recovering, Weak, and Ireland/Spain; with the latter perceived as considerably worse than the 'reported' data would suggest. Is it any wonder that Spain trades wide of Italy again now and as Citi's Buiter noted earlier, Spain is now the fulcrum market (Spanish 10Y spreads +30bps from Friday's tights).

There are two main news updates dominating early newsflow: the first comes from BHP Billiton, after the world's largest miner raised concerns about the possibility of a sharp slowdown in demand from top metals consumer China. Per Reuters: "There is a slowing trend in China ... moving increasingly away from the growth model that they have had, which may be a little less metals intensive. This is not new, but recognition by big mining companies would have had an effect." Australian iron ore miners, key beneficiaries of China's modern-day industrial revolution, signaled on Tuesday demand growth was finally slowing in response to Beijing's moves to cool its economy. BHP Billiton said it was seeing signs of "flattening" iron ore demand from China, though for now it was pushing ahead with ambitious plans to expand production." That this comes just on the tail of JP Morgan warning of a hard landing in China is curious, and one wonder if the Federal Reserve Bank of JP Morgan is not fully intent on telegraphing that the next big center of QE will be the PBOC. The other news is that the perpetual crude "upside capacity" strawman Saudi Arabia 'has pledged to take action to lower the high price of oil, which has risen to around $125 a barrel, with laden supertankers set to arrive in the US in the coming weeks. ... Saudi Arabia said yesterday it will work "individually" and with the other petrol-rich Gulf states to return prices to "fair" levels. The country indicated earlier this year that $100 a barrel was the ideal oil price." There is one problem with this as expected Saudi attempt to help Obama's reelection campaign: as pointed out yesterday, it is very unlikely that Saudi Arabia has any realistic ability to do much if anything to push the price of crude lower, especially if and when the middle east hostilities flare up.

Animals Are Getting Fatter, Too …

For now, these are isolated incidents. But in Europe events of this kind have an unpleasant tendency of recurring just when it is darkest...

• There is no Spanish siesta for the eurozone (FT)
• Greece over halfway to recovery, says PM (FT) - inspired comedy...
• Sarkozy Trims Gap With Rival, Polls Show (WSJ) - Diebold speaks again
• IMF’s Zhu Sees ‘Soft-Landing’ Even as Property Slides: Economy (Bloomberg)
• Obama Uses Lincoln to Needle Republicans Battling in Illinois (Bloomberg)
• Three shot dead outside Jewish school in France (Reuters)
• Osborne Seeks to End 50% Tax Spat With Pledge to Aid U.K. Poor (Bloomberg)
• Monti to Meet Labor Unions Amid Warning of Continued Euro Crisis (Bloomberg)

The Fed is not a “dealer” giving “hits” of monetary morphine to an “addict”… the Fed has permitted cancerous beliefs to spread throughout the financial system. And the end result is going to be the same as that of a patient who ignores cancer and simply acts as though everything is fine. That patient is now past the point of no return. There can be no return to health. Instead the system will eventually collapse and then be replaced by a new one.

Peak oil will scare us to death, peak water will kill us.

There's a lot of it even in Germany, but it finally has a way of measuring it