Do Not Adjust Your Monitors: The Red Color Is Not A Malfunction

Please do not adjust your monitors: that strange, non-green color greeting you this morning is not a "glitch." Following yesterday's market drubbing, in which a modest 1% decline in the S&P ended up being the biggest market drop of 2013, we next got a wipe out in China, where the SHCOMP plunged by 3% the most in 15 months, down the third day out of four since the start of the year of the Snake on renewed concerns around home purchase restrictions urged by the government, but mostly driven by rampant liquidations of commodity-related stocks following yet another liquidity withdrawing repo (not reverse) by the PBOC which took out even more money out of the market.

We then continued to Europe where despite the near-record surge in German optimism (because in the New Normal hope is a strategy - the only strategy), German manufacturing PMI missed expectations of a rise to 50.5 from 49.8, instead printing at 50.1, while the Services PMI outright declined from 55.7 to 54.1 (55.5 expected).  We wonder how much higher this latest economic disappointment will push German investor confidence.

Not too unexpectedly, Europe's suddenly weakest economy France also disappointed with its Mfg PMI missing as well, rising from 42.9 to 43.6, on expectations of a 43.8 print, while Services PMI declined from 43.6 to 42.7, on "hopes" of a rise to 44.5. The result was a miss in Europe's composite PMIs with the Manufacturing posting at 47.8 on expectations of 48.5, while the Services PMI was 47.3, with 49.0 expected, and a blended PMI missing just as much, or 47.3 with 49.0 expected, and down from 48.6. The news, which finally reasserted reality over hopium, immediately pushed the EURUSD to under 1.32, the lowest print since January 10. Therefore while Germany may or may not escape recession in Q1, depending on how aggressively they fudge their export numbers, for France it seems all hope is now lost.

So much for Europe exiting that "brief, technical recession" any minute now.

More on the PMI miss from SocGen:

Flash PMIs for France, Germany and the euro area today added to the negative market sentiment following the Fed minutes yesterday. In contrast to expectations, both the manufacturing and services PMI for the euro area declined, suggesting that the recovery in Europe may be stalling. While that may still be too early to call, we expect to see some readjustment in expectations, which have led the improvement in sentiment, while lagging real data could continue to improve in the coming weeks. The PMIs, however, raise concerns over the strength of the recovery for the rest of the year, with negative headwinds coming from fiscal austerity in southern Europe.


While the manufacturing PMIs in Germany and France managed a slight improvement in February, the euro area PMI surprisingly declined to 47.8, suggesting poor outcomes in Italy and Spain. For the services PMIs, the outcome was even worse with all three indices declining - the German services PMI remaining at a relatively high level of 54.1 while the slide in France continued to 42.7. For both indices, the gaps between Germany and France are close to historically high levels.


For manufacturing, the positive news on both Germany and France was that the new orders index increased the most, while current production remained weak. In addition, the outlook for employment increased in both countries, although from low levels. For services, new businesses declined the most, suggesting that we may see continued weakness. In both Germany and France, the recent strength of the euro may have influenced while in France the weakness is likely to be linked to fiscal tightening and added uncertainties surrounding the reform agenda. In Germany, we expect both manufacturing and services PMIs to hold up relatively better in the coming months, although expectations may be shifting down.


In sum, the weakening in PMIs is in line with the view that expectations may have overshot in recent months, which should lead to some adjustment. This does not exclude that we may see stronger real data in the near term, as suggested by positive new order PMIs. More importantly, it suggests some  uncertainty over the strength of the recovery into Q2. The picture of divergence is likely to remain, especially between relatively good conditions in Germany  and weak conditions in southern Europe.

In other news:

  • The chairman of France’s Building Federation says President Hollande should “twist the arm” of Axa SA and other insurers to plow more of their $1.86t of life insurance policies into new housing
  • Britain saw its budget surplus widen in January as the Treasury received the first payment of gilt-coupon income from the Bank of England’s quantitative easing program
  • BofAML Corporate Master Index OAS holds at 147bps as $16b priced yesterday, led by $8.5b in Yankees. Markit IG widens to 88bps from YTD low 85bps. High Yield Master II OAS holds at 492bps; one deal from $900m priced yesterday. CDX High Yield declines to 102.44
  • Nikkei falls 1.4%; European stocks slide, Germany’s DAX down 1.9%, FTSE -1.6% lower. U.S. equity-index futures lower. Italian and Spanish bonds little changed. Energy, precious metals lower

Market recap:

  • Spanish 10Y yield up 1bp to 5.19%
  • Italian 10Y yield up 7bps to 4.5%
  • U.K. 10Y yield down 6bps to 2.14%
  • * German 10Y yield down 6bps to 1.59%
  • Bund future up 0.58% to 143.25
  • BTP future down 0.59% to 111.39
  • EUR/USD down 0.84% to $1.3171
  • Dollar Index up 0.51% to 81.49
  • Sterling spot down 0.14% to $1.5212
  • 1Y euro cross currency basis swap down 1bp to -20bps
  • Stoxx 600 down 1.48% to 284.78

More on the peculiar non-buying action of the past 24 hours from DB's Jim Reid:

Brent Oil dipped -1.63% to $115.6/bbl a barrel, the biggest drop in three months, with silver falling more than 3 percent, and gold declining to an almost eight-month low. Appetite for commodities softened as the Dollar spiked sharply on the back of the FOMC minutes. Adding to worries in commodities, Bloomberg and Reuters  reported that a commodity fund had potentially begun a broad unwind and/or liquidation of positions during the day after being “caught on the wrong side of the market”. This contributed to the biggest one day fall of the S&P 500 (-1.24%) since the middle of November of last year and it was no surprise that oil & gas (- 1.8%) and mining (-4.87%) were amongst the worst performing sectors. On the Fed minutes, whilst DB’s Joe LaVorgna noted that the debate appears to be fairly balanced with respect to the continuation of QE the market reaction suggested that investors were more focused on the hawkish elements of the FOMC’s discussion. Interestingly after an initial spike the 10yr UST finished 2bp lower at 2.009% though.

Looking at the FOMC minutes in more detail, most participants viewed the asset purchases to date as effective in stimulating the economy, but “many participants” expressed concerns about potential costs and risks of further asset purchases. A number of officials said that their evaluation of costs and benefits of the policy "might well lead the Committee to taper or end its purchases before it judged that a substantial improvement in the outlook for the labour market had occurred". Offsetting the hawkish tone, the minutes noted that "several others argued that the potential costs of reducing or ending asset purchases too soon were also significant, or that asset purchases should continue until a substantial improvement in the labour market outlook had occurred”. On growth, FOMC members were more upbeat, noting that downside risks had reduced. "Nearly all" participants expected inflation for the medium term to remain below the Committee's 2% target.

Continuing the central bank theme, the BoE minutes yesterday also surprised the market with three of the nine MPC members including Governor King himself voting for GBP25bn of additional asset purchases. DB’s George Buckley noted that Mr King was accompanied by Paul Fisher and David Miles in voting for further easing – the last time we saw this same voting pattern was back in June 2012, the month before the MPC voted for an additional GBP50bn of asset purchases at the July meeting. The sterling traded 0.6% and 0.8% lower against the USD and EUR respectively in the immediate aftermath of the BoE minutes, bringing the year’s depreciation to 6.4%/6.9% against the greenback/euro.

Back to markets, investors continue to shy away from risky assets overnight as we are seeing the Nikkei, Hang Seng, Shanghai Composite, and the KOSPI down 1.2%, 1.8%, 2.8%, and 0.5% respectively as we type.

Chinese markets are being hit by renewed concerns around home purchase restrictions urged by the government. The USDJPY has traded in a fairly narrow range over the last 24 hours and is hovering around the 93.50 mark. The commodities sell-off appears to be continuing in the overnight markets with gold, silver and crude down 0.3%, 0.5% and 0.5% respectively in Asian trading.

Moving on we have a big day ahead with flash PMIs across Europe being the main event. The market is expecting a modest improvement in February. Indeed for Euroland as a whole, the market consensus for the Manufacturing, Services and Composite series is 48.5, 49.0 and 49.0, respectively – slightly higher from the 47.9, 48.6 and 48.6 seen in January. Clearly these are still contractionary readings but we are also off the 2012 lows of 44.0, 46.0 and 45.7. Whilst there is general upward momentum in these numbers, markets can be persuaded of the recovery story and the Sovereign crisis can remain dormant. So this day every month is going to be key to risk assets in 2013.

As well as the overall Euro-zone readings, we also get the manufacturing and services reading for France and Germany today. Importantly German manufacturing PMI is expected to edge above 50 for the first time since February last year although the services sector reading is expected to be a smidgen lower after having surged to a 19-month high of 55.7 in January. German sentiment and conditions surveys have seen a decent run lately so let’s see if the trend holds today. In France, the manufacturing (43.8 expected v 42.9 previous) and services (44.4 expected v 43.6 previous) sectors are also expected to be slightly better in February albeit from a very low base.

We also have the Markit Preliminary PMI on the other side of the pond where expectations are going for 55.5 v 55.8 previously. Elsewhere in the US, CPI readings, initial jobless claims, existing home sales, leading indicators and the Philly Fed manufacturing survey are the other releases today. So a bumper day.


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