Sentiment Hobbled By Hawkish China Sending Futures Lower To Start The Week

Earlier we reviewed the overnight plunge in China stocks, especially those related to the real-estate market in the aftermath of the latest move by the State Council to be far more hawkish than expected, in its effort to curb property inflation. The economic and market weakness that resulted has followed through to overnight US and European futures, even as peripheral bonds are trading roughly unchanged, surprising many who thought this weekend's Beppe Grillo statement on the future of Italian debt and presence in the Eurozone would be market moving: it wasn't as Grillo said nothing that he had not already made quite clear.

In other, more recent economic news, UK construction PMI imploded to recession levels, plunging to 46.8 from 49.0, far below expectations and the lowest print since October 2009, setting the stage for much more Goldman-led reflation by the BOE. Also negative was the drop in the Eurozone Sentix Investor Confidence index which tumbled to -10.6 from -3.9 on expectations of -4.3, sending the EURUSD deep into 1.29 territory. It appears the Sentix excludes the soaring German confidence, which two weeks ago was the sole driver of all upside, not once but twice in one week. Today we get the first day of the sequester being digested by the market - this togetger with an empty macro calendar in the US means rumors and headlines will determine how far GETCO's algo push the stop hunts during the first and last 30 minutes of trading.

A full recap of overnight events from Deutsche Bank:

US payrolls and central banks take centre-stage this week and alongside the latest developments in Italy this will probably dictate whether we continue the upward march towards the recents highs or whether we pullback to the levels seen during last month’s wobble. We'll take a closer look at what’s in store for the week ahead later, but firstly we’ll review the overnight session in Asia and Friday’s risk- turnaround in the US.

Firstly, overnight trading in Asian markets has been marked by a risk-off tone as investors take note of new measures from the Chinese government to control real estate speculation. DB’s Jun Ma writes that the State Council issued a circular on Friday which included two key measures 1) raising the downpayment ratio and mortgage rates for second homes in localities with excessive property speculation and 2) a 20% profit tax on price differentials between selling price and purchase prices on homes. On the profits tax, Jun Ma’s view is that the strictness of implementation is the key unknown at this stage and will likely weigh on the real estate sector in the short term. On the back of the news, the Shanghai Composite (--2.8%) and Hang Seng (-1.5%) are underperforming with real estate developers, construction companies and resources stocks bearing the brunt of overnight declines. The Australian dollar is 0.75% lower to start the week, its seventh decline in the last nine sessions. The Nikkei (+0.6%) is the region’s outperformer this morning on comments from BoJ governor nominee Haruhiko Kuroda during his lower house hearing today. Kuroda was quoted as saying that "If I were appointed as the governor ... I would do everything possible to get out of deflation,". He added that "(the BOJ) is not doing enough in terms of the size of its asset purchases or the range of assets being bought”. 10yr JGB yields have hit a new low of 0.62% (-4bp on the day) while USDJPY is slightly lower at 93.45.

Returning to last Friday’s session, better than expected US manufacturing ISM (54.2 vs 52.5 expected) and consumer confidence (77.6 vs 76.3) data set the tone for a stronger US session, offsetting concerns over the impact of the sequestration and a mixed set of final PMIs in Europe. The S&P500 (+0.23%) closed near the day's highs rallying more than 1% from the morning lows, and taking the index to about 3% shy of its record 2007 closing high. Industry-wise, mining (-1.3%) and resources (-2.9%) were the main underperformers, weighed by weaker than expected official and HSBC manufacturing PMIs in China. The Dow Jones closed 0.25% higher and is now less than 1% from its 2007 peak.

Returning to Europe, in their latest Focus Europe piece, our economists have made an interim revision to their euro area GDP forecast following the downside surprise from Q4 GDP numbers, the weaker signal from the PMIs in Q1 and a provisional reaction to the increased political uncertainty in Italy. The result is a cut in euro area 2013 GDP growth from -0.3% to -0.8% for 2013

In terms of Italian elections, President Napolitano wants to bring forward the country’s first post-election parliamentary meeting to March 12th from March 15th, according to Bloomberg who cite Italian newspaper Corriere della Sera. Meanwhile Bersani hopes to persuade Italy's president that he could govern without a majority in the Senate. He has drawn up a seven or eight-point plan to present to Napolitano next Wednesday.

Bersani ruled out a deal with Silvio Berlusconi, saying a grand coalition with the centre-right was not an option (The Guardian).

As regards to Beppe Grillo, the UK Telegraph quoted that he has said that "if conditions do not change" Italy "will want" to leave the euro and return to its former national currency" citing an interview with a German magazine published on Saturday. So fairly inflammatory remarks.

Over to the US, in one of the first ramifications since the start of the budget sequester on Friday, The Hill is reporting that the Pentagon will cancel a carrier group’s deployment to the Middle East which will save roughly $300 million, helping the military curb its spending as it faces across-the-board cuts under sequestration.

In other weekend news, the PBoC deputy Governor Yi Gang said in Beijing that China is “fully prepared” for a currency war. Yi added that a currency war can be avoided if policy makers observe the consensus reached at the G20 meeting that monetary policies should be aimed at domestic economies (Xinhua).

Turning to today’s calendar, the Eurogroup/ECOFIN meeting kicks off today with developments in Italy, Ireland and Cyprus likely on the agenda. Spain’s February unemployment report is also due today while there will be no major data releases in the US.

Looking out further into the week, on Thursday the ECB, BoE and BoJ will all announce their latest policy decisions with all three expected to stay put for the time being. Draghi’s post- ECB press conference will be closely watched in light of recent uncertainty following the Italian elections. From the Fed, Chairman Bernanke speaks on the topic “Low Long-Term Interest Rates" on Friday.

In the US, the focus will be on Friday’s payrolls report – the market is expecting a +160k change in the headline, +167k change in private payrolls and the unemployment rate to remain unchanged at 7.9%. Ahead of that, Tuesday’s services ISM, Wednesday’s ADP employment report and factory orders, and Thursday trade balance and consumer credit reports are also worth highlighting.

In Europe, final services PMIs and retail sales are due on Tuesday; Euro area Q4 GDP (preliminary) and an update on Spain’s budget balance for 2012 is on Wednesday; German factory orders are on Thursday followed by industrial production on Friday.

In China, the National People’s Congress is scheduled begins its annual session on Monday where Xi Jin Ping is set to be officially confirmed as the new President and Li Keqiang will officially succeed Wen Jiabao as Premier. The key data releases scheduled are the HSBC services PMI on Tuesday and the February trade report on Friday. On Saturday (9th March), China provides its monthly macro data update with CPI, PPI, industrial production, fixed asset investment and retail sales all scheduled