Overnight Action: European Knee Jerk Fade

SSDD. Europe has a late night conference, regurgitates stuff, gives no details, makes lots of promises, peripheral bonds tighten only to blow out, etc, etc, etc. Seen it all before. Unlike a week ago, Spanish bonds, when Spanish bonds ripped by 1%, this time we can barely muster a 25 bps move tighter, with the 10 year "down" to  6.82%. It was 6.25% a week ago. Expect the blow out as has been empirically proven time and again. Hint: there is no magic money tree nor is there a magic collateral tree.

A less jaded version of the overnight events from BofA:

Market Action

Asian equity markets slide after the release of the Chinese trade report that showed China's economy is slowing. See the overseas data section for more. That helped cause the MSCI Asia Pacific Index to record its fourth consecutive selloff. Looking at the individual markets, the worst performer was the Japanese Nikkei and Korean Kospi both down 0.4%. The Shanghai Composite fell 0.3%, while the Hang Seng lost 0.2%. On the flip side, the Indian Sensex rose 1.3%. 

In Europe, a risk on mode has swept over investors after the Eurogroup agreed to ease budget rules for Spain and made progress on the Spanish bank recap. For more see the European watch below. In the aggregate European equities are trading 1.1% higher in the aggregate. At home, futures are pointing to a solid 0.4% rally in the S&P 500 later today. 

Treasuries are backing up modestly across the curve. The five year yield is 1bp higher while the ten year and long bond are both up 2bp. The ten year yield is currently trading at 1.53%. In Europe, Spanish ten year yields are down 23bp to 6.75% and Italy's ten year note is trading at 5.88% after falling 19bp. 

The dollar is weaker with the DXY index down 0.1% and commodities are mixed. WTI crude oil is down 16 cents to $85.83 a barrel and gold is up $9.05 an ounce to $1,596.58. 

Overseas Data Wrap-Up

Chinese export and import growth slowed in June. Exports rose 11.3% yoy in June after increasing by 15.3% yoy in the prior month. Imports slowed considerably increasing just 6.3% yoy in June, that's down from the 12.7% yoy growth rate recorded in May. Chinese export growth has slowed considerably since the first half of 2011 weighing on the country's economic growth. Our Chinese economist Ting Lu estimates that the export slowdown has knocked 1.5pp off of headline GDP. With US growth set to slow to 1% by the fourth quarter of this year and the Euro area to fall further into a recession, China's export growth faces considerable headwinds in the second half of this year. Ting expects export growth to dip below 8.0% in the second half of this year but expects the government to offset weak external demand with more policy easing measures. 

Several European countries released industrial production data early this morning. In the Euro area, both France and the Netherlands recorded drops in their industrial output in May, -1.9% mom and -0.3% mom respectively. With the recession expected to get worse over the next several months, investors should brace for additional declines in the region's industrial production. Outside the Euro area, the UK managed to record a 1.0% mom increase in industrial production. That was partly a bounceback from the revised lower 0.4% mom contraction in the prior month. 

No major news from yesterday's Eurogroup meeting

There were no major news and most of the progress was on the Spanish recap program and the deficit adjustment:

1. Spain will get an extra year to reach a budget deficit of 3% (2014) which will be approved at the ECOFIN meeting today as long as Spain takes the fiscal measures our European team has highlighted before. There was also confirmation that the bank recap loan would initially come from the EFSF. Once the ESM is up and running the loan would be transferred to the ESM without gaining seniority status. The first tranche of the program to recap the weakest banks will be released by the end of July. We will get more details at the next Eurogroup meeting (July 20).

2. Regarding the secondary market purchase programme, the ECB and EFSF signed a technical agreement to set up the program for secondary market sovereign debt purchases, but no further details were released. 

Today's events

The only thing on the calendar today is the release of the NFIB's small business optimism report at 7:30 am. Consensus expects the index to fall to 93.3 in June from the 94.4 recorded in the prior month.