Overnight Sentiment: Clutching At Straws

After plunging by 19 points in the overnight session, and just touching the 100 DMA, ES has managed to score a recovery, one which has so far clutched at straws, namely stronger than expected German factory orders (+2.2% vs Exp. 0.5%) despite German GDP due in a week which may well push the core European country into the same double dip tsunami which has swept the resto of Europe, if it prints even a slightly negative GDP print. News from Spain that the "bad bank" bailout has started, with Bankia as the first casualty is also lifting spirits as it means that more taxpayer cash will be used to support risk assets. How long this micro euphoria of "bad news is good news" lasts is anyone's guess, but mostly that of the BIS which after failing to defend the 1.3000 EURUSD, has again managed to get the all important pair over the critical support area. 

Below is a complete summary of the overnight action from BofA:

Market action

Most Asian equity markets nose dived overnight as the Greek and French elections sparked new Euro area jitters. The primary fear of investors is that the new governments would reject or weaken austerity measures. The biggest risk is the political paralysis in Greece leads to the country exiting the Euro area. Our FX Strategist believe Greece's survival in the Eurozone could be at risk, with negative implications for the still fragile periphery.

Looking at the individual markets the Japanese Nikkei shed 2.8%, the Hang Seng fell 2.6% and the Korean Kospi lost 1.6%. The Shanghai Composite managed to finish flat while the Indian Sensex closed 0.5% higher.

In Europe, equities have recovered some of their initial losses and now are only trading down 0.1% in the aggregate. Blue chips are fairing worse than the broader market down 0.3% while in Germany shares are down 0.9% and in France equities are 0.2% lower. The London markets are closed for a bank holiday.

At home, futures are pointing to a 0.5% lower opening for the S&P 500 as European fears add to the downbeat mood following last Friday's weaker than expected payroll report.

In bondland, Treasuries are bid across the curve as investors continuing to take risk off the table. The ten year note is 3bp lower at 1.85% and the long bond is also trading 3bp lower at 3.04%.

The risk off trade is also benefiting the US dollar the DXY index is 0.3% stronger. On the back of the stronger dollar commodities are selling off marginally. WTI crude oil is down 68 cents to $97.81 and gold is $3.48 an ounce cheaper at $1,638.93.

Overseas data wrap-up

On Sunday, France elected Francois Hollande as the country's next President. Mr. Hollande's victory was in line with the polls and so expected by the financial markets. Judging by his speech after winning the election his agenda will likely be focused on European matters as they unfold over the course of the next several months. To read more take a look at: French Election Implications.

In the short term, the results of the Greek elections will likely be the greatest worry for the markets. The latest results show New Democracy and PASOK having only 149 parliamentarians out of 300. The very large number of small parties just below the 3% threshold required to elect parliamentarians has reduced the required threshold for any coalition government that includes the leading party (New Democracy) to well below earlier estimates. We expect very challenging negotiations this week. All scenarios are open in our view. A government in support of the new adjustment program cannot be taken for granted. Our FX Strategist believe Greece's survival in the Eurozone could be at risk, with negative implications for the still fragile periphery. To read more about the risks from the Greek elections see: FX Viewpoint, 01 May 2012.

The Indonesian economy grew 6.3% in the first quarter from a year earlier, compared with a 6.5% yoy pace in the fourth quarter of last year as domestic consumption and rising investment helped to counter a global slowdown that has damped exports.

Inflation in Taiwan accelerated from the 1.3% yoy pace recorded in March to 1.4% yoy in April. Most of the rise in the inflation rate can be contributed to higher vegetable and food prices.

The week's events

Initial jobless claims are expected to rise to 370,000, with recent volatility attributable to seasonal factors. The data highlight of the week is March's trade balance, which we expect to widen to -$51.0b after the sharp narrowing in February. It is fairly quiet on the Fed speaking circuit. Minneapolis Fed President Kocherlakota (non-voter) speaks on monetary policy on Thursday. Bernanke speaks as well, but it will be on bank regulation.