Overnight Sentiment: Europe Front And Center As BOJ Checks To Fed

With only new home sales (which we actually report as opposed to NAR goalseeked marketing materials) to hit the docket in the US, the only newsflow that matters again will be that coming out of Europe, which is holding an informal summit. As BofA reminds us, the summit was originally set up to discuss growth. Now, it is there for Grexit damage control. Today's discussions will focus on the use of existing tools for supporting short-term growth. Spain and Greece are likely to be on the agenda as well. On Greece, although discussions should focus on the pros and cons of a Greek exit, we believe there will be no communiqué other than to mention that Greece should stay in the euro area and implement the programme. On Spain, discussions will likely focus on the banking sector. The discussion will likely be around using the EFSF (or its successor ESM) directly to fund the banking sector, a step Germany opposed in the past. Overall, we do not expect many decisions from the summit. Rather, we expect a communiqué about what was officially discussed, and a date for a later rendezvous. In other words, "investors are likely to be let down by today's summit" (that was BofA's assessment). Also let down, were markets in the overnight session when the BOJ, contrary to some expectations, left its QE program unchanged. As usual keep an eye on headlines: record EUR interest means violent short covering squeezes if the algos sense a hint of optimism in any red flashing text (if only briefly, as the long-term outlook for the situation is quite hopeless).

Full market summary via BofA:

Market action

Asian markets snapped their two-day rally after comments by the former Greek prime minister Lucas Papademos dampened optimism ahead of today's European Union summit. The MSCI Asia Pacific fell by 1.7%. The biggest sell-off was in Japan - the Japanese Nikkei fell 2.0% - as the BoJ refraining from additional easing and weaker-than-expected exports dampened investor moods even further. Looking at the other regional markets, we find that the Hang Seng slipped 1.3%, the Korean Kospi dropped 1.1% and the Shanghai Composite lost 0.4%. In Indian, the Sensex closed 0.5% lower. 

European stocks also snapped their two-day winning streak, as investor enthusiasm ahead of today's EU summit has faded and UniCredit SpA and Intesa Sanpaolo SpA sold shares to raise capital. In the aggregate, European equities are down 1.5%. Blue chips are off 2.0%, while shares in London and France are down 1.9%. German shares are off 1.7%. At home, the S&P 500 is set to open 0.8% lower after finishing flat yesterday. US investors also have to worry about a looming recession in 2013, according to a CBO report, if all scheduled budget cuts hit the economy on January 1. 

In bondland, Treasuries are rallying as investors flock to safe-haven assets. The 10-year yield is down 3bp, to 1.74%, while the long bond is down 4bp, to 2.83%. In Europe, UK gilts are bid, with the yield 8bp lower, at 1.78%, and the German bund is rallying to an all-time low of 1.41%. Yields on Spanish, Italian and Portuguese debt are all rising, as investors worry about the impact on those countries from a possible Greek exit. 

The dollar is also benefiting from its safe-haven status, with the DXY index up 0.4%. In the commodities market, crude is down 0.9%, to $90.9 a barrel, while gold is down 0.8%, to $1,555.60 an ounce.

Overseas data wrap-up

Japan's exports rose 7.9% in April from a year earlier, underscoring the risk that weakness in global demand may limit the rebound in the economy. On the flip side, imports gained 8.0%, leaving a trade deficit of 520.3 billion yen in April. That represents a widening in the trade deficit. A large part of that widening is due to the increased imports of fossil fuels to make up for the closure of the country's nuclear plants. That trend will likely continue, as opposition remains high against restarting the country's nuclear power plants. 

Overnight, the Bank of Japan left its monetary policy stance unchanged, leaving its asset purchase program unchanged, as well as its benchmark interest rate on hold at 0.10%. Looking ahead, the risk is that the BoJ eases policy to try to help the country escape from deflation. 

UK retail sales excluding auto fuel declined more than expected in April, falling 1.0% mom versus consensus estimates of a 0.7% drop. March's figure was revised marginally higher to 1.6% from 1.5%. From a year ago, sales are down 0.3%. Retail sales are very volatile, but the trend has been roughly flat since the beginning of this year. Overall, our UK economist expects growth to remain stagnant, with the economy remaining flat this year. 


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