Overnight Sentiment: Everyone At The Bailout Trough

Futures are well bid overnight even though following a modest short covering squeeze of the new record number of EUR shorts, the primary driver of risk, the EURUSD is now back to mere pips above its 2010 lows. It is somewhat confusing why equities are so jubilant about what can only be more imminent bailouts, following statements by the ECB's Nowotny who made it clear that the ECB is not discussing the renewal of bond purchases and that the central bank provides "liquidity not solvency." Adding to the confusion was a release in Chinese daily Xinhua which said that China has no intention of introducing large scale stimulus. All this simply means that the only possible source of liquidity remains the Fed, whose June FOMC decision could make or break the global stock markets, pardon economy, and why this Friday's NFP print is so critical. Absent a huge miss, it will be difficult to see the Chairman pushing through with another $750 bn-$1 trillion in LSAP. Which Europe desperately needs: first we got Italy pricing €8.5 billion in 6 month bills at much worse conditions than April 26, with the yield rising over 2%, or 2.104% to be precise, compared to 1.772% previously, and a BTC of 1.61, declining from 1.71. More importantly, the Spanish economic deterioration gets even worse after Spain just recorded a record (pardon the pun) plunge in retail sales. From AP: 'A record drop in retail sales added to Spain's woes Tuesday as the country struggles to contain the crisis crippling its banking industry and investors remained wary of the country's ability to manage its debt. Retail sales dropped 9.8 percent in April in year-on-year on a seasonally-adjusted basis as the country battles against its second recession in three years and a 24.4 percent jobless rate that is expected to rise. The fall in sales was the 22nd straight monthly decline, and was more than double the 3.8 percent fall posted in March, the National Statistics Institute said Tuesday." So all those focusing on the Greek economic freefall may want to shift their attention west.

Finally, even as PIIGS bonds slide, the bulk of core European countries saw their bond yields drop to record lows as the pan-European capital flight continues.

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Market Action

Asian equity markets rallied on speculation that China would inject new stimulus into the economy to boost growth. That sent the Hang Seng up 1.4% and the Shanghai Composite 1.2% higher. The cyclically sensitive Korean Kospi managed to rise 1.4%. The Japanese Nikkei managed a respectable 0.7% gain while the Indian Sensex eked out a 0.1% rise. 

Earlier in the day, European equities were trading in positive territory until a Chinese news agency reported that China has no intentions of introducing a large stimulus program. Currently, in the aggregate European equities are down 0.1%. After the holiday weekend unofficially kicking off the Summer season, US investors are coming back to their desks upbeat pushing US futures on the S&P 500 up 0.5%. 

In bondland, Treasuries are bid across the curve. The US 10-year is trading at 1.73% down 0.2 bps while the long bond is trading at 2.83% down 0.1 bps. In Europe, German bunds contain to make new lows as investors seek their safe haven status. German bunds are currently trading at 1.35%. The bailout of Bankia and the downgrade of several Spanish banks over the weekend helped drive yields on Spain's 10-year yield up to 6.42%. 

The dollar is trading down 0.2% against a basket of other major currencies. Meanwhile commodities are higher. WTI crude oil is trading up 0.8% at $91.60 a barrel while gold is trading at $1,576 an ounce, up 0.2%. 

Overseas data wrap-up

Spanish retail sales spending collapsed in April falling 11.3% yoy. In the prior month, retail sales were down 3.8% yoy. In our view, the drop in retail sales is a result of the current deterioration in the economic outlook, the ongoing credit contraction and the fiscal contraction. 

The week's events

The data mills churn again this week, with the employment report and ISM on Friday and the second estimate to Q1 GDP on Thursday. We expect non-farm payrolls to increase 140,000 in May and the unemployment rate to increase to 8.2% from 8.1%. The ISM survey should show that the manufacturing sector continues to expand, but at a decelerating pace. We expect the ISM manufacturing index to tick down to 53.5 in May from 54.8 in April. We look for GDP to be revised down to 1.9% in Q2 from the advance estimate of 2.2%.