Overnight Sentiment: Optimism Waning

The main event of the past 48 hours: the Chinese "Schrodinger" PMI, which came much weaker or stronger, depending on whether one uses the HSBC or official data (which always has a seasonal jump from February into March) has been forgotten. Any bullish sentiment from a 'hard landing-refuting' PMI (which incidentally means less chance of easing), was erased following a very weak Japanese Tankan sentiment report, which saw exporters fret about a return to Yen strength. Naturally, the market response was to immediately shift hopes and dreams of more easing to the BOJ, if the PBOC is for the time being off the hook. Alas, since the BOJ's actions have traditionally had much less impact on global markets, stocks are not happy. This was followed by a bevy of Eurozone data, where unemployment rose to 10.8% from 10.7%.

And while this deterioration was expected, the slide in French PMI was not, dropping from 47.6 to 46.7, on expectations of an unchanged print. The modest bounce in German PMI and especially in the UK from 51.5 to 52.7, where QE is raging, were not enough to offset fears that it is now "France's turn" and that global PMIs are once again showing that the recent $2 trillion in global liquidity equivalent injections have already peaked, in line with expectations: after all the half life of central planning interventions is getting progressively shorter (as we will demonstrate visually shortly).

More overnight market sentiment recap from BofA:

In focus

Today we receive a bevy of March PMI reports providing an early read on the state of the global manufacturing sector. The early read is that the manufacturing sector improved in March with a majority of countries reporting mom improvements in their manufacturing PMIs. Like the prior month a majority of countries reporting below the 50 breakeven level on their PMIs were located in Europe. That is consistent with our European economics team view that the Euro area economy will contract 0.5% yoy in 2012. Another highlight was that the Chinese manufacturing PMI jumped to 53.1 in March the highest level in a year and up from 51.0 in February. That should help ease concerns investors have recently had that China will face a sharp slowdown in growth. For more detail see the overseas data section.

Market action

The majority of Asian equity markets finished higher as the region's investors reacted to Friday's stronger than expected US consumer sentiment report and the better than expected uptick in consumer spending in February. The Korean Kospi was the region's best performer up 0.8% followed by the Indian Sensex which closed up 0.4%. The Japanese Nikkei finished 0.3% higher while on the flip side the Hang Seng fell 0.2%. The Shanghai Composite was closed today.

In Europe, equities started the day off in positive territory on the strong Chinese PMI report but later reversed direction after an article in the French newspaper Le Monde grabbed investors' attention. The article highlighted the above 20% unemployment rate in Spain and how the recently announced budget for the country would likely put upward pressure on the current unemployment rate.

In the aggregate European stocks are down 0.2%. Blue chips are underperforming the market down 0.5% while shares listed in London are down only 0.1%. Companies listed on the DAX are actually up 0.2% while French listed firms are in line with the overall drop of 0.2%. At home, futures are pointing to a 0.1% higher opening for the S&P 500.

In bondland, Treasuries have sold off modestly across the curve. The five, ten and long bonds are all yielding 1bp more than Friday's close. The 10-year yield is currently 2.22%. In Europe, both the UK gilt and the German bund are 5bp higher at 2.25% and 1.84% respectively.

The dollar is weakening in the currency markets with the DXY index 0.1% lower. Commodities are lower: gold is down $1.33 an ounce to $1,667.30 and WTI crude oil is 38 cents a barrel lower to $102.66.

Overseas data wrap-up

Unemployment in the Euro area rose to 10.8% in February from 10.7% in the prior month. That was in line with consensus expectations. Looking ahead, we expect the unemployment rate to continue to rise in the region, reaching 11.3% in the fourth quarter, as the Euro area's economy contracts 0.5% this year forcing businesses to cut headcount. In addition, fiscal austerity will also weigh on the labor market as governments shed workers to help reduce their budget deficits.

On the first workday of a new month, global PMI manufacturing surveys are released around the world. That gives us an early read on the state of manufacturing. As the nearby table shows, out of the 22 countries that have reported so far, 14 reported improvements in their manufacturing sectors in March while 8 recorded a weakening in their manufacturing sector. Out of the eight manufacturing PMIs still in contraction territory, a reading below 50 is consistent with a contraction in the manufacturing sector, five of those countries are in Europe. That is consistent with our European teams' view that the Euro area will fall further into a recession this year ultimately contracting 0.5% yoy. Another notable theme in the March PMIs was that China's PMI jumped from 53.1 in March from 51.0 in February. That should help ease market concerns over a sharp slowdown in the world's second largest economy.