Overnight Sentiment - Run And Hide

Just in case early morning traders are confused by that odd shade of red on their monitors this morning, here is Bank of America's summary of what has happened in the last 48 hours as reality has finally come back with a vengance.

From Bank of America

In focus

Market sentiment seems to have converged on this April's FOMC meeting being relatively uneventful, with Fed officials in "watch-and-wait" mode. We would agree. Nonetheless, there does appear to be an undercurrent of anticipation that the Fed may make a significant revelation about the future path of policy. We worry that the market could misread a hawkish intent into the information the FOMC will release on Wednesday. We thus caution investors to be wary of another such "Fed fake." Bernanke will set the tone for policy in his post-meeting press conference, where we expect him to keep the Fed's options open.

Market action

Our equity Bloomberg screens are bright red, as equity markets sell off across the globe. Several reasons are contributing to the market selloff: 1) several firms in Asia posted weaker-than-expected earnings, 2) worries that Europe's debt crisis still threatens global growth, 3) the French elections, and 4) a breakdown of budget talks in the Netherlands.

Overnight, in Asia, the MSCI Asia Pacific Index fell 0.5%. The worst-performing regional markets were the Hang Seng and the Indian Sensex, which both finished 1.8% lower. The Shanghai Composite rounded out the bottom three, falling 0.8%. Japan's Nikkei lost 0.2%, while the Korean Kospi fell 0.1%.

In Europe, equities are down 2% in the aggregate. Blue chips are underperforming, down 2.3%, and the German DAX is 2.8% lower. In London, shares are off 1.6% and, in France, listed companies are down 1.9%. At home, futures are pointing to a sharp sell-off later today, with the S&P 500 set to open 1.0% lower.

In bondland, Treasuries are bid as investors flock to their safety. The 10-year and long bond yields are both down 4bp, to 1.96% and 3.08%, respectively. In Europe, the collapse of the budget talks in the Netherlands is driving yields 7bp higher on the 10-year, to 2.38%. Spain's borrowing costs are rising as well, up 3bps, to 5.93%, while German and UK government debt are rallying 4bp.

Just like Treasuries, the dollar is benefiting from its safe-haven status. The DXY index is up 0.3%. The stronger dollar is driving commodity prices lower. WTI crude oil is 77 cents lower, to $103.11 a barrel, and gold is down $9.28 an ounce, to $1,633.53.

Overseas data wrap-up

After seven weeks of negotiations, the Dutch government failed to reach an agreement on budget savings of €10-15bn. That is needed to reduce the budget deficit from 4.6% in 2011 to the maximum 3% deficit rule for Europe by the end of 2013. Failure to reach agreement on reining in the budget deficit would be marginally pro-growth; however, it raises the risk that the country loses its AAA credit rating. Failure to pass fiscal austerity measures is also likely to result in higher borrowing costs for the Dutch government; we are already seeing yields on the country's debt trade higher. To read more, take a look at today's European Economic Daily.

On Sunday, France held its first round of Presidential elections. The second round takes place on 6 May, to be followed by Parliamentary elections on 10 and 17 June. Given the results of the Presidential first round, the most likely scenario would be for Mr Hollande to win: he would then get into power within 10 days of the election, i.e., 15 May at the latest, and form a government. To read more about yesterday's result see: France Macro Watch, 23 April 2012 and for implications for the markets and the Euro area crisis, see: France Macro Watch, 13 April 2012.

Economic activity slowed in the Euro area, according to the preliminary April PMI composite report. The decline from 49.1 to 47.4 took conditions to their weakest since November last year, and notably below market expectations of a tick-up to 49.3. Looking at the detail of the report, the slowdown was in both the manufacturing and services sectors.

The HSBC flash manufacturing PMI for China remained in contractionary territory, at 49.1, in April. In March, the index stood at 48.3, indicating that the pace of contraction was slowing. Markets tend to focus less on the HSBC flash PMI report and give more weight to the official release issued later, on the first of every month. The official measure remains firmly in expansion territory, at 53.1.

The week's events

Fed officials are unlikely to make any significant changes to their outlook or policy at the FOMC meeting on Wednesday. Instead, Chairman Bernanke's comments during the post-meeting press conference may clarify what conditions would warrant a change in Fed policy. This week's other big event is the 1Q GDP release on Friday. We expect it will show that the economy grew at a 2.3% annual rate and we expect most of the growth to come from final demand, with inventories contributing 0.3ppts to the headline.


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