Overnight Sentiment: Tumbling Into Global Recession

As if depressing PMI data out of China overnight was not enough (it was certainly enough to send the Shanghai Composite tumbling 2.08% to 2024.8 and just off fresh 4 year lows), we then got Europe to join in the fray with a composite PMI print of 45.9, down from 46.3, and a miss to expectations of a modest rise to 46.6 (driven by a manufacturing PMI of 46.0 up from 45.1, and a Services PMI down from 47.2 to 46.0). The biggest surprise was the sheer collapse in French manufacturing data which tumbled from 46.0 to a 4 year low of 42.6 on expectations of a rise to 46.4, which sent the EURUSD firmly into sub 1.30 territory and not even several good paradoxical bond auctions from Spain (because a good auction here means no bailout, means those who bought the bonds will soon suffer big losses) have managed to dent the very poor overnight sentiment which now implies a European GDP contraction of -1% of more. Reality has also halted the global easing euphoria (the USDJPY is now 40 bps below where the BOJ announced the injection of another Y10 Trillion), and has everyone wondering, now that QEternity is priced in, what next?

Europe's PMI capitulation visually:

On Europe's PMI debacle via Bloomberg:

Europe appears headed for a deepening economic recession despite a recent easing in market concerns over the three-year debt crisis, a closely-watched survey found Thursday.


Financial data company Markit said its purchasing managers' index — a gauge of business activity — for the 17-country eurozone fell to 45.9 in September from 46.3 the previous month.


The decline was a surprise as the consensus in the markets was for a modest improvement. Anything below 50 indicates a contraction in economic activity.


September's rate was the lowest in over three years and came despite an easing in the rate of economic contraction in Germany, the eurozone's largest economy.


The decline also highlights the scale of the challenge facing European policymakers as they seek to get a grip on the debt crisis and may fuel hopes that the European Central Bank will cut its main interest rate further from the record low of 0.75 percent.


"The fall in the PMI in September is another reminder that the ECB's new asset purchase programme is not an answer to all of the region's problems," said Ben May, European economist at Capital Economics.


The euro was down 0.8 percent at $1.2940 an hour after the survey's release.


Analysts said the figures suggest the eurozone economy is contracting at a sharper rate than the 0.2 percent quarterly decline recorded in the second quarter of 2012. Conditions in both the manufacturing and services sector worsened.


"The latest readings not only suggest that the euro area has been in recession over the past six months, but also augur ill for the final quarter of the year," said James Ashley, senior European economist at RBC Capital Markets.

It was not all bad news: Spain did manage to sell €4.8 billion in bonds overnight to investors who still don't get the Catch 22 dynamics of the ECB rescue for Spain. They will soon enough. Via the WSJ:

Spain Thursday cleared its biggest hurdle since the European Central Bank signaled two weeks ago that it would buy the bonds of fiscally-frail countries, with the country selling its largest slice of debt since March.


In a sign that the impact of the ECB's pledge continues to seep through financial markets, Spain sold €4.80 billion ($6.26 billion) in the two bonds, above its €3.5 billion to €4.5 billion target. The offer received €8.577 billion in bids.


"All in all, the auction seems to have gone well and another funding challenge has been cleared successfully," said Orlando Green, fixed income strategist at Crédit Agricole.


The ECB's pledge to buy bonds with a maturity of up to three years encouraged the Spanish Treasury to launch a new three-year bond, maturing in October 2015 and carrying a coupon, or scheduled interest payment, of 3.75%.


This bond accounted for the bulk of the funds raised at Thursday's auction, with the rest coming from a new tranche of the existing 10-year, 5.85% January 2022 bond.


Thursday's auction means that Spain has completed about 82% of its annual gross fundraising target of €86 billion for 2012.


But the solid demand at the bond sale doesn't allay concerns about Spanish finances and doesn't rule out investors cooling off Spain if it doesn't move to seek aid for its funding needs.


Lower borrowing costs makes it less urgent for the Spanish government to ask for assistance, potentially undermining the biggest driver for the buoyant tone toward Spanish debt.


At Thursday's auction, the average yield on the new three-year bond came in at 3.845%. Since this was the first time this particular three-year bond has been issued and the amount sold was larger than usual, the auction results aren't directly comparable to those of the last three-year bond auction held Sept. 6 for the 4% July 2015-dated bond. At that auction, the Treasury sold the three-year bond at an average yield of 3.676%.


The average yield on the 10-year bond came in at 5.666%, down from 6.647% at the previous auction Aug. 2. This is also below a euro-era high of 7.58% achieved in July in secondary market trading, where bonds trade after their initial sale.

Finally, a complete recap of overnight market action, via DB's Jim Reid:

Away from Europe, China’s HSBC flash PMI in September came in a touch higher than August (47.8 v 47.6) but still indicative of economic weakness. The manufacturing sub-index printed at a 10-month low of 47.0. The news is not helping overnight sentiment with the Nikkei (-1.0%) and Hang Seng (-0.5%)  both trading lower while the Shanghai Composite (-1.2%) is lagging again. In Asian credit, CDS indices roll is the main focus overnight and the theme should continue into the London and New York session today. In other data Japan’s exports dropped 5.8%yoy in August to post the third straight month of declines. Meanwhile in Australia, DB’s economists now expects the RBA to ease by 50bp before year end and another 50bp by mid 2013 bringing the cash rate down to 2.5%. Nike announced a new $8bn share repurchase program after the US close.


In overnight news, the Dow Jones newswire quoting the El Pais, said that the Spanish government is looking to use the remainder of the EU100bn EU bank bailout for the sovereign sector in order to avoid an official aid request. The article said that the detailed bank recap assessment due next week by Oliver Wyman is expected to amount to EU60bn. Considering that banks may tap private financing that may leave some EU55-60bn from the EU loan for the government.


Looking at the day ahead, the Philly Fed survey will also be an important data point today following the disappointing Empire State manufacturing survey earlier this week and the weak IP data last week. The market is expecting a negative print of -4.5 in September but moderately better than the -7.1 in August. Weekly jobless data and Markit US PMI preliminary reading are also due. In Europe we will also get German producer prices, Italian industrial orders and UK retail sales but the main focus will be on the Spanish auction and European flash PMIs.

Has the time come for Morest Greatest QEst? It would be, if it wasn't all priced in now.


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