Interestingly the downgrade of the UK didn't move either asset.
OVernight the Final Euro-Area Composite PMI Index came out with a slight improvement to the Flash reading, coming in at 46 compared to the Flash reading of 45.9 (remember under 50 indicates contraction).
After having the May Service PMI, also released today, some things became clear: business activity over the last several weeks has remained stable, however on a country by country basis there were some unsettling data points.
Services PMI for Germany, France and Spain have weakened, as Germany is the powerhouse of Europe or the growth engine, this wasn't good news. France seems to be seeing the effects of further contagion as they were the first of the core countries to see contagion and of course Spain is teetering so any decline in Spain will alarm the markets.
Adding to the concerns about Germany, their Factory orders declined to -1.9 with consensus of a -1.2 decline, so a deeper decline in Factory Orders which is not surprising when you consider the real reason for the Euro-zone was to allow the German manufacturing machine to engage in free trade across the continent, with most EU countries in serious trouble it's not surprising that their factory orders declined, they just happened to decline more than expected. The actual domestic vs foreign orders came out like this: Domestic orders rose 0.4%mom after +1.8%mom (slowing there), while foreign orders declined -3.6%mom after +4.4%mom (a major decline there).
The larger, simple implications are a decline in German manufacturing which has been a trend since about mid 2011.
The other implication of Euro PMI is for revisions to Euro GDP to the downside.
So while a sovereign credit downgrade of the UK didn't bother the market much, the picture of accelerating contagion of the core did unsettle the market.
In Spain, after Barrosso's meeting with Merkel there were conflicting press reports, some suggesting Germany (and perhaps France) were pressing Spain to seek a bailout, while Spain denied the media reports, saying they are not being pressured by Germany to seek a bailout and do not need one as late as yesterday.
As they say, what a difference a day makes, according to Reuters:
"Spain said on Tuesday that credit markets were closing to the euro zone's fourth biggest economy as finance chiefs of the Group of Seven major economies were to hold emergency talks on the currency bloc's worsening debt crisis. Treasury Minister Cristobal Montoro sent out the dramatic distress signal in a radio interview about the impact of his country's banking crisis on government borrowing, saying that at current rates, financial markets were effectively shut to Spain. Montoro said Spanish banks should be recapitalised through European mechanisms, departing from the previous government line that Spain could raise the money on its own and and prompting the Madrid stock market to rise. But his comments on Spain's borrowing sent the euro down after the 17-nation European currency earlier hit a one-week high against the dollar on expectations that a conference call of G7 finance ministers and central bankers may hasten bold action."
So despite denials to the contrary, Spain has admitted it is locked out of the bond market (meaning the yields are unsustainable) and they are looking for a bailout as can be noted in this sentence, "Montoro said Spanish banks should be recapitalised through European mechanisms," which means, bailout.
From there, hope in Europe and the financial markets was that the G7 would come up with some good news, this has been widely seen as a pipe-dream among those in the know and true to form, just this morning pre-US open...
JAPANESE FINANCE MINISTER AZUMI SAYS G7 WILL NOT ISSUE A JOINT STATEMENT
- AZUMI: G7 AGREED WILL WORK TOGETHER TO DEAL WITH PROBLEMS IN SPAIN, GREECE - RTRS
- AZUMI URGED EUROPE TO EASE CONCERNS OF FINANCIAL MARKETS
- AZUMI: G7 AGREES TO COOPERATE TO RESOLVE SPAIN, GREECE PROBLEMS
And Finally as noted this week when I mentioned Japan will soon be as common in the press as Greece or Spain, confirmation:
Also overnight the RBA (Central Bank of Australia) cut rates by 25 basis points. As FX market traders expected a deeper cut of 50 basis points, the relief sent the $AUD higher.
At 10 a.m. US Non-Manufacturing ISM came out...
Released On 6/5/2012 10:00:00 AM For May, 2012
| Prior | Consensus | Consensus Range | Actual | |
| Composite Index - Level | 53.5 | 53.5 | 52.0 to 55.1 | 53.7 |
This was a modest beat, but the devils are always in the details, along the lines of the NFP print, the employment sub-index in the report declined from 54.2 to 50.8
Here's the market's initial reaction to the report.
Good momentum and volume, I wonder if the employment sub-index was realized later?
That was the last economic report for the US today, although we do have 3 F_E_D speakers lined up.
And that's what happened overnight and in to the open.
It's about the right time for a look at the market to see what's going on beneath the surface.
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