Knocking the Shanghai Composite around yesterday was Chinese Services PMI which came in at 10 month low, giving more evidence to a string of bad either official or HSBC Flash PMI readings in both Manufacturing and Services. The actual report was higher than consensus, but the slowest pace in 10 months; the bottom line is the same as it has been since mid-2011, China is in more trouble than their opaque government lets on.
The Euro-area ISM Services Composite reading of 17 EU countries came in at 46.4, slightly above expectations of 46, but well below the 50 level which signals contraction in Services as well as Manufacturing saw earlier in the week. This is the 5th consecutive month of contractionary readings for the Euro area Composite in both services and manufacturing.
Germany surprised a few as German Service Sectors report contracted to 49.9 on consensus of 50.3 (contraction below 50). Spanish and Italian 10- year yields crept up yesterday on the news. In contrast, the Irish 5 year yield fell as the Irish government announced they'd be back in the debt markets selling treasuries for the first time since 2010.
Yesterday the Stoxx European 600 and the DAX were down -0.50% and -0.60% respectively.
Sovereign Yields have not been helped by the news from the German Finance Ministry,
"It remains unclear if Eurozone finance ministers will decide on Spain's request for banking sector aid at their next monthly meeting on July 9."
This comes after divisions arose in German politics with the CDU's main opposition party, the SPD opposed the plan to allow Europe's permanent rescue fund, the European Stability Mechanism (ESM), to directly recapitalize banks. You may recall this was one of the key agreements reached at last week's EU summit, but as usual, these summits propose grand ideas that the market takes as the gospel without realizing that each individual member country must pass, ratify or otherwise agree with the terms, this is why EU summit headlines are typically little more than temporary market moving events. It must have been at least a month ago since that 2 hour Finance minister weekend call that promised Spain $100 bn Euros to re-capitalize their banks, yet it is still not agreed on and the ESM is still not ratified.
Furthermore, the Troika is now expected to make its own assessment, originally the Troika was not to be involved after the IMF and private Spanish banking system audits. It never fails, grand EU plans always fall flat on their face. The fact still remains that even if the EFSF (temporary bailout fund) and the ESM (permamnent bailout fund) were both fully capitalized (which Finland, Holland and Slovakia seem to oppose in one form or another) and running simultaneously, there still isn't enough money to deal with Spain and Italy. In addition, this morning Finland made news as they contine down the road they have been clearly moving toward. As Bloomberg reports this morning of July 5th:
"Finland is contesting the wording of an agreement struck last week in Brussels, arguing it doesn’t adequately address the possibility that loans to Spain from Europe’s permanent rescue fund can give taxpayers seniority.
A June 29 statement from the 17 euro-area leaders stripping the European Stability Mechanism of its preferred creditor status in Spain was incomplete, said Martti Salmi, a Finnish Finance Ministry official. The 100 billion-euro ($126 billion) bank bailout could provide seniority to contributor nations if fresh funds are transferred by the ESM, he said."
So, as mentioned above, Summit headlines are one thing, reality is another-Watch those sovereign bond yields in Spain and Italy!
On the Syrian/Turkish/Nato front, the two pilots originally shot down on June 22nd after crossing into Syrian airspace were discovered yesterday, dead in the Mediterranean Sea. Since the event there have been daily scrambling of Turkish fighter jets to the Syrain border.As of July 5th...
First in Asian, the Japanese Central Bank (BoJ) has upgraded the 9 Japanese regional economies which is the first upgrade from the BoJ since 2009.
In the EU, German Factory Orders came in better than expected at +0.6% on a month/month basis (since May) with consensus at 0% and the previous at -1.9%. However price action in Europe remained muted as the Central Bank decisions from the ECB and BOE (Bank of England) were awaited.
Brent and WTI crude gained some ground after losing some upon the release of Chinese economic data on July 4th, after the Norwegian pension negotiations for oil workers is still unresolved and as a result, locks out some 6000 oil workers with an expected drop of 1.2 mn barrels a dat from Norway.
Around 12 p.m. local time the BOE did meet market expectations by increasing (QE) or asset purchases to a target of an additional $50 bn Pounds and leaving interest paid on bank reserves as is at .50%.
The real SURPRISE came only moments before as China's PBoC announced,
"The People's Bank of China decided to cut financial institutions RMB benchmark deposit and lending interest rates since July 6, 2012. One-year benchmark deposit rate cut of 0.25 percentage points, year benchmark lending interest rate cut by 0.31 percentage points; other deposit and lending interest rates and individual housing provident fund deposit and lending rates be adjusted accordingly."
This move sent ES popping higher as it was unexpected, there was chatter earlier in the week of a Reserve Requirement Ratio cut coming, but the cut announced this morning pre-market was a surprise.
As for filling out the Global Central Banking coordinated movement today, the ECB cut its benchmark rate by 25 basis points to .75% as expected. The ECB also moved the deposit rate to 0%, perhaps trying to finally ignite the carry trade intended by the ECB LTRO 1 and 2 loans to banks as the deposit interest rate is stripped away.
Futures started sliding as Draghi says during the public statement portion of the rate decision, "There will be no LTRO 3", which is perfectly understandable as EU banks have no assets left to pledge as collateral.
The Euro's reaction...
Gold which is a reflection of easing bias in the markets also fell on the Central Bank actions.
In the US, Initial Claims were released at 8:30
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| Initial Claims finally beat after 6 weeks of misses. At 10 a.m., US Non-Manufacturing ISM missed | |||||||||||||||||||||||
| Prior | Consensus | Consensus Range | Actual | |
| Composite Index - Level | 53.7 | 53.0 | 51.5 to 54.0 | 52.1 |
You may recall US Manufacturing ISM missed earlier this week, now services follow. This is the 3rd consecutive miss in Non-Manufacuring ISM, however it did manage to print above 50. Market updates are on the way... |
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