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Overnight Sentiment: Bad News Means Green Futures


Welcome to another morning which saw weak news out of Asia (Chinese Services PMI declining to lowest level since January), weak news out of the UK (Services PMI down to 53.3 from 55.3 previously), and weak news out of Europe where a Spanish auction once again paid well into the unsustainable levels to give the market the illusion that it is well funded. Completing the picture is the ECB which announced that yesterday banks deposited for the first time since early March a total over €800 billion (primarily as Northern European banks see their holdings of Southern paper mature and not get rolled over), or €803 billion to be precise, a €14 billion increase overnight, as one can make the argument that liquidity is once again starting to freeze up. However, despite all the ugly news, US futures are of course up, with the only question the headline scanning algos care about is whether initial claims will once again miss the consensus of 380K solidly (thus making sure tomorrow's NFP print is QE enabling). Our guess it that last week's print of 388K is revised as usual upward, into the low 390K region, with the number missing Wall Street forecast but posting a "decline" from last week's revised number. After all this scheme has worked for so long, why end now?

ECB deposit facility usage:

Full summary from BofA:

Market action

Yesterday, the S&P 500 dropped sharply following the worse-than-expected ADP employment report. At around 10:30 am, the index had fallen roughly 0.9% from the prior day's close. However, over the course of the trading day, the market slowly recovered finishing a smaller 0.3% lower.

Overnight, Asian equity markets finished mostly lower, as they reacted to the weak ADP report. The worst-performing market was the Indian Sensex, down 0.8%. The Hang Seng lost 0.3%, while the Korean Kospi finished 0.2% lower. On the flip side, the Shanghai Composite managed to finish 0.1% higher.

In Europe, equities are enjoying a solid rally, up 0.6% in the aggregate, as several of the region's biggest companies posted better-than-expected earnings for the first quarter. Not surprisingly the region's blue chips are up 1.1%. French and German listed firms are also outperforming the overall market, climbing 1.0%, while shares listed in London are lagging, up only 0.3%. At home, futures are pointing to a moderately higher open for the S&P 500.

In bondland, Treasuries are flat across the curve. The 10-year yield is currently trading at 1.93%. In Europe, the German bund is 1bp higher, at 1.62%, while yields on the UK, Italian and Spanish 10-year notes are bid.

The dollar is stronger against a basket of other major currencies. The DXY index is 0.1% higher. Commodities are selling off. WTI crude oil is down 46 cents, to $104.76 a barrel, and gold is $7.45 an ounce cheaper, at $1,645.83.

Overseas data wrap-up

China's non-manufacturing industries grew at a slower pace in April. The country's PMI service index came in at 56.1, compared with 58.0 for March. That is the lowest level since January, but still well above the 50-breakeven level that marks the boundary between expansion and contraction. The decline in China's service PMI today indicates that the country's service sector is expanding, but at a slower pace.

The service sector also slowed in the UK. The UK's service PMI moderated to 53.3 in April, down from 55.3 in the prior month. The country's services PMI had been surprisingly strong - close to its pre-crisis average - and so this fallback in April potentially brings it back to more underlying levels.

Late yesterday, French presidential candidates Nicholas Sarkozy and Francois Hollande faced off in a debate before the country heads to the polling stations on Sunday. There were no major surprises, as both candidates stuck with their political platforms. Polls suggest that Mr. Hollande will be elected President on Sunday; at that point, the focus will shift to the parliamentary elections in June.

Too late for this report, but later today, the ECB will announce any changes to their monetary policy stance. Our European team expects no changes in interest rates or announcements of further LTRO programs. The ECB is likely to mark down their growth rate, however.

Today's events

We have initial jobless claims and non-farm productivity both scheduled for release today at 8:30 am. Initial jobless claims are expected to drop modestly, to 380,000 for the week ending April 28 from 388,000 the week prior. Meanwhile, non-farm labor productivity is expected to decline -0.9% annualized in the preliminary release for Q1 - the first decline at a quarterly annualized rate since Q2 of last year. At 10:00 am, we expect the ISM non-manufacturing index to moderate to 55.5 in April from 56.0 in March - a four-month low.

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