SCOREBOARD: Glum Europe

Generally bad news from the old continent sliced the top off European and US markets.

The news out of Europe was, by and large, on the negative side last night and without any offsetting dataflow it was risk off. Moves were fairly restrained under the circumstances though. I mean, Italy comes out and says that they will join Spain and delay their deficit reduction strategy by one year. So we are talking a deficit of 0.5 per cent next year from balance.

Then we’ve got the IMF saying that European banks may need to sell €3.8 trillion in assets (in an adverse shock type scenario) and if that wasn’t enough, Spanish bad loans rose to their highest since 1994 (8.16 per cent from 7.91 per cent). That’s a lot of euro trash news just there and plenty of reason to panic. And yet Spanish and Italian bond yields didn’t do all that much – euro unchanged at 1.3120 (77 pip range). I have to confess to being surprised by that, especially Spanish bonds which rallied – the yield on the 10-year falling to 5.82 per cent from 5.89 per cent. The Italian 10-year was at 5.48 per cent from 5.47 per cent.

Even in equity land the mood wasn’t as dire as it could have been although falls were still decent – I should also mention at this point that European construction output dived in February, falling 7.1 per cent – and so the Dax was off 1 per cent, the CaC 1.6 per cent and the FTSE 0.4 per cent.

Across the Atlantic, Wall Street had a better session of it and at the close, the S&P500 was off 0.4 per cent (1385) with financials, tech (disappointing sales from IBM and Intel weighed here) and telecommunications leading the index lower. The Dow for its part fell 0.6 per cent (13032), the Nasdaq was off 0.4 per cent (3031) and the SPI 0.3 per cent lower (4347). So a fairly straightforward session and there was no major data out – weekly mortgage applications was it for the US and they rose 6.9 per cent in the week to April 14 after a 2.4 per cent decline.

More interesting news came from mother England and in particular, the Bank of England’s minutes. The bank has finally woken up to the fact that they haven’t correctly forecast inflation for years. This is a habit the Fed has as well, still talking as if inflation hadn’t accelerated and wasn’t above target. Specifically, the bank’s minutes suggest that there is "a greater chance than before, that above target inflation would persist into the medium term”. I would say that it is guaranteed unless the major central banks withdraw excessive stimulus now. The banks’ official forecast is that inflation will be below 2 per cent by year-end. Not looking likely at all and the deputy governor pretty much admitted as much in a speech when he said inflation could remain above 3 per cent into the second half of this year, despite the "possibility" the economy could slip into a technical recession. Tellingly, Adam Posen (monetary policy committee member) who I can only assume is insane, or alternatively a protg of Bernanke’s, has finally dropped his constant demand for the BoE to print more money. Sterling shot up on the news, about a big figure or just shy to be at 1.6021.

Price action elsewhere was non-descript. US treasuries did little again and the yield on the 10-year is about 3 basis points lower to 1.97 per cent, the 5-year is 2 basis points lower at 0.84 per cent while the 2-year is little changed at 027 per cent. Aussie futures were up 2- to 3 ticks with the 3s at 96.70 and 10s at 96.22. Then for forex and commodities, we saw the Australian dollar off about 40 pips or so to 1.0353 and yen sits at 81.26 virtually unchanged. Finally, gold fell about $12 to 1641, copper was 0.5 per cent lower and crude was weaker as well – WTI off 1.4 per cent to $102 and Brent off 0.6 per cent to $118.

Bits and pieces otherwise. UK unemployment fell to 8.3 per cent in February, while the Bank of Canada said that growth prospects had improved and revised up 2012 growth forecast from 2 per cent (forecast in January) to 2.4 per cent now. Can the RBA board please take note – the rest of the world is upgrading growth forecasts, while you people seem to be living in some alternate reality.

Data kicks off today with NZ CPI at 0845 AEDT and the market looks for a rise of 0.5 per cent. A little latter (0950 AEDT) we get Japanese trade data and then that’s pretty much it until tonight when we see US jobless claims, the Philly Fed index (April) and existing home sales (March).

Adam Carr is a leading market economist. See Business Spectator's glossary for definitions of technical terms used in SCOREBOARD articles.

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