SNAPSHOT:
-Sterling hit, dollar mixed; Treasury yields close to record lows; stock futures slump; ICE July Brent down $1.78 at $100.09, after dipping to $99.60, Nymex July crude down $1.48 at $85.05; gold 0.5% lower at $1,552.21
-Watch for: U.S. nonfarm payrolls, unemployment rate; ISM manufacturing data
Top News: Euro Zone April Jobless Highest On Record; Negative German Yields Highlight Euro-Zone Woes; Euro-Zone Manufacturing Falls Further; Asia Slowdown Sounds Ominous Warning
MARKETS OUTLOOK:
FOREX:
There was absolutely no joy in London trade ahead of the long Jubilee weekend celebrations. May’s U.K. manufacturing PMI slumped to 45.9, a full 10% below the flash and GBP/USD dumped to a fresh four-and-a-half month low. The pound was even falling against the euro. Cable’s drop weighed on EUR/USD, which hit a new 23-month low. The yen was back in demand as a safe haven option amid falling equities and widening peripheral yield spreads. EUR/JPY sank below 96.50 for the first time since December 2000 and USD/JPY made a fresh 3-month low, neither of which will please the Bank of Japan which had already ramped up in intervention talk in Asian hours.
BONDS:
U.S. Treasurys remained very well supported ahead of Friday’s all-important nonfarm payroll number, with Morgan Stanley looking for a figure of +160,000 and an unemployment rate of 8.1%. Weak manufacturing in China and across other parts of Asia helped support the fixed income bid and kept cash yields on the medium- and longer-dated Treasurys close to Thursday’s record lows. At 0346 ET, the September Treasury contract was 3/32 higher at 134-01 and the 10-year cash yielded 1.572%.
The cost of protecting European corporate debt against default rose Friday as data on euro-zone manufacturing activity showed a decline to a near three-year low. Around 0500 ET, the iTraxx Europe index, which comprises 125 high-grade borrowers, 25 of which are banks and insurers, was at 181/182 basis points, one basis point wider from the close Thursday, according to Markit. The Crossover index of 40 mostly sub-investment-grade European corporate borrowers was six basis points wider at 725/728 basis points.
EQUITIES:
Stock futures fell sharply Friday as the flight to safety gathered pace and as traders braced themselves ahead of the non-farm payroll report. In Europe, stocks slumped, Spanish bond yields crept higher and bund yields hit record lows, as investors sank their teeth into a series of downbeat manufacturing figures from China, the euro zone and the U.K.
“Clearly concerns remain – including China and Europe and those with money on the table will be hoping that nonfarm payrolls don’t add the U.S. to the list,” said Rebecca O’Keeffe, head of investment at Interactive Investor.
Expectations for Friday’s U.S. nonfarm payrolls have been scaled back after Thursday’s ADP employment report, initial jobless claims and Chicago PMI data all disappointed. Indeed, Credit Agricole Corporate & Investment Bank pointed out that U.S. economic data for April and May have continued to take a modest turn for the worse this week.
“The four-week moving average of initial jobless claims and Challenger job cuts have been buoyant whilst durable goods orders, ADP employment, some key housing data and a couple of the PMIs have been noticeably weak or missed expectations,” it said. “The trend could have raised the stakes surrounding a worse than expected print in today’s U.S. employment report and contribute to a softening of rhetoric from key Fed officials heading into the June 20 rate decision.”
COMMODITIES:
Crude-oil futures dropped 2% Friday, with Brent falling below $100 a barrel for the first time since last October, as weak manufacturing data from Asia and Europe sparked fresh fears of a contraction in the world’s oil demand. “We are in for a bit of a rough ride here,” said a manager on the futures and fixed income trading desk at Saxo Bank.
Spot gold was lower in Europe, treading water as investors kept to the sidelines ahead of key U.S. nonfarm payroll data later in the global day. Widely viewed as a proxy for the health of the world’s largest economy, the stakes are particular high for this month’s release following a swathe of poor U.S. data in recent days and weeks.
=======TODAY'S CALENDAR=======
ET PERIOD
0830 US Weekly Export Sales
0830 US Apr Personal Income & Outlays
0830 CAN Mar GDP by Industry
0830 CAN 1Q GDP
0830 US May Employment Report
0930 CAN May Canada Manufacturing PMI
1000 US Apr Construction Spending
1000 US May ISM Manufacturing Report
1400 CAN Bank of Canada Financial
Statistics
1600 US May Domestic Auto Industry Sales
==============================
TOP STORIES OF THE DAY:
Euro Zone April Jobless Highest On Record
The number of people out of work in the euro zone rises in April to its highest level ever recorded in the history of the currency union, official statistics show.
Negative German Yields Highlight Euro-Zone Woes
Yields on ultra-safe government bonds from U.S. Treasurys to German Bunds plunge to record lows, as weak economic data exacerbate mounting concerns over the euro zone’s fate.
Euro-Zone Manufacturing Falls Further
The decline in euro-zone manufacturing worsens further in May, suggesting that the region’s economy will continue to flounder in the second quarter as its debt crisis deepens.
Spanish Manufacturing Hits 3-Year Low
Spanish manufacturing activity falls at its fastest rate in three years in May, the latest sign that the country’s economy is souring rapidly as Europe’s debt crisis deepens.
UK Manufacturing Falls To 3-Year Low
U.K.’s manufacturing sector contracts in May with activity slumping to its lowest level in three years as a result of the worsening euro-zone crisis and the recession-hit domestic economy.
Italy Unemployment Rate Rises To 10.2%
Italy’s unemployment rate rises to an all-time monthly high in April, hitting 10.2%.
Ireland Appears To Have Backed Treaty
Irish voters appear to have approved the EU’s fiscal treaty, although by a narrower margin than recent opinion polls had suggested.
Eastern European PMIs Show Further Slowdown
The euro zone’s deepening fiscal crisis continues to take its toll on the economies of central and eastern Europe in May, as surveys indicate manufacturing activity contracted again.
Asia Slowdown Sounds Ominous Warning
Manufacturing in China and across a wide swath of Asia slows in May, raising fears that turmoil in Western economies is dragging down one of the few remaining engines of global growth.
Greek Conservatives Lead In Final Two Polls
Greece’s conservative New Democracy party leads in two polls, the last before elections on June 17 viewed as a de facto referendum on the country’s future inside the euro zone.
PMIs Show Accelerated China Slowdown
Two gauges of China’s manufacturing activity fall in May, showing an accelerated slowdown in the world’s second-largest economy that calls for more stimulus policies.
BP Seeks TNK-BP Sale
BP said it has informed its Russian partner it is pursuing the potential sale of its 50% stake in TNK-BP in a move that would free BP from governance skirmishes at the joint venture.
-By Paul Larkins, Dow Jones Newswires; 4420-7842-9319; paul.larkins@dowjones.com
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