• US Equities took a tumble on Wednesday after retail sales showed an unexpected decline in April. Dow/S&P ended 2.18% / 2.69% lower led by 5% plunge in financials. This morning, Asian shares track US equities lower.

  • US retail sales fell for a second straight month in April, pulled down by weak gasoline and electronic goods purchases. The Commerce Department said retail sales fell by 0.4% M/M.

  • EMU Industrial production dropped by 2.0% M/M in March setting a record year-on-year decline which raises fears that first quarter economic output could have contracted more than expected.

  • Japan’s Finance Minister Yosano said he would do his best to keep the jobless rate from rising to a new record even as the government looked set to upgrade its official view of the world’s second largest economy.

  • The European Commission fined Intel Corp a record €1.06 billion for abusing its dominant market position and using illegal sales practices to encourage computer manufacturers to carry its chips.

  • Crude oil ($57.43) prices fell on Wednesday following an OPEC warning that the market faced considerable risks as fundamentals were far from balanced.


Markets

Yesterday, investors turned more cautious following a series of disappointing eco data and earnings from the insurance sector, which indicated that recent optimism about the economic outlook may have been premature. In the euro zone, the March industrial production data came out below expectations, but investors reacted mainly disappointed to the unexpected decline in the April retail sales in the US. Earlier on the day, the Bank of England had already issued a very cautious inflation report in which it expected only ‘a relatively slow recovery in economic activity’ in the UK.

This prompted an increase in risk aversion and incited investors to book profits on the recent rally in the equity and commodity markets. US and European equity markets dropped by more than 2%, while the CRB index also fell off the recent highs. This may indicate that the January highs are a hurdle too high to break for now and suggests that first some downward correction is needed. The increase in risk aversion helped government bonds rebound, especially in the UK, where the Gilt market outperformed in the wake of the Bank of England’s inflation report. In the euro zone, German 10-year yields fell by 6.4 basis points to 3.34%, again below the key resistance level of 3.4%. The other European bond markets however underperformed, as the intra-EMU sovereign spreads widened for the third day in a row. In the US, 10-year yields fell by 5.3 basis points, but are in contrast to German yields still above the previous resistance level of 3%.

On the currency markets, the dollar and the yen benefited from the change investors’ sentiment. As such, EUR/USD failed to break above the March highs at 1.3739, while sterling retreated from a four-month high against the dollar. The yen outperformed and USD/JPY is currently below the April lows at 95.63. A sustained break lower would paint a double top formation on the screens, with first intermediate support at 93.54, the March lows.

Today, the calendar is thin both in the euro zone and in the US as it only contains Spanish first quarter GDP, US weekly claims and April PPI data. In Spain, first quarter GDP is expected to come out at -1.8% Q/Q after contracting by 1.0% Q/Q in the fourth quarter of 2008. The risks might be on the downside of expectations following the disappointing industrial production data. In the US, initial claims are forecasted to have risen by 9 000 (to 610 000) in the week ended May 9, after the better than expected outcome in the previous week. Nevertheless, the large scale plant closures by GM and Chrysler might put the claims under upward pressure in the coming weeks. US PPI are expected to show a slight uptick (0.2% M/M) in April, which might be Easter related.

On the supply front, Italy will tap the market today, as it plans to sell bonds in the 4-, 6- and 30-year sector for a total amount of €4.75-7.25B. It will be interesting to see whether the increase in risk aversion will have dented investor’s appetite for non-German debt issues, as this may reverse the recent sharp narrowing of the intra-EMU sovereign spreads.