European Equity markets fell sharply overnight with the French CAC40 index down 3.0%, the German Dax down 2.5% and the FTSE100 down 1.6%.
The declines were a mix of weaker than expected banking earnings and political speculation in Spain and Italy (see below).
US markets inhaled the fear with the Dow falling but to a lesser extent than European markets.
Bond yields in the US and Germany fell as investors fled to safe haven bond markets.
Equity markets were unsettled by allegations of corruption against the Spanish PM Mariano Ranjoy and by news that former Italian PM Silvio Berlusconi is gaining ground as Italians prepare for their elections.
Spanish long bond yields rose from 5.21% to 5.44% overnight while German ten year bond yields fell from 1.67% to 1.61%. US long bond yields fell back below 2.00% to 1.96%.
Unsettled political conditions in Spain and Italy saw the euro decline against USD and the AUD.
After a solid run for the past few weeks, oil prices fell on what appeared to be profit taking. Copper made further gains on reasonable economic data out of the US (see below).
Building approvals were weaker than expected, falling 4.4% in December, indicating the data remains volatile. The weakness was led by a decline in private 'other' dwellings (units, townhouses etc), which fell 5.4% in December, although private house approvals also fell 3.3% for the month.
For the year to December, building approvals rose 9.3%. In trend terms, building approvals remain positive up 0.5% in December.
The TD-MI inflation gauge rose 0.3% in January and 2.5% over the year. The annual pace of inflation using this measure has remained in the range 2.4% to 2.5% since September, but is up from 1.5% in July.
ANZ job ads fell 0.9% in January, to be down 18.4% for the year to January. This data highlights the softness of the Australian labour market and suggests we will see the unemployment rate rise further from here, over the course of the year.
This is one of the factors that leads us to expect the RBA to reduce its cash rate in April.
The Eurozone's Sentix investor confidence index rose from -7.0 to -3.9 in February, its sixth straight gain since September last year, reflecting increased confidence that the ECB's bond-buying program, and more recently further Fed easing and fiscal agreement, have reduced the "tail risks" that were threatening European and global growth prospects.
In other data, the Eurozone PPI was steady at 2.1% for the year to December.
The UK PMI for construction was steady at 48.7 in January, its sixth sub-50 reading in the past eight months.
US factory orders rose 1.8% in December reflecting a drop in non-durable goods orders that partly countered a rise in the orders of construction equipment and computers.
The New York ISM, a measure of business conditions in New York, slipped from 57.7 to 56.7 in January. The index stood at 50.2 in October with the latest reading still suggesting a considerable lift in business sentiment over the past three months.
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