Markets: European equities slump heavily on growth & debt concerns, US equity futures down 2%, commodities generally weaker (gold the exception) and commodity currencies weaker, Euro hits 1-mth low against the Dollar. EUR: ECB's Trichet says disagrees with IMF on European bank capital needs, says IMFS's final; figure would be well below EUR200bn.

EUR: Final August services PMI confirmed at 51.5, at mkt.

EUR: Retail sales rise 0.2%mom in July, to be down 0.2%yoy, above mkt.

UK: PMI services down 4.3pts to 51.1 in August, well below mkt.

UK: Lloyds employment confidence index falls 13pts to -66 in Aug, lowest since February.

DEU: PMI services revised up 0.7pt to 51.1 in August, above mkt, but down from 52.9 in July.

FRA: PMI services revised up 0.7pt to 56.8 in August, above mkt, up from 54.2 in July.

ITA: PMI services down 0.2pt to 48.4 in August, at mkt.

ESP: PMI services falls 1.3pts to 45.2 in August.

CHN: HSBC performance of services PMI falls 2.9pts to 50.6 in Aug.

AUS: AiG performance of services index rises 3.3pts to 52.1 in Aug, highest since April 2010.

AUS: TD monthly inflation gauge falls 0.1%mom in Aug, up 2.9%yoy.

AUS: ANZ Job ads fall 0.6% mom in Aug, below mkt.

AUS: Company operating profits rise 6.7%qoq in Q2, above mkt, inventories rise 2.5%qoq, well above mkt, DB estimates Q2 GDP could be up 1.5%qoq.

NZL: Barfoot & Thompson house sales down 9%mom in August.

THE DAY AHEAD...

USA: Fed's Kocherlakota speaks, ISM Non-Manufacturing Composite (Aug)

EUR: GDP (Q2P)

UK: BRC Sales Like-For-Like (Aug)

DEU: Factory Orders (Jul)

CHE: HICP (Aug)

NOR: Consumer Confidence (Q3)

SWE: Service Production (Jul)

AUS: RBA, Current Account (Q2), Housing Finance (Jul), NSW State Budget

Anxiety levels rising?

(The US investor base may have been out on holiday but Europe has given the market a firm lead overnight. A combination of continued reaction to the FHFA's law suit against many of the major banks and worries about the implementation of the Greek and Italian austerity programs has led to heightened stress in financial markets and a strong risk-off tone. (Investors in Greek 2-year bonds now demand a yield of over 50% p.a. and despite reported ECB buying, Spanish, Italian and Belgian spreads to bund were all out sharply overnight. Even the French spread widened 8bps at the 10-year tenor and as a result is now closing in on the highs seen a month ago. As a result, the European SovX index has made a new wide (see our first chart). Worryingly, fears about liquidity and solvency are increasingly being reflected in the interbank market, with the 3-month European Libor-OIS spread widening further to 77bps -a level last seen in early April 2009 (see our second chart) whilst the 3-month cross currency basis swap tightened to -97bps as European banks were forced to pay a higher premium to buy the Dollar. The stress in financial markets was reflected in equity markets with a 5.4% decline in financials (driven by banks) leading the Stoxx600 to a 4.2% loss for the session. The index is now closing in on last month's two-year lows. The DAX shed 5.3% to make a fresh 2-year low (see our third chart) and has now lost close to 30% of its value since 26 July - a decline that will surely have real consequences for the German economy. Investors clearly expect this to flow through to US markets when they reopen today with US S&P futures down 2% as I write. (There was little in the way of dataflow overnight. The Euroland service sector PMI was unrevised at 51.5, with small upward revisions to the German and French flash estimates offset by weakness elsewhere. The composite PMI was revised down to a final reading of 50.7, the lowest since September 2009, courtesy of the downward revision to the manufacturing index reported last week. As our final chart shows, the PMI is now at levels that suggests growth is stalling. Unfortunately, we probably have not seen the bottom as yet. Meanwhile, the UK's service sector PMI fell the most in a decade, with the August reading of 51.1 fitting better with indicators of activity in the sector than last month's reading of 55.4. (Looking at the day ahead, first up the UK's BRC Retail Monitor will shed some light on consumer activity (or lack thereof) in August. Thereafter, the final partial GDP indicators will be released in Australia, allowing my colleagues to finalise their pick for tomorrow's Q2 national accounts (after yesterday's partial indicators they have more than doubled their estimate of growth to 1.5% qoq - a solid rebound after a 1.2% qoq decline in Q1). Attention will then turn to the RBA's latest policy announcement, which in my colleagues' opinion will demonstrate a 'neutral' policy bias, reflecting unusually large, but also unusually symmetric, risks to the inflation outlook at present. This would mark a clear softening from the August meeting, the minutes to which revealed that the Board "considered whether the recent information warranted further policy tightening". Of course the market is well-ahead of the RBA, with close to 90bps of rate cuts priced by the end of this year. In Europe we fear that German factory orders will look significantly weaker in July, in line with developments in the manufacturing PMI. Finally, the US will print the non-manufacturing ISM. Needless to say, a reading of under 50 would not go down well with the market.

Markets

KEY RELEASES

Source: Bloomberg Finance LP

NORTH AMERICA

No data

EUROPE

EUR: August final PMI services confirm its flash estimate, at market

( The August final services PMI dropped 0.1pt from July's reading of 51.6; this was the second lowest reading since September 2009. The German PMI declined 1.8pts to 51.1 in August (a 22-month low), while French service index rose 2.6pts to 56.8 (3 month high) in August. The Italian PMI slipped 0.2pt to 48.4 (a 2-month low) in August and the Spanish services PMI plunged 1.3pts to 45.2 (20-month low) in August.

( The composite PMI index for Euro-area fell 0.4pt to 50.7 in August, second lowest reading since September 2009.

EUR: Retail sales rise 0.2%mom in July, to be down 0.2%yoy, above mkt

( According to Eurostat, sales for "Food, drinks and tobacco" fell 0.4%mom while that of non food sector rose 0.5%mom in July.

UK: PMI services down 4.3pts to 51.1 in August, well below mkt

( This was the sharpest fall for a decade and now stands at its lowest level since the end of last year. However, some of the important sub-indices were not quite as distressing as the headline numbers in report. Take the index measuring new business, for example - this fell less sharply than the headline index and thereby currently stands at a higher level. In fact at 53.4 this index is only 1.3 points below its long run average of 54.7. Business expectations also only fell by two points, and at around 65 there stands a good buffer between its current reading and the sub-50 low reached in the recession. Moreover, the news from the price components was positive too. Input price inflation moderated to its slowest in nine months, while output price inflation was broadly stable. The result was a narrowing of the gap between the input and output price indices, a positive development for margins.

While the risks have risen sharply, therefore, we remain of the view that the UK will avoid both Recession 2.0 and QE2.0 and that following a temporary - albeit concerning - slowdown, the picture will look brighter in 6-12 months time.

UK: Lloyds employment confidence index falls 13pts to -66 in Aug, lowest since February

JAPAN/CHINA/INDIA

CHN: HSBC performance of services PMI falls 2.9pts to 50.6 in Aug

AUS COMMENTARY

AiG performance of services index rises 3.3pts to 52.1 in Aug, highest since April 2010.

TD monthly inflation gauge falls 0.1%mom in Aug, up 2.9%yoy

ANZ's newspaper based job ads series fell 3.0% mom in August (-15.6% yoy), the internet based series declined 0.5% mom (+7.3% yoy)

The newspaper based job ads series remains consistent with employment growth of just under 10k per month in our view.

Business indicators suggest GDP growth of 1.5%qoq

( Across the business indicators release we saw consistent upside surprises: namely inventories rose 2.5% qoq versus our expectation of a 0.5% qoq increase; wages and salaries rose 2.3% qoq versus our pick of 1.3% qoq (a result much more robust than that suggested by the monthly labour force survey and the Q2 wages data); company gross operating profits increased by 6.7% qoq (again stronger than our 3.0% qoq estimate); and finally when we look across the sales and production detail we see an upward revision to our estimate of Q2 GDP growth from the production side.

The net of all these has significantly lifted our estimate of Q2 GDP growth to 1.5% qoq (from 0.7% qoq ahead of today's data). As always we will finalize our GDP forecast following the release of the final partial indicators, with the balance of payments and government expenditure data due today.

NZ COMMENTARY

Barfoot & Thompson house sales down 9%mom in August

( Based on our seasonal adjustment, Barfoot & Thompson's Auckland house sales fell 9.1%mom in August after edging down 0.5%mom in July. Whilst still up 19%yoy, all of that increase was recorded earlier this year (see chart below). The agent reports that "The market is not weighted in favour of either buyers or sellers, and has been in this unusual, balanced state for four months. While there is keen buyer interest, they are not prepared to go beyond what they believe the property is worth. For their part, sellers are not accepting what they consider unrealistic offers." Over the three months to August the average sales price was up 0.9% yoy. The REINZ nationwide report may be released on Friday, but more likely early next week.

Source: Barfoot & Thompson, RBNZ, DBGMR

DIARY

AUSTRALIA

Today

RBA cash rate announcement [DB 4.75%; market 4.75%; previous 4.75%]

Balance of payments (Q2)

[Current account deficit: DB: AUD6.5bn (1.9% of GDP), previous AUD10.4bn (3.0% of GDP)]

[Net export cont. to GDP: DB: 0.0ppt qoq/ -3.3ppt yoy, previous -2.4ppt qoq/-2.8ppt yoy]

Housing finance (Jul) [Total ex-refinancing: previous -1.0%mom-5.8%yoy]

NSW State Budget

Wednesday

RBA's Stevens speech to the WA Chambers of Commerce and Minerals & Energy, Perth

National Accounts (Q2) [DB: 0.7%qoq/-0.2%yoy, Previous -1.2%qoq/1.0%yoy]

Thursday

Labour force (Aug) [Employment: DB: +25kmom/1.7%yoy, previous -0.1k mom/1.7%yoy

[Unemployment rate: DB: 5.1%, previous 5.1%]

[Participation rate: DB: 65.7%, previous 65.6%]

Friday

No data

NEW ZEALAND

Today

No data

Wednesday

Wholesale trade survey (Q2) [Sales: Previous 2.8%qoq/9.7%yoy]

Thursday

Building work put in place (Q2) [Volume: Previous -6.3%qoq/-2.2%yoy]

Economic survey of manufacturing (Q2) [Volume of Sales: Previous 1.9%qoq/1.9%yoy]

Friday

Electronic card transactions (Aug) [Retail: Previous 0.4%mom/9.0%yoy]

DIARY