Following on my discussion in Friday's Weekly Capital Strategy, the concerns that Chinese authorities may be having with regards to slowing growth rose to the surface over the weekend as the central bank lowered bank reserve requirements by half a percent to 20%.  This marks the third time the PBOC has cut requirements since the first move back in November, when it dropped it to 21% (in February, requirements were lowered to 20.5%). The move, however, did not create optimism in global markets overnight - rather, it reinforced worries that China's economy is a more serious slowdown, and it has prompted calls by analysts for more reserve requirement reductions and ultimately actual rate cuts before the end of the year.  This has been our view for a while, but I don't agree that authorities are acting out of desperation, or else we would be seeing lower rates today and not by the third quarter, which I expect.  In fact, Fitch Ratings released a report last night stating that it doesn't expect a Chinese hard landing and it sounded optimistic on the Asian region as a whole.  More importantly, the agency doesn't Europe's mess to translate into significant damage to the region. 

That said, one of the reasons why the Chinese action didn't provide us a good start to the week for equities is that speculation of an early Greek exit from the euro mounted on comments made by an ECB official over the weekend.   Council member Patrick Honohan said that a withdrawal "is not necessarily fatal, but it is not attractive".  Greece has a 436 million euro note coming due tomorrow as well and the view that the country will not receive planned bailout money because of political gridlock has grown.   The Euro Stoxx 50 index was down 2.6% at the time of writing, with heavy losses in Germany and France and S&P futures were down 14 pts, which means we'll likely see the S&P close below its early March low of 1339 unless we get a major shift in attitude today. Crude oil has also lost close to two bucks to near $94/barrel.  One possible saving grace would be a constructive comment from today's meeting of EU finance ministers regarding cooperation in the region on growth, but adhering to fiscal control as well - high hopes I know.

The weekend elections in Europe were the main focus/worry for markets on Friday and the results were exactly what the worry was about.  The ousting of French President Sarkozy by the Socialist's Francois Holland (52-48% margin) puts in place a regime that not only wants to kick the deficit reduction can down the Champs Elysees (election platform was to balance the budget in five years), but one which is at odds with the EU and Germany's eurozone bailout program.   Global equity and commodity markets recoiled immediately after the election results and the initial weakness was compounded by news that Greece's parliamentary elections failed to deliver a coalition majority for the two main (pro-bailout) parties.  Even in Germany, Angela Merkel's ruling party was handed defeat in local elections in the northern region of Schleswig-Holstein, though the street has largely ignored this in light of the French-Greek headlines.   Of the two, market participants are more fixated on what will happen to Greece if Parliament breaks down on commitments to adhere to the conditions underlying the country's second bailout from the EU and IMF.  In other words, early exit (from the euro) risk has elevated.

That said, markets have calmed down a bit going into the North American session, thanks in part to stronger-than-expected German factory orders for March (a 2.2% gain versus calls for a 0.5% lift). Investors are also stepping back a bit and recognizing that whatever political shift has taken place in France, the country is not necessarily going to completely butt heads with Germany over the region's issues.  There may also be a hint of optimism that a change of regime could spur consumer sentiment and growth, although we have now also kicked much-needed labour reforms down the road as well. The key variable now is how rating agencies deal with the new government's plans that delay fiscal austerity in a climate of weak growth/high unemployment. 

European equities have come off their session lows rather smartly, with the Stoxx 50 off only 0.2% at the time of writing, while S&P futures were indicating a smaller opening loss in NY. Crude oil, which had tumbled further to test $95.50/barrel in Asia, had trimmed losses to about half a buck before the open and the US dollar was seeing sizable profit-taking from its overnight surge. Once the street has fully digested the weekend developments, focus will shift to North American fundamentals - specifically US housing and Canadian employment (Friday).