Archive - Dec 12, 2014 - Story

Oil is not just something that is refined into fuel--it is capital, collateral, debt and risk. In other words, it is intrinsically financial. Simply put, the sharp drop in oil revenues has knocked over a line of financial dominoes whose end is not yet in sight.

Despite numerous interventions by Mexico, Russia, and Nigeria, the free-fall continues in their currencies. The Russian Ruble is the poster-child (down 40% since June alone - testing 58/USD today) but the crash in Mexico and Brazil is accelerating in the last week. Default risks are surging for all of the Oil-Producing nations with Russia topping 450bps (5Y CDS) .

After a brief respite overnight, the selling of crude oil and buying of US Treasuries has resumed in the early US session.WTI is comfortably back below the $59 level and rapidly looking to test the $57 handle. Treasury yields are down 3-5bps across the complex with 30Y as low as 2.76% and 10Y 2.10%. With bond yields and crude 'oddly' correlated to the collapse in global GDP expectations (and stocks anti-correlated in their "just wait til next year" delerium), we wonder how badly this will all end.

Remember: deflation is bad, evil, horrible...  except when it involves tumbling crude oil prices: then it is "unambiguously good" for the consumer and a "tax cut." Which is why we are moritifed to report that for the second month in a row, alcohol prices have dropped, and are down 0.1% from a year ago. Surely, time for more QE to reset US consumer inflation expectations?  Or maybe not, because if said Keynesian US consumer is drowning his sorrows from declining alcohol prices in, well, alcohol, all shall be well if on the side said consumer orders some steak: with a price increase of 28.6% from a year ago, this is the biggest annual jump in beef prices since 2003.

Final Demand Producer Prices fell 0.2% in November, more than the expected 0.1% drop, for the largest deflation since October 2011. This leads to a 1.4% YoY PPI, the weakest since March and has fallen for 7 straight months. The driver - unsurprisingly - Energy prices fell 3.1% MoM (5th monthly drop in a row) with fuels & lubricants plunging 7.7% MoM and there is more good news - alcohol fell 0.1% YoY for the 2nd month. Beef/Veal prices continue to surge (+28.6% YoY). Core PPI was unchanged on the month, also missing expectations. Prices for finished goods moved down 0.7 percent in November, the largest decrease since a 1.2-percent drop in July 2009.

Overnight the bank with the $58 trillion in derivative exposure issued a note "From GRecovery to GRelapse" which is quite absent on the usual optimism, cheerfulness and happy-ending we have grown to expect from the bank whose former employee is in charge of the European printing press. Here is the punchline: "In the event of a severe Greek government clash with international lenders, interruption of liquidity provision to Greek banks by the ECB could potentially even lead to a Cyprus-style prolonged “bank holiday”. And market fears for potential Euro-exit risks could rise at that point." Dear Greeks, you have been warned, and "don't vote wrong" as EU's Juncker urges the Greeks.

• Oil slide hits European stocks, safe-haven assets sought (Reuters)
• IEA Cuts Global Oil Demand Forecast for 4th Time in Five Months (BBG)
• Cue constant pro-Abe propaganda out of Japan: Japan’s Secrecy Law Takes Effect as Abe Seeks Fair Vote Coverage (BBG)
• As if it has a choice: Japan’s GPIF Bets on Abenomics-Driven Recovery (WSJ)
• Heather Capital: How a $600 Million Hedge Fund Disappeared (WSJ)
• Senate Panel Votes to Authorize U.S. War on Islamic State (BBG)
• Japan’s 28 IPOs in 11 Days Give Abe a Lift as Startups Boom (BBG)
• U.S. authorities face new fallout from insider trading ruling (Reuters)
• Greek Stock Rout Means ASE Is 2014 Worst After Russia (BBG)

Anyone who was hoping the market would rebound on last-minute news that the US government has gotten funding for another 9 months, will be disappointed this morning, when futures are finally starting to notice the relentless decline in crude, and with Brent down another 1% as of this writing following yet another cut in the forecast of Global oil demand by the IEA (the 4th in the last 5 months) and with Chinese industrial production also missing estimates (recall that the Chinese slow-motion hard landing has been said by many to be the primary catalyst for the crude collapse) which however pushed Chinese stocks higher on hopes of even more stimulus, the S&P is trading lower by some 14 points, the 10 Year is in the red zone at 2.12%, and the USDJPY is close to session lows. In short: Kevin Henry's "ETF" desk at the NY Fed will have its work cut out to generate one of the now traditional pre-weekend feel good, boost confidence stock market ramps.