Alarms are going off in assorted plunge protecting offices, now that the USDJPY has breached the 102.000 "fundamental" support level, below which the Yen can comfortably soar to sub 100.000 in perfectly even 100 pip increments. The first trading day of February has brought another weaker session across Asia though some equity indices such as the KOSPI (-1.1%) are in catch-up mode given they were shut towards the back-end of last week. Over the weekend, the Chinese government published its latest official manufacturing PMI which showed a 0.5pt drop to 50.5, a six-month low, and consistent with consensus estimates. DB’s Jun Ma believes there was some element of seasonality affecting this month’s result including the fact that Chinese New Year started at the end of January (vs February last year), anti-pollution measures in the lead up to CNY and efforts to control government consumption around the holiday period. The official service PMI was released overnight (53.4) which printed at the lowest level since at least 2011. The uninspiring Chinese data has not helped market sentiment this morning, with the Nikkei plunging -2% and ASX200 once again under pressure. S&P500 futures have fluctuated around the unchanged line this morning although if support below the USDJPY fail solidly, then watch out below. Markets in Mainland China and Hong Kong remain closed for Lunar New Year.
Nine Event Risks for the week ahead: identified, discussed and assessed.
Following last week's Flash PMI print of 49.6, the Final print for January China Manufacturing dropped further to 49.5 confirming the contraction is deepening. Japanese stocks were down the most since August in the early going as Nikkei futures extended the losses from the US day-session (and rather notably decoupled from USDJPY and breaking below 15,000). The Nikkei is heading for the worst month since May 2012 (-8.66% so far). S&P futures tracked USDJPY as 102.00 was defended aggressively. Chinese stocks are also tumbling (though not as hard as Japan and US) and the PBOC will not be adding liquidity today. Furthermore the blame is being shifted as Deputy FinMin Zhu warns that the "Chinese economy faces risks from overseas uncertainty." EM FX is drifting lower still.
There are two major factors that have emerged in the last five years that have sparked a surge in LNG investments. First is the shale gas “revolution” in the United States, which allowed the U.S. to vault to the top spot in the world for natural gas production. This caused prices to crater to below $2 per million Btu (MMBTu) in 2012, down from their 2008 highs above $10/MMBtu. Natural gas became significantly cheaper in the U.S. than nearly everywhere else in the world. The second major event that opened the floodgates for investment in new LNG capacity is the Fukushima nuclear crisis in Japan. Already the largest importer of LNG in the world before the triple meltdown in March 2011, Japan had to ratchet up LNG imports to make up for the power shortfall when it shut nearly all of its 49 gigawatts of nuclear capacity. In 2012, Japan accounted for 37% of total global LNG demand. The future of LNG may indeed be bright, especially when considering that global energy demand has nowhere to go but up. But, investors should be aware of the very large threat that Japanese nuclear reactors present to upstart LNG projects.
One of the big disconnects over the past year has been the divergence between the price of paper gold and the seemingly inexhaustible demand for physical gold, from China all the way to the US mint. Today we get a hint on how this divergence has been maintained: it now appears the main culprit is the massive boost in supply by gold mints around the world working literally 24/7, desperate to provide enough supply to meet demand at depressed prices in order to avoid a surge in price as bottlenecked supply finally catches up with unprecedented physical demand.
- Emerging sell-off hits European shares, lifts yen (Reuters) - but not really if you hit refresh since the latest central bank bailout announcement
- Apple’s Holiday Results to Show Whether Growth Is Back (BBG)
- Israel attacked Syrian base in Latakia, Lebanese media reports (Haaretz)
- Abenomics FTW: Japan Posts Record Annual Trade Deficit as Import Bill Soars (BBG)
- When all else fails, Spain's hope lie in a 16th century saint: Saint “might help Spain out of crisis,” says interior minister (El Pais)
- Global Woes Fail to Send Cash Into U.S. Stocks (WSJ)
- IMF's Lagarde sees eurozone inflation "way below target" (Reuters)
- Minimum wage bills pushed in at least 30 states (AP)
- AT&T Gives Up Right to Offer to Buy Vodafone Within 6 Months (BBG)
The conventional view of China and India sports not one but two pair of rose-colored glasses: Chindia (even the portmanteau word is chirpy) is the world's engine of growth, and this rapid economic growth is chipping away at structural political and social problems. Nice, especially from a distance. But on the ground, China and India (not Chindia--there is no such entity) are both powder kegs awaiting a spark for the same reason: systemic corruption in every nook and cranny of both nations. The conventional rose-colored view is that corruption will inevitably decline with modernization and economic growth. This is simply wrong on multiple levels...
New York City may be buried under more than a foot of snow, but global markets don't sleep, however judging by the color of futures this morning, today's respectable $2.25-$3.00 billion POMO will have a tough time digging US equities out of the red, following a tepid overnight session in which the traditional driver of futures levitation, the USDJPY, was flat as the BOJ disclosed unchanged policy despite some inexplicable hopes that Kuroda would increase QE as early as today.
- Hilsenrath: Next Cut in Fed Bond Buys Looms - Reduction to $65 Billion Could Be Announced on Jan. 29 (WSJ)
- China Workforce Slide Robs Xi of Growth Engine (BBG)
- Obama pulls the race card: Obama Says Race May Blunt Poll Standing in Interview (BBG)
- Chinese firm's IPO deal switches banks as chairman's daughter moves from JPMorgan to UBS (SCMP)
- China and Russia may hold joint naval drill in the Mediterranean (RT)
- Iran invite to Syria talks withdrawn after boycott threat (Reuters)
- Seven Chinese IPOs Halt Trading After 44 Percent Share (BBG)
- U.S. military says readying plans for Olympic security assistance (Reuters)
- Thank you Bernanke: Investors Most Upbeat in 5 Years With Record 59% Bullish in Poll (BBG)
- From His Refuge in the Poconos, Reclusive Imam Fethullah Gulen Roils Turkey (WSJ)
But fear not, dear poor people of the world, for Lloyd Blankfein, Mark J. Carney, Mario Draghi, Haruhiko Kuroda, Christine Lagarde, Jacob Lew, Shimon Peres, Larry Fink, David Cameron, Shinzo Abe, Marissa Meyer, and many others are there fighting for you. Fighting all the way...
The Forex market is dead and dying, in parallel with the US economy; which is fitting, considering the US is still the world reserve currency.
Significant harbingers that have changed the Forex market forever:
Last week we were the first to raise the very real and imminent threat of a default for a Chinese wealth management product (WMP) default - specifically China Credit Trust's Credit Equals Gold #1 (CEQ1) - and its potential contagion concerns. It seems BofAML is now beginning to get concerned, noting that over 60% of market participants expects repo rates to rise if a trust product defaults and based on the analysis below, they think there is a high probability for CEQ1 to default on 31 January, i.e. no full redemption of principal and back-coupon on the day. Crucially, with the stratospheric leverage ratios now engaged in such products, BofAML warns trust companies must answer some serious questions: will they stand back behind every trust investment or will they have to default on some or potentially many of them? BofAML believes the question needs an answer because investors and Trusts can’t have their cake and eat it too. The potential first default, even if it’s not CEQ1 on 1/31, would be important based on the experience of what happened to the US and Europe; the market has tended to underestimate the initial event.
Overview of the major forces shaping the investment climate.
Overview of the dollar's outlook against the major currencies, without a preconceived notion that the US is in some kind of terminal decline.
The Supply demand fundamentals of the gold market remain sound with the flow of gold from West to East. COMEX gold stocks have fallen to new record lows (see chart) showing demand for physical bullion remains very robust. Indeed, the scale of the fall in COMEX gold stocks since 2007 and which accelerated in early April 2013 is important to note.