Risk Off: Yen Soars, Equity Futures Tumble As EM Revulsion Escalates

Tyler Durden's picture

It's Risk Off time.

It all started early in the session when China’s banking regulator ordered regional offices to increase scrutiny of credit risks in coal-mining industry, signaling not only government concern about possible defaults but the implication that possible defaults especially in the much-discussed Trust product which may default as soon as a week from today. This caused a hiccup in the USDJPY which until that point was being pushed higher by Japanese banks hoping to reverse recent losses by adding to their losing long positions.  But then things got really out of control, and the USDJPY plunged by some 150 pips in the matter of hours, plunging as low as 102, driven by unfavourable interest rate differential flows amid heightened concerns over EM nations, in particular TRY and ARS which also supported bid tone in USTs. This also saw spot TRY rate print fresh record high, while 5y Turkish CDS rate advanced to its highest level since June 2012, while at the same time Argentina announced it would life currency controls and dollar purchases in the aftermath of the ARS devaluation by 13%. 

And since everything tracks the JPY carry pair as we have been showing for the past year, futures once again plunged overnight, for now held by 1810 support, Treasurys are bid throughout, with the same treasury yields that have "no where to go but up" sliding to 2.71% from 2.87% at the beginning of the week, while gold is finally spiking as the realization that absolutely nothing has been fixed, that apparently nobody got the taper is priced in memo, and that soon the Fed will have to untaper, begins to spread. Are the central planners finally starting to lose control?

More details from RanSquawk

Heading into the North American open, stocks in Europe are seen lower across the board, as concerns over EM markets continued to weigh heavily on investor sentiment. As a result, Argentina exposed BBVA shares fell 4% after Argentinian central bank devalued the ARS the most in 12 years as the central bank scaled back its intervention in a bid to preserve international reserves that have fallen to a seven-year low, which in turn saw the Spanish IBEX-35 underperform its peers.

Negative sentiment, together with touted month-end related flows has supported flows into fixed income assets, with UK Gilts also better bid in spite of the bear steepening of the short-sterling curve in reaction to press reports by FT which wrote that Carney has signalled scrapping of forward guidance target. This in turn ensured that despite the flight to quality, with GBP initially outperformed its peers, however, a retracement of these gains amid a stronger EUR following higher than expected LTRO repayment has seen GBP/USD trade lower.

Asian Headlines

Touted profit taking ahead of the Chinese New Year, together with renewed concerns over EM markets and consequent short-covering of positions saw the JPY swap curve aggressively bull flatten overnight. While JGBs are expected to be supported next week by BoJ conducting JGB purchasing ops, comments by the President of the GPIF, who said that the fund will not buy more Japanese government bonds and that there is limited room for JGB prices to increase may weigh on sentiment. (BBG)

BoJ's Kuroda says Japanese economy is on track; after sales tax hike and economy will continue to grow around 1.5%. (RTRS)

EU & UK Headlines

Fitch affirmed Germany at AAA; outlook stable and said that Germany's general government debt to GDP ratio started to fall. (BBG) Elsewhere, Fitch affirmed Luxembourg at AAA; outlook stable, S&P affirmed Estonia at AA-; outlook stable. Markets now await the judgement on the UK and French sovereigns at Moody's by the end of the day.

ECB's Visco has said ECB could consider asset purchases if needed and EUR does not face deflation threat. (BBG) Visco added that the ECB could cut interest rates if needed.

BoE's Weale says lowering unemployment threshold would not achieve forward guidance core aim of greater certainty. (East Anglian Daily Times)

UniCredit now sees first BoE rate hike in Q4 of 2014 vs Prev. Q1 of 2015. (BBG)

ECB says one week USD liquidity-providing operations will continue to be conduced at least until 31 July 2014. With the BoE set to phase out USD liquidity-providing operations. (BBG)

UK BBA Loans for House Purchase (Dec) M/M 46,521 vs Exp. 47,300 (Prev. 45,044, Rev. 45394) - highest since September 2007

Barclays preliminary pan-Euro agg month-end extensions: +0.12y. Barclays preliminary Sterling month-end extensions:+0.19y

US Headlines

JPMorgan's Lee says decline in S&P 500, while disappointing is not yet sufficient to alter positive stance on equities in 2014. With equities supported by strengthening US consumer, pent up demand for durables investment spending and improved global growth. (BBG)


Concerns over stability in EM markets, which resulted in further pressure on TRY this morning, together with negative broker recommendation by analysts at MS saw Aberdeen Asset Management shares come under significant selling pressure. On the other hand, Celesio shares outperformed and traded higher by over 5% after Mckesson said that it is to offer EUR 23.50 per share in a voluntary public takeover offer, and McKesson to get about 75% of company in pact with Haniel and Elliott.


SPDR gold holdings down 0.68% to 790.46 tonnes from 795.85 tonnes. (RTRS)

Iran is exaggerating its crude oil export figures and won't be allowed to sell more than 1mln bpd over the next six months according to US officials involved in managing sanctions against the country. (BBG)

China targets 2014 crude oil production increase of 0.5% to 208mln tonnes according to energy administration. (Energy Administration)

China are to cut diesel price by CNY 125/ton and cut fuel prices from tomorrow. (NRDC)

* * *

We conclude with Jim Reid's usual overnight recap

The jury is still out on whether yesterday’s selloff was caused by the US data, poor corporate earnings or the Chinese PMI. Whatever the reason, the real damage was in done in EM where the rumblings from Turkey, Argentina and Venezuela cumulated in another very weak day for EM sovereigns. Even with the fall in the USD and rally in UST yields (-9bp to 2.78%), there was little to cheer in EM sovereign credit as the dual worries of inflation and potential BoP issues provided a common thread yesterday. All this provides a fairly nervous lead-in to next week’s FOMC where the consensus appears to be that another $10bn in tapering will result.

To put yesterday’s EM performance in perspective, the CDX EM and JPM EMBI credit indices widened by more than 15bp apiece in the worst one-day performance since the turbulent summer of 2013. Starting with Argentina, the peso suffered its biggest one-day fall in more than a decade (-13%) after the country’s central bank decided to pull its support for the currency in order to preserve its FX reserves which had fallen by almost a third over the past year.

Our EM strategists point out that unfortunately neither the Central Bank nor Treasury is doing much to contain the pass-through to inflation by tightening policy. Thus, more volatility is almost guaranteed in the short term and the stability will only be established once the peso is weak enough – probably at a level one Peso or two away from yesterday’s closing. In Turkey, the Central Bank intervened directly in the FX market yesterday for the first time in just over two years, by selling USD3bn in support of the lira. Our EM team’s bottom line here is that the CBT does not have enough reserves to credibly mount a sustained defense of the lira by selling FX. Net reserves do not fully cover short-term external debt and provides only about two months of import cover, and are also not enough to cover the risk-weighted measure of potential drains on reserves developed by the IMF. In Brazil, the lower than expected IBGE inflation reading (0.67% M/M vs 0.79% consensus) was a welcome development, but this didn’t stop the IBOVESPA from losing 2% while Brazil CDS and bond yields closed about 5bp higher on the day.

Turning to the Asia, equity markets are experiencing another pullback today as worries in EM weigh on risk sentiment across the region. The Nikkei is trading 2.2% lower as it drifts further away from the 16,000 mark and as yesterday’s 1.2% drop in dollar-yen drags on Japanese exporters. Chinese A-shares are the only major market trading in positive territory today (Shanghai Comp +0.8%) but it appears to be driven by one or two sectors – namely tech stocks – after it was reported that PC giant Lenovo (+2.25%) may acquire IBM’s low-end server business. A sharp fall in Chinese money market rates is also providing a tailwind for Chinese equities. Overnight it was reported that China’s banking regulator had issued an alert on credit risks in the country’s coal sector (Bloomberg). This comes after Chinese bank ICBC’s chairman reiterated yesterday that it won’t be bailing out investors in a troubled $500m wealth management product that matures in one week’s time. In Asian sovereign credit, the spreads on higher beta names such as Indonesia (+8bp) and the Philippines (+5bp) are being marked wider while the benchmark Asia IG index is 5bp higher.

Taking a brief look at the data flow yesterday, the selloff appeared to gather momentum with the release of some uninspiring US data. December existing home sales (4.87M vs 4.93M) were modestly below expectations, but the details of the report suggests weather may have impacted sales in the month. Indeed, weakness was concentrated in two regions of country particularly prone to adverse winter weather, namely the Northeast (-1.5% vs. -3.0%) and the Midwest (-4.3% vs. -4.9%), while the South (+3.0% vs. -4.4%) and the West (+4.8% vs. -11.1%) both registered modest gains. Our US economists point out that since last July, existing home sales have declined -9.7% - the lack of supply on the market being one of the reasons for the decline. The US Markit PMI fell to 53.7, well below the 55.0 Bloomberg consensus estimate. Initial jobless claims for the week of January 18 increased +1k to 326k after the prior week was revised down -1k to 325k. This leaves our economists calling for +200k for January’s payrolls. Euro-zone flash PMIs increased by 1.1 to 53.2 (vs 52.4 expected), the highest reading since June 2011, which provided a brief reason for markets to rally. The stronger Euro PMI was led by firm manufacturing readings in France (48.8 vs 47.5 expected) and Germany (56.3vs 54.6 expected). On the earnings front, there was disappointment with Lockheed Martin’s (-3.93%) earnings despite a strong earnings beat and management predicting that US defence spending will be soon bottoming out.

Starbucks was also cause for worry after Dec quarter same store sales growth rose 5%, which was less than the consensus estimate of 5.9%. In other headlines, the BoE’s Mark Carney gave a series of television interviews yesterday on the sidelines of the World Economic Forum downplaying the idea of rate rises were around the corner given the fall in the jobless rate to 7.1%. Carney joined his BoE colleagues McCafferty and Fisher in saying that the 7% threshold was merely a marker to then "begin to think about" raising rates. The FT was more forthcoming in its interpretation, saying that Carney was potentially signaling that he was scrapping forward guidance as he was against “unnecessarily focusing on one indicator”. We may get more detail on Carney’s thoughts later today when he speaks at the WEF in Davos.

Turning to the day ahead, the week draws to a close with very little on both the earnings and data calendar. Mark Carney will be speaking today at the World Economic Forum at around midday London time. The WEF annual meeting concludes tomorrow. Canada provides an update on December inflation and there will be some focus on the current account numbers from Brazil.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Cognitive Dissonance's picture

Just tell Yellen to print up some more barborous relic and all will be fixed. Oh...wait....

Headbanger's picture


Wasn't the writing on the wall clear enough!!??

The Fed is done with this clown show c ause the big banks who OWN the Fed are protecting their ass(et)s now that they see all this QE bullshit was worthless to the economy.

And obozo has lost all respect and political power so there's no use supporting him now financially.

eclectic syncretist's picture

All roads in the flight for safety end, ultimately, at gold and silver.  Many will get lost along the way, but for those of us already there, all we have to do is.......nothing.  They will come to us.

stocktivity's picture

"JPMorgan's Lee says decline in S&P 500, while disappointing is not yet sufficient to alter positive stance on equities in 2014. With equities supported by strengthening US consumer"


El Hosel's picture

Hey Mr Lee, Pot is legal, LCD not so much.


    "Decline" in the Nasdaq..  http://finviz.com/futures_charts.ashx?t=NQ&p=w1

      SPY "Decline"  .....     http://finviz.com/futures_charts.ashx?t=ES&p=w1

El Hosel's picture

..... Its just a little Bond Sale, Bernanke is raising cash. He is paying for the Party in Davos as a going away present for his Masters.

buzzsaw99's picture

egad JPMorgan's Lee is full of crap

kornholio's picture

just buy the fucking dip...works everytime...till it doesnt...you feeling lucky?


new game's picture

buy the fucking alltime low dip with in the untaper taper, untaper 100b ramp with yellen to do an ecb "whatever it takes" complicit with jamie and gods from wallstreet. yo smokin da potus, come to da podium, plez say it is so, you are here to help us and we are ready to comply and put the full faith and trust in you and the treseuries cheif - lew of the lands-thanks have a nice inflation ride...

Oldwood's picture

All we need is more convincing that the ongoing rape is actually an act of love.

Yen Cross's picture

  Yep, yields will probably go back up even if the Fed. doesn't taper, and the usd will get crushed even harder initially.

buzzsaw99's picture

sorry yen, gotta take the other side of that one

Once you eliminate the impossible, whatever remains, no matter how improbable, must be the truth. [/Sherlock Holmes]

fonzannoon's picture

I'm with Yen here, I'm getting ready to put some chips on yields going higher.

Yen Cross's picture

  You think yields will continue lower if no taper buzz? You're probably right. I was just going from the loss in Fed. faith, and the fact that yields have already been crushed so hard this week approach. The usd will get an even bigger smackdown if they don't taper though.

buzzsaw99's picture

Short term anything could happen, but long term, taper or no taper, treasury yields will, imo, continue lower.

Yen Cross's picture

  I can see that scenario for sure. At least until things go thermal nuclear.

buzzsaw99's picture

that's the thing. betting on teotwawki is a lose-lose wager

fonzannoon's picture

agreed, i'm playing for a bounce here, that's all.

new game's picture

fear trade, my vote... 10 year 2.5 handle no mater wtf these fucks do...

Boston's picture

The 2.55-2.60 range on the 10y could be a big test. If yields break and hold below that range, then they could fall a lot further. Below this range, both the lows of  Oct 12 and the the 200dma will have failed. Would probably need some serious risk-off catalyst for this to happen.

On the other hand, if this range holds, then I will lighten up on my longs (bought mostly in the 2.9% area) and wait for yields to bounce back up....before repeating.

GeoffreyT's picture

Buying Nikkei CFDs at 15074 right now.


Selloff is overdone (and I'm a "permabear").


This is like Gold at 1185 a few months ago (I posted that on the night of the low). Easiest swing trade on offer.


EDIT: not looking for a return to recent swing highs - just a ~300-point bounce. Mid 15300s will do - will give me my nut for the month.

ghostzapper's picture

A few weeks ago I opined that we might see a legit correction early this year before a rampapalooza momo monkey orgy blow off top new all time high.  I said at the time would need to see a fairly violent, aggressive spike down to initiate this.  well, we might have that and today should tell us a lot.

1812ish could be a key.  could see a bounce off of that.  if it tries but utimately moves below that and closes below it on a weekly basis with increasing volume then maaaaaayyyyyyybbbbbbbeeeee the move to 1645ish is on.  Maybe.  

of course who the fuck knows what the central banks announce on Monday morning if this were the case because those cocksuckers are using the same charts I am.  Charts still work.  the caveat is that when the rigged market is about to really break the opposite way the CB wants it to that's when voila you get some sort of policy/jawboning.  

ghostzapper's picture

And I still expect at least one more ridiculous move to new highs.  Is that because of untaper or whatever who knows.  Not sure the real crash is here just yet.  

ghostzapper's picture

Already seeing one bounce off of 1812ish before the "open".  

BandGap's picture

According to BoA, wasn't something magical supposed to happen with gold north of 1270? I like magic.

NoDebt's picture

Well, we'll see.  The reverse-slam-down happened about 6:00.  1271.  "We have (momentum) ignition."

LetsDoThisAlready's picture

Looks like we will be getting day 2 of red. Please let this be the big one. Time for some changes. Unfortunately another oppressive scheme is waiting in the wings, but at least we can use the change to our advantage.

TalkToLind's picture

Both gold and silver futures are up nicely this morning.  Check out the vertical spikes; it's beginning to look like 2010 up in here.

Loanman26's picture

On our way to 2.35 on the 10yr


Boston's picture

NOW you tell us!?

Where were you when the 10y exceeded 3.0% a few weeks ago? Most folks here only yapped about 3.5%, 4% or 5% being 'around the corner'.


MyBrothersKeeper's picture

Wonder what the odds are now of more taper vs untaper?

Today will tell us if we are at start of a mini-capitulation.  If so, the Fed better come up with some super strong language that says "we are willing to do whatever it takes to make sure the recovery stays on track....even if it means more stimulus" to keep the memories of 2008 out of peoples minds.  These idiots discussing bond bear markets should just find a nice cliff because it will be impossible to cover all their shorts.

Meanwhile, Al Gore is somewhere far away from the public as this latest polar vortex will keep his scam in the "lockbox" for at least a few weeks.

Hindenburg...Oh Man's picture

Between my after workout shower and getting some coffee, e mini NASDAQ futures climbed .25. I guess some people woke up and started slamming on the buy button.

You can't keep this thing down, seriously. I expect another "correction day" that ends up with the NASDAQ index slightly lower, at best. Maybe even money or green. 

MyBrothersKeeper's picture

Most likely you are correct.  The thing that trumps everything is this is an election year.  Next year the wheels fall off

Tall Tom's picture

Are the central planners finally starting to lose control?


No. They lost control in January, 2008. The outcome of that loss was the collapse in September, 2008. They have been vainly attempting to regain control ever since. Every single move which they do has unintended consequences.


The QE Liquidity Trap which they have built for themselves has ensured the final destruction and has guaranteed a Crash of epic proportion.


It is not a Bubble Economy anymore. It has not been for awhile. It is more like a FROTH of Many Bubbles in a Boiling Cauldron.


I think that they have lost power more than they have lost control.  Power, without control, generally leads to disasterous outcomes when the loss of Power is realized.


They are out of Magic Bullets, out of ammunition, and the Forces of the inherent imbalances are now too overwhelming. They have not any Power left to control them as thier resources have become depleted, exhausted.


We are freaking doomed.