After a burst of volatility in the developed market over the past month, one odd outlier was China, where after a surge of gut-wrenching moves in both its currency and equity markets (recall that it was China's troubles with marketwide circuit breakers at the start of January that may have catalyzed the global volatility wave), Chinese stocks remained relatively quiet and resilient, levitating quietly day after day. That all changed overnight when the Shanghai Composite plunged by 6.4% with the drop accelerating into the close. This was the biggest drop in over a month and was big enough to almost wipe out the entire 10% rebound from the January lows in one session.
There was confusion about what catalyzed the selling with several theories proposed.
According to one, the catalyst was a jump in money market rates: the overnight repo rate jumped as much as 33 bps which led to a tightening in financial conditions. The cash squeeze was caused by banks' reserve submission and corp. tax payments for 2015 due this week: Commerzbank economist Zhou Hao
"Market confidence is very weak so an increase in money-market rates triggered a sell-off today,” said Wu Kan, a fund manager at JK Life Insurance Co. in Shanghai. “Technically speaking, the rebound has reached its target and a new round of declines is resuming. The valuations of smaller companies are still too high and that’s the basic reason behind the plunge. I am not too sure that the government will step in to buy stocks now." Judging by the final result, he was right.
A second theory speculated that losses accelerated after regulators banned Zhongrong Life from adding to its equity investments, according to Castor Pang, head of research at Core-Pacific Yamaichi Hong Kong. "Zhongrong Life can’t add to holdings as its solvency ratios fall into criteria of insolvent insurers", China's Insurance Regulatory Commission said.
This is a problem because "the government is trying to make sure all insurance companies need to meet potential demand for claims from clients and keep liquidity ample,” says Pang. "But almost all insurers which heavily bought shares last year when the Shanghai Composite was at high levels" are facing problems. As a result, the latest black swan to appears in China in the form of Zhongrong Life’s situation, is fueling concern further selling pressure in stock market: Pang
"A big jump in Shanghai turnover implies investors turned risk averse and want to dump holdings en masse,” Pang says. “Investors are scared of further declines. The government may try to step in to calm investors’ nerves. It may help moderate losses but can’t reverse the trend."
A third, far less credible theory postulated that stocks were tumbling on concerns that there may be negative news from the G-20 tomorrow. Since that would be patently impossible as the G-20's only concern is to stabilize markets we would discount this idea.
Whatever the reason, it appears that Chinese stocks were just waiting for a catalyst to dump and they got it: "The market is in a quite fragile state when everyone scrambles for an exit," said Central China Securities Co.’s Shanghai-based strategist Zhang Gang, who accurately predicted last year’s June selloff. “None of the news in the market is sufficient enough to trigger such a slump."
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Elsewhere in the world, the sentiment was initially of the risk-off variety, with treasuries rallying gold rose and crude oil falling after the Chinese rout. U.S. stock-index futures were little changed, while European equities advanced as banks rebounded.
As Bloomberg writes, global equities have swung between gains and losses in the past week as investors tried to get a handle on the world economy’s prospects. So far they are failing, and yet it is only massive short squeeze that manage to provide support under the increasingly jittery market. Crude’s gyrations and concern that China can’t regain momentum have dominated financial markets this year, spurring central banks to ponder further stimulus. U.S. Treasury Secretary Jacob Lew said Group-of-20 finance ministers wouldn’t deliver an “emergency response” to the market turmoil when they meet this week as we aren’t in a crisis environment.
“The conversation has shifted from an accelerating economy to one possibly falling into recession,” said Kully Samra, who manages U.K. clients for Charles Schwab Corp. in London. “Our outlook for the year is still good, but what happens over the next few days in the stock market depends on how much those worries intensify.”
At last check, S&P 500 futures were up 0.1%, to 1933, before data that is forecast to show durable goods orders expanded in January, while initial jobless claims increased in February.
Europe's Stoxx 600 benchmark gauge of European equities added 1.4% before the Euronext broke as reported previously, a gain that has since jumped to 1.8% as the market remains broken: go figure. Lloyds rallied as much as 11 percent after raising its dividend, introducing a special payout and indicating it may have reached the end of charges for wrongly sold payment protection insurance that cost it 4 billion pounds ($5.58 billion) last year.
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Looking at regional markets, Asian equity markets traded mixed, having shrugged off the positive lead from Wall St where gains in oil prices post-DoE spurred risk-on sentiment, with renewed Chinese concerns leading to the downbeat tone in the region. Nikkei 225 (+1.4%) traded in positive territory supported by JPY weakness. Elsewhere, ASX 200 (+0.1%) traded range-bound amid a mixed bag of earnings reports. While the Shanghai Comp (-6.4%) underperformed amid profit-taking and increasing money market rates with the overnight Shibor up 2.45%, subsequently signalling at tighter liquidity. Alongside this, a total of CNY 960b1n of reverse repurchase agreements are due to mature this week, again further squeezing liquidity. Finally, 10yr JGBs fell amid gains in riskier assets in Japan, while the latest securities transactions figures also showed foreign purchases of Japanese debt nearly halved. However, prices pulled off their worst levels following the 2yr note auction where the auction average yield declined to its lowest on record.
European equities are in the green (Euro Stoxx: +1.4%) paring some of yesterday's gains after benefitting from the positive close and Wall St. and a spate of earnings this morning. Europe shrugged off the significant losses seen in China, to see financials and energy names outperform. Both these sectors were among the worst performers yesterday, so while much of the move could be put down to profit taking, financials have also benefitted from significant gains Lloyds (+9.0%) in the wake of their earnings, while energy names continue to see upside in tandem with WTI's move higher during US hours.
In FX it has been a tight session in early London today, the pound halted its steepest decline in more than six years as data confirmed that the U.K. economy gained momentum at the end of last year. Australia’s dollar weakened for a third day, dropping 0.1 percent to 71.89 U.S. cents, after a government report showed businesses’ annual investment plans fell to the lowest level in nine years.
The sharp reversal in Wall Street adds to the conflicting signals in FX. Oil also turned sharply higher on what was a marginal miss in the DoE Crude build, so all points to a short squeeze in risk (in general), spelling some USD weakness against all currencies with the exception of the JPY. Early selling in USD/CAD saw us dip under 1.3700 as locals decided to cut their longs established at the lows. GBP continues to grind lower against the EUR, but Cable looks to be finding some support below 1.3900 for now. Larger EUR/USD support seen down in the 1.0950 area, but for now, pre 1.1000 is finding some bids coming in. USD/JPY has been very quiet around 112.00, with S&P futures more or less flat to give little away in the US session ahead.
In commodities, WTI crude initiall declined modestly on the day after gaining 0.9 percent on Wednesday following a massive API and a modest DOE inventory build; it has since regained all of its losses and was at last check green on the day. Stockpiles of gasoline in the U.S. fell 2.24 million barrels to 256.5 million, according to the Energy Information Administration, as demand climbed on pump prices near a seven-year low. American crude inventories, however, rose by 3.5 million barrels to an 86-year high of 507.6 million last week.
U.S. natural gas slipped for a third day, extending a decline from a two-month low, amid forecasts for a warmer weather. Futures for March delivery, which expire Thursday, fall as much as 2 percent to $1.742 a million British thermal units on the New York Mercantile Exchange.
Gold extended its biggest monthly advance in four years, on speculation that U.S. interest rates remaining lower for longer.
On today's US calendar we have Initial (Exp 262K) and Continuing (Exp 2.273MM) jobless claims, as well as the latest durable goods report, the FHFA House Purchase Index, the latest Bloomberg Consumer Comfort report, and the Kansas Fed report. Speaking will be Fed's Lockhart and SF Fed's John Williams
Bulletin Headline Summary from Bloomberg and RanSquawk
- Shanghai Comp. slumped over 6% to post its largest loss in over a month amid increasing money market rates, consequently signalling tighter liquidity, alongside a bout of profit-taking.
- European equities shrugged off the losses in China to pare some of yesterday's losses with strong earnings from Lloyds bolstering financial names.
- Looking ahead, highlights income US weekly jobs data, Durable Goods Orders, Fed's Lockhart and Williams and ECB's Linde.
- Treasuries higher in overnight trading as Chinese equities and oil slide lower; today’s data includes durable goods orders, and Treasury concludes this week’s auctions with sales of $28b 7Y notes, WI yield 1.50%, compares with 1.759% awarded in January.
- China’s stocks tumbled the most in a month as surging money- market rates signaled tighter liquidity and the offshore yuan declined for a fifth day. The Shanghai Composite Index sank 6.4% at the close
- China will allow domestic banks to issue up to 50 billion yuan ($7.7 billion) of asset-backed securities based on their non-performing loans, the first quota for such sales since 2008
- Lloyds Banking Group Plc surged after the lender increased its dividend payout and indicated it may have reached the end of charges for wrongly sold payment protection insurance that cost it £4 billion ($5.6 billion) last year
- Europe’s biggest banks face a stress test this year that will have no pass mark to identify capital shortfalls, a break from previous practice, because banks have emerged from the financial crisis, the European Banking Authority said
- Euro-area consumer prices rose 0.3%, less than the 0.4% initially estimated in January, increasing the pressure on the European Central Bank to take steps to sustain the region’s recovery
- The U.S. government has urged some of the nation’s largest banks to refrain from helping Russia sell bonds, according to people with knowledge of the situation, as helping the nation obtain foreign funding risks undermining sanctions
- Amid conversations about central bank policy and algorithmic trading, it was concerns about diminishing liquidity that dominated discussions this week at the TradeTech FX conference in Miami
- No IG corporates priced yesterday (YTD volume $256.9b) and no HY priced (YTD volume $11.375b)
Sovereign 10Y bond yields mostly steady; European, Asian markets rise (except China); U.S. equity-index futures little changed. Crude oil falls, copper and gold rise
US Event Calendar
- 8:15am: Fed’s Lockhart speaks in Atlanta
- 8:30am: Initial Jobless Claims, Feb., est. 270k (prior 262k); Continuing Claims, Feb. 13, est. 2.253m (prior 2.273m)
- 8:30am: Durable Goods Orders, Jan. P, est. 2.9% (prior -5%)
- Durables Ex Transportation, Jan. P, est. 0.3% (prior -1%)
- Cap Goods Orders Non-def Ex Air, Jan. P, est. 1% (prior -4.3%)
- Cap Goods Ship Non-def Ex Air, Jan. P, est. -0.5% (prior 0.2%)
- 9:00am: House Price Purchase Index q/q, 4Q (prior 1.3%)
- FHFA House Price Index m/m, Dec., est. 0.5% (prior 0.5%)
- 9:45am: Bloomberg Consumer Comfort, Feb. 21 (prior 44.3)
- 11:00am: Kansas City Fed Mfg Activity, Feb., est. -6 (prior -9)
- 12:00pm: SF Fed’s Williams speaks in New York
- 1:00pm: U.S. to sell $28b 7Y notes
DB's Jim Reid concludes the overnight wrap
Yesterday felt pretty bad in the European session again (Stoxx 600 -2.30%) but a turnaround in Oil actually helped lift the mood by the time the US closed (S&P 500 +0.44% after being as much as -1.60% at the earlier lows). Despite that positive momentum for risk emanating from the US session last night, it’s been a bit of a mixed follow up in Asia this morning. With the Yen a bit weaker, the Nikkei is leading the way with a +1.09% gain, while the ASX is currently +0.26%. However as we head into the midday break it’s a big selloff in China which has rippled through other markets (despite there being a lack of newsflow) with the Shanghai Comp (-3.61%) and Shenzhen (-4.76%) both a steep leg lower. That’s taken the Hang Seng (-1.21%) and Kospi (-0.08%) with them, while Oil markets have retraced a touch.
Meanwhile the CNY fix was set little changed this morning. With the G20 Finance Ministers Meeting kicking off tomorrow in Shanghai expect a lot of focus not just on global growth and negative rate concerns, but also on the transparency of the PBoC’s FX policy. It's far too early for coordinated fiscal policy to gain much traction but it'll be interesting if there's any chatter on this.
A lot of the volatility yesterday was centered on oil. It had initially continued the downward trajectory it had been on from Tuesday afternoon in what’s been a fairly wild week so far, touching a low yesterday of $30.56/bbl on the new contract which was nearing a 4% drop on the day (and nearly 9% off Tuesday’s high) before a sharp reversal sparked by the latest inventory data saw it bounce off the lows to close up +0.88% on the day and back above $32/bbl. Despite the latest EIA data showing crude stockpiles building on their 86-year high, much of the commentary was focusing on the larger than expected decline in Gasoline stockpiles last week which fell 2.2m barrels while demand for Gasoline and other refined products were up. That helped Gasoline futures climb over +4.5% yesterday. Credit markets were subject to similar swings in sentiment. In Europe we saw Main and Crossover finish 3bps and 13bps wider respectively with financials also under pressure. CDX IG initially opened up a sharp 4bps wider before paring all of that move to finish 1bp tighter on the day.
Moving on. We’d previously highlighted last week that the various US economic surprise indices that we monitor had been trending up in the last couple of weeks. Well over the last two days we've seen them hit of a bit of a wall as after Tuesday’s much softer than expected consumer confidence print, yesterday’s flash February services PMI dipped unexpectedly into contractionary territory (49.8 vs. 53.5 expected, -3.5pts from January) for the first time since October 2013 and just the second time since 2009. The reaction to this was fairly mixed. Some pointed towards this as being evidence of the much talked about weakness in the manufacturing sector now leaking into the larger services component, while others pointed towards the poor winter weather in January being a major factor as well as highlighting the still supportive employment sub-component in the data (-0.1pts to 54.2). In any case it’s another reason to keep a close eye on the ISM services data this time next week. It could be a pivotal release.
Away from this, US new home sales for January also disappointed yesterday, declining 9.2% mom last month (vs. -4.4% expected) although the trend in sales has continued to remain fairly positive of late. Treasury yields were once again subject to another big high to low range (11bps) before they eventually settled up a couple of basis points on the day at 1.749%.
Closer to home, in the UK we saw CBI reported sales fall 6pts to 10, while French consumer confidence was a little softer than expected at 95 (vs. 97 expected), falling a couple of points from January. Moves in core European rates markets reflected the largely risk off tone with 10y Bunds finishing 3bps lower at 0.152% and extending the recent lows to levels only lower in the mad frenzy around April last year. Remember yields closed as low as 7.5bps then, so we’re getting close. Speaking of levels, Sterling continues to get hit hard with the $1.40 level showing little resistance as the Pound smashed through it during the Asia session yesterday and edged lower as the day went on, eventually closing -0.68% at $1.393 (and -0.63% vs. the Euro) which is where its hovering this morning.
Over at the Fed, yesterday we heard from Dallas Fed President Kaplan who again reiterated his need to remain patient while leaving all options on the table in saying that he has no predetermined timetable in mind for the policy rate path. Kaplan also made special mention of the possibility of Brexit, noting that it is another potential tail risk that the Fed needs to keep a close eye on.
Meanwhile, Richmond Fed President Lacker was a bit more upbeat, saying that much of the recent decrease in market measures of inflation expectations ‘could represent a decline’ in risk premium, while his 10y expected inflation estimate forecast is ‘consistent with a belief that inflation will move back to the Fed’s target’. Finally, overnight the St Louis Fed President, Bullard, has become the latest Fed official to voice his opposition against negative rates in the US.
Looking at today’s calendar, the early data out of Europe this morning will be the preliminary reading on UK Q4 GDP along with the associated trade components. Shortly following this we’ll get the final revision to the July CPI data for the Euro area and Germany. It’ll also be worth keeping an eye on the Euro area money and credit aggregates data ahead of the ECB meeting next month. The highlight this afternoon in the US will be the preliminary readings for durable and capital goods orders (headlines for both expected to be +2.9% mom and +1.0% mom respectively). Away from this we’ll see the latest initial jobless claims reading, the FHFA house price index for December and finally the Kansas City Fed manufacturing activity print. Fedspeak wise we’ll hear from Lockhart (at 1.15pm GMT) who is due to give opening remarks at a banking conference, while this evening Williams (at 5.00pm GMT) is due to speak.