Stocks Rebound, Oil Resumes Slide, Ruble Tumbles As Yen Flirts With 119

A few days of near-record crude volatility (which the CME is scrambling [34]to reduce following 2 crude margin hikes in the past week) is giving way to the New Normal default thinking: that central banks will soon take care of everything.

And sure enough, just an hour earlier, US equity futures had jumped 8 points on virtually zero volume, wiping out all of yesterday's losses, driven higher by that new "old favorite", the USDJPY, which has once again resumed its climb higher, briefly rising above 119.00 once again and sending the Nikkei and the Topix to fresh 7 year highs, perfectly oblivious to both yesterday's Moody's downgrade and now open warnings from both Eisuke Sakakibara and [35]Goldman Sachs [35]that further declines in the Yen will accelerate the collapse of the Japanese economy. And, since there is also zero liquidity in the market, that entire gain was also just as promptly wiped out with futures now practically unchanged from yesterday's close.

With everyone focused on crude, it is worth noting that both Brent and WTI have resumed their downward trend, down a little over 1% each, following yesterday's mad short-covering scramble which may have been all the dead cat bounce we will get this time around as Saudi appears perfectly happy to send Brent to $60 or even lower.

The other thing everyone appears to be focused on these days is Russia, which earlier announced its economy would shrink 0.8% next year on oil price drop, sanctions. The immediate result was a sharp reversal in the Ruble, which wiped away all gains and tumbled to another day of record lows against western currencies, sliding 2.3% against the dollar. Comments from VTB Chairman Dubinin who said there was "some panic" in the Russian bank system did not help the mood. The Ruble has now declined 30% since the end of September. Russia’s 5yr CDS widened a further 26bps yesterday to 344bps whilst the 10y government bond yield finished 15bps higher at 10.76%. The moves also come on the back of an announcement by the Finance Minister Siluanov last week that capital flight may reach $130bn in 2014 - the most since 2009.

This morning’s European session initially kicked off on a positive note with the DAX breaking above 10,000 for the first time since June 2014 after tripping stops at the handle, although the index has since come off best levels on concerns over Russian. On a sector specific basis, basic materials and energy names led the way higher for European equities following on from yesterday’s gains in the commodities complex, which subsequently saw some mild outperformance for the FTSE 100. However, gains for oil services names have been limited by news that Russia are to abandon their Southstream pipeline plans. Furthermore, financials are also seen higher in a continuation of the trend seen overnight on the expectation that the PBoC may implement further easing policies. Elsewhere, Bunds have crept higher throughout the European session helped with the decline in equities and thus paring some of yesterday’s fixed income-related losses following positive US ISM manufacturing and rate lock selling due to a large corporate bond issuance.

Switching focus to Asia, the Japan Topix is modestly stronger (+0.49%) and shrugging off Moody's sovereign rating cut yesterday (to A1/stable from Aa3). For the record, Japan's foreign currency rating is still AA-/Neg by S&P and A+/Neg by Fitch. The Moody's action comes just before Prime Minister Abe commences his campaign today ahead of the election later this month. Just on the subject, the Nikkei QUICK monthly bond survey yesterday showed that respondents saw a 79.9% probability that the LDP/Komeito ruling coalition would do better than its stated victory of 270 seats. Away from Japan, with the exception of Korea, major bourses are largely trading in the green. The Hang Seng (+0.74%), Shanghai Composite (+1.80%) and ASX 200 (+1.41%) are all trading firmer. On the latter, the RBA has kept its benchmark rate unchanged at 2.50% (as expected by most) overnight but it is worth noting that our Australian economist now expects a cumulative 50bps cut by the RBA in 2015 citing a forecasts of rising unemployment, nascent signs of moderation in house price growth and ongoing commodity price declines. This is a non-consensus call by DB so we'll see if the street follows from here.

Looking at today’s calendar, In the US this afternoon we’ve got the ISM NY due with the market expecting a slight uptick to 55.0 (from 54.8). Shortly after, we get the construction spending print which is expected to increase – residential construction in particular is expected to show a decent gain given the improvements in housing permits. We round today off with November vehicle sales data in the US. In terms of Fedspeak, early this afternoon both Fischer and Yellen will be talking in Washington so watch out headlines here.

Bulletin Headline Summary from Bloomberg and Ransquawk

With the lack of any tier 1 economic data and lingering concerns over Russia, equities have edged lower (Eurostoxx50 -0.1%), Bunds have retraced some of yesterday’s losses and commodities are on the back foot with WTI trading marginally below USD 68 and Gold below USD 1200.
Treasuries mixed, curve spreads flatten as U.S. investment-grade calendar builds, with AMZN 5- part likely to price today after MDT sold $17b yesterday in year’s largest deal.
Europe’s latest bank stress test was flawed, and dozens of the region’s lenders, including Deutsche Bank and BNP Paribas, aren’t sufficiently capitalized to improve the economy’s anemic growth or withstand a repeat of the 2008 financial crisis
The EU faces a rebuke from global regulators for shortcomings in its implementation of bank capital rules, according to two people with knowledge of the matter
Russia is entering its first recession since 2009 as sanctions over the Ukraine conflict combine with plunging oil prices and the weakening ruble to hammer the economy and force the government to prop up banks
China is tightening checks on local bond sales in its latest bid to reduce risks as debt loads surge to a record amid slowing economic growth
Prime Minister Shinzo Abe took his economic message to Japan’s regions today, starting his campaign for re-election with the country in recession
The 3Q contraction that tipped Japan into recession may not be as sharp as first thought, with economists revising gross domestic product forecasts
Greece needs a debt haircut and easier servicing costs, Greek opposition Alexis Tsipras said at a conference today; also said Syriza will be at forefront of radical progressive change in Europe
Sovereign yields rise. Asian stocks gain; European stocks, U.S. equity-index futures rise. Brent crude and gold fall, copper rises
Looking ahead, attention turns to ISM New York and API Crude Inventories
and any comments from Fed’s Fischer, Yellen and Brainard.

US Event Calendar

9:45am: ISM New York, Nov. est. 55 (prior 54.8)
10:00am: Construction Spending, Oct., est. 0.6% (prior -0.4%)
TBA: Wards Total Vehicle Sales, Nov., est. 16.6m (prior 16.35m)
Wards Domestic Vehicle Sales, Nov., est. 13.30m (prior 13.12m)

Central Banks

8:10am: Fed’s Fischer speaks in Washington
8:30am: Fed’s Yellen speaks in Washington
12:00: Fed’s Brainard speaks via video to conference in Los Angeles

The USD remains broadly stronger alongside the recovery in US yield, which has subsequently seen USD/JPY ebb higher back towards the 119.00 handle amid favourable interest differential flows. Elsewhere, AUD was seen higher overnight following a less-dovish than anticipated RBA despite the recent slump in commodity prices, however, this upside has since been pared following the movements in the USD-index with RANsquawk sources also reporting Middle-Eastern selling in the pair. Elsewhere, heading into the North American crossover, the RUB is once again seen weaker as concerns over the Russia economy remain at the forefront with the Russian Finance Ministry warning of a potential recession in Q1 2015.

COMMODITIES

In terms of precious metals, gold has ebbed lower breaking back below USD 1,200.00 after retracing around 38.25% of the move, furthermore, on a geopolitical front tensions appear to be easing between Ukraine and Russia amid reports that the Ukraine and Russian rebels could reach a truce following the recent fighting around Donetsk airport. In the energy complex oil is trading in negative territory and is trading around the USD 68.00 level in what has been a relatively choppy morning with price movements largely led by USD fluctuations. Nonetheless, expectations for tomorrow’s DoE inventories are looking for yet another build for the headline figure and thus due to further increase the global glut of supply in oil markets

DB's Jim Reid Completes the overnight Event Summary

The falling oil price continues to dominate the agenda at the moment although we did see some respite yesterday. Both WTI (+4.31%) and Brent (+3.41%) finished the NY session off the morning session lows to close at around $69 and $72 respectively although they are somewhat softer in the overnight Asian session (more below). The rebound in Oil yesterday also coincided with what was generally a firmer day across the commodity complex. After falling to a three week low on the back of the SNB vote over the weekend, Gold was +3.83% stronger yesterday at $1212.10 whilst Silver traded +6.53% to close at $16.46/oz. For equities it was a fairly weak day for the S&P 500 (-0.68%) despite the rebound of Energy stocks (+0.7%) as the market was weighed down by losses in 8 out of the ten major sector groups. Industrials (-1.29%), IT (-1.11%) and Consumer Discretionary (-1.09%) were main decliners at the end of play which to some degree probably reflects the sluggishness of the retail numbers coming out from the Thanksgiving weekend.

Away from the strength in commodities and the weakness in equities, the move in Treasuries was another big theme yesterday. The 10yr benchmark reversed Friday’s gains to close 7bp wider at 2.235%. Some hawkish comments from the Fed’s Dudley probably didn't help matters after the NY Fed President suggested that a mid-2015 rate hike still seemed reasonable. To be fair though he did highlight the need for patience over rate hikes but the market seemed to zoom in on Dudley's comments that an increase would be a ‘welcome development’ and signal that the economy has healed enough to warrant ‘somewhat less accommodative’ policy, even if we see a bump or two in financial markets. Highlighting the moves in the oil price, Dudley also noted that the recent drop in prices was a clear positive for the US economy and that it could spur more expansive monetary policy in other countries by pulling down inflation. Elsewhere, the Fed’s Fisher was quoted on Reuters downplaying the dis-inflationary effect of the fall in the oil price – commenting specifically that it would be a ‘temporary’ drag on inflation and ultimately lower energy costs would help growth in the US.

Away from Fed speak and Oil, the ISM reading yesterday was also a notable release for markets. November's manufacturing ISM survey (58.7 vs. 58.0) came in a touch above consensus. Whilst this is a tad lower than the 59 print in October it was still the third highest reading for the current business cycle. Prices paid fell nine points to 44.5 in November (lowest reading since July 2012) which was largely driven by the sharp decline in energy prices.

Taking a look at developments on the other side of the Atlantic we saw the Stoxx 600 close -0.46% lower and Xover widen 10bps on the day probably not supported by what was seen to be a generally soft set of data. The final November manufacturing PMI for the Euro-area printed at 50.1, down from the 50.4 flash estimate and 50.6 October reading. DB’s Peter Sidorov notes that the details in the report were not particularly encouraging either. With new orders falling by 0.8pts and new export orders unchanged it suggests that the weakness in manufacturing cannot be explained simply by external weakness.

Regionally across Europe, the German manufacturing PMI disappointed 49.5 (revised down 0.5pts from the flash estimate) and is now at its weakest level since June 2013. The French reading was revised up (to 48.4) but declined 0.1pts relative to the October print whilst the Italian reading was unchanged at 49. Spain was a relative standout registering a 2.1pt rise to 54.7 marking a new post-2007 high. Peripheral bonds performed well yesterday as 10y benchmark yields in Spain (-6bps), Italy (-2bps) and Portugal (-2bps) fell to around 1.83%, 2.01% and 2.81% respectively.

Briefly back to the Oil theme, the effect of the recent slump continues to have a negative impact on the Russian Rouble. The currency was down as much as 6.6% yesterday versus the dollar before paring back some of those intra-day losses to close around 4.5% lower on the day (at 51.65). The currency has now declined 30% since the end of September. Russia’s 5yr CDS widened a further 26bps yesterday to 344bps whilst the 10y government bond yield finished 15bps higher at 10.76%. The moves also come on the back of an announcement by the Finance Minister Siluanov last week that capital flight may reach $130bn in 2014 - the most since 2009.

Looking at today’s calendar, we’re fairly light on data prints today with just unemployment data in Spain to look forward to as well as PPI for the Euro-area. In the US this afternoon we’ve got the ISM NY due with the market expecting a slight uptick to 55.0 (from 54.8). Shortly after, we get the construction spending print which is expected to increase – residential construction in particular is expected to show a decent gain given the improvements in housing permits. We round today off with November vehicle sales data in the US. In terms of Fedspeak, early this afternoon both Fischer and Yellen will be talking in Washington so watch out headlines here.