The Crunch Continues: WTI Tumbles Under $49, 10Y Dips Below 2%

Same slide, different day, as the crude crash continues, with both WTI and Brent tumbling to multi-year highs, below $49 and $52 respectively. This happened despite the news overnight that China [35]is accelerating 300 infrastructure projects valued at 7 trillion yuan ($1.1 trillion) this year, suggesting that China will focus more on fiscal policy than monetary easing, which in turn led to much confusion in the SHCOMP, which fluctuated up and down for the day several times before finally closing unchanged. There was no confusion about the stops slamming USDJPY, and its Nikkei225 derivative which tumbled 3%, sending Japanese Treasury yields to fresh record lows. Record low yields were also seen in Germany, Austria, Belgium, Netherlands, Finland, France (and many other places), which in turn forced the US 10 Year to finally dip back under 2.00%. In fact, taken together, the average 10Y bond yield of the U.S., Japan and Germany has dropped below 1% for the first time ever, according to Citi.

The impetus for today's panic bond buying was a report in Dutch Het Financieele Dagblad [36]which says the ECB is considering three possible options for QE, all of which would naturally lead to lower yields, and further pricing in of well over 100% of any easing program the QE may launch (recall that Goldman and MS both said ECB's QE had been fully priced in as long ago as October [37]).

The Euro weakened again overnight, and is now flirting with the 1.19 level after another month of disappointing Eurozone PMI, as the final Composite PMI missed expectations. From Goldman: The December Euro area final composite PMI came in at 51.4, 0.3 pt below the Flash (and Consensus) estimate. Relative to November, the composite PMI rose by 0.3pt. The weaker Final composite PMI was driven partly by flash/final downward revisions to the French manufacturing PMI. The most notable country developments in December were that the Italian Composite PMI weakened substantially by 1.9 (the other 'big 4' countries, most notably France, all recorded gains in December).

[38]

But while the deflation story is well known, the bigger problem for the mainstream media is that even NBC is starting to hint that stocks are sliding for all the "wrong reason", namely sliding oil. This crushes the narrative that lower oil is good for the economy, as it makes one wonder just why is the market dumping when it should be discounting a stronger US economy. As such everyone will again be following every tick of crude, and certainly Russia whose 5 year CDS jumped over 50 bps to about 610 bps. the widest since March 2009 as increasingly more are worried about Russia's default risk.

Meanwhile, jittery global stocks, lacking any visibility on the multiple expansion front (because EPS are now guaranteed to decline with the energy rout assured to crush the EPS of at least 15% of the S&P), continue to trade as a derivative of either the USDJPY or the EURJPY carry pair: whichever one is higher and/or igniting upward momentum at any given moment.

Some more detail on the overnight action from RanSquawk:

WTI and Brent crude future prices continue to decline which in turn, has weighed once again on global equities with the DJIA and S&P 500 posting its worst losses in 3 months as well as the Nikkei (-3.02%) printing its largest decline in 10 months. As such, this has filtered through to European bourses coupled with the negative sentiment in Europe with energy being the worst performing sector. The dampened risk appetite in the market provided support to USTs as the US 10 yield broke back below 2% for the first time since October 2014, prompting the German 10yr yields to also fall back below 0.5%. Analysts at IFR have noted that the correlation between oil and US breakevens shows that much of a rally is about expectations of lower inflation with the EUR 5y5y forward swap rate now down to a new record low.
In Eurozone related news, reports suggested that the SYRIZA party are not looking to trigger an exit should they win the Greek snap-election after the sources say that the ECB plan to discuss the implications of a possible Grexit tomorrow in their non-monetary policy meeting, although the news has had little impact on the market.

In Eurozone related news, reports suggested that the SYRIZA party are not looking to trigger an exit should they win the Greek snap-election after the sources say that the ECB plan to discuss the implications of a possible Grexit tomorrow in their non-monetary policy meeting, although the news has had little impact on the market.

In the FX market the USD-index (+0.15%) continues to trade near multiyear highs, however the greenback has been unable to lift USD/JPY to a sustained break of 119.00 as safe haven flows and sharp selling in JPY crosses persist from yesterday. Separately, UK Services PMI 55.8 vs Exp. 58.5 missed expectations causing GBP/USD to break 1.5200 alongside the relatively stronger USD. Oil related currencies continue to remain weak (CAD, NOK, RUB) amid the persistent pressure in crude prices as WTI has fallen below USD 49.00 this morning. Overnight, antipodean currencies outperformed amid better than expected Aus Nov. Trade Balance (-925mln vs. Exp. -1600mln (Prev. -1323mln, Rev. -877mln). AUD/USD consequently broke above 0.8100, dragging NZD/USD higher in sympathy to send the pair back above 0.7700.

In the energy complex, WTI and Brent crude futures continue to print fresh 5 and a half year lows as the USD remains near multi year highs. The move has seen WTI consolidate below USD 50.00 with Russian production reaching record highs adding to the oversupply in the market. In addition, early estimates for this week's DoE oil inventories show an expectation for a build of 750K compared to a draw last week of 1.754mln. Meanwhile, precious metals, Gold (+0.90%) is a major beneficiary of the Greek political instability and slump in energy prices as safe haven flows into the have helped the metal trade firmly above the USD 1,200/oz level.

In summary:

European shares remain lower with the tech and oil & gas sectors underperforming and autos, chemicals outperforming. Euro-zone composite PMI below expectations, as was U.K. services PMI. China said to accelerate $1 trillion of projects to boost economic growth. WTI crude falls below $50 a barrel. Global bond yields fall to record low. The U.K. and Spanish markets are the worst-performing larger bourses, the Italian the best. The euro is weaker against the dollar. Japanese 10yr bond yields fall; German yields decline. Commodities decline, with Brent crude, WTI crude underperforming and wheat outperforming. U.S. ISM non-manufacturing, factory orders, RBC consumer outlook, Markit U.S. composite PMI, Markit U.S. services PMI due later.

Market Wrap

• S&P 500 futures up 0.1% to 2012.7
• Stoxx 600 down 0.6% to 331.9
• US 10Yr yield down 3bps to 2%
• German 10Yr yield down 3bps to 0.48%
• MSCI Asia Pacific down 1.8% to 134.9
• Gold spot up 0.6% to $1211.5/oz
• Asian stocks fall with the Shanghai Composite outperforming and the Sensex underperforming.
• MSCI Asia Pacific down 1.8% to 134.9
• Nikkei 225 down 3%, Hang Seng down 1%, Kospi down 1.7%, Shanghai Composite up 0%, ASX down 1.6%, Sensex down 3.1%
• Euro down 0.27% to $1.1901
• Dollar Index up 0.2% to 91.56
• Italian 10Yr yield down 3bps to 1.81%
• Spanish 10Yr yield down 3bps to 1.58%
• French 10Yr yield down 4bps to 0.77%
• S&P GSCI Index down 1.2% to 399.6
• Brent Futures down 2.6% to $51.7/bbl, WTI Futures down 2.5% to $48.8/bbl
• LME 3m Copper down 0.2% to $6131/MT
• LME 3m Nickel up 0.5% to $15269/MT
• Wheat futures up 1.1% to 595.5 USd/bu

Bulletin Headline Summary from Bloomberg and RanSquawk:

• The slide in energy prices continues to weigh on global sentiment as WTI trades through USD 49.00 to the downside
• Weakness in energy names allied to expectations of lower inflation has sent US 10yr yields back below 2% for the first time since October 2014
• Treasuries extend yesterday’s rally as global stocks decline, WTI crude extends its losses below $50/bbl;  10Y yield falls below 2.00% for first time since October.
• Taken together, the average 10Y bond yield of the U.S., Japan and Germany has dropped below 1% for the first time ever, according to Steven Englander, Citi global head of G-10 forex strategy
• China is accelerating 300 infrastructure projects valued at $1.1t this year as policy makers seek to shore up growth that’s in danger of slipping below 7%
• Markit’s euro-area composite PMI rose to 51.4 in Dec., less than expected, from 51.1; weakness will “add to calls for more aggressive central-bank stimulus,” according to Markit’s chief economist
• ECB is working on discussion paper on different ways to execute govt bond buying, Dutch newspaper Het Financieele Dagblad reports, citing people familiar with ECB discussions
• Growth at U.K. service companies slowed more than economists forecast in December, adding to signs the economy lost momentum at the end of 2014
• About 18,000 people marched through Dresden yesterday night in the latest weekly rally backed by organizers who call themselves Patriotic Europeans Against the Islamization of the West, or Pegida. The group says it’s for stricter immigration and asylum laws, protecting “western culture” and avoiding “parallel societies” of Muslims in Germany
• Two New York Police officers were shot while responding to a call about a robbery in the Bronx, leading to a manhunt for the suspects as the city’s officers remain on edge  after a pair were gunned down last month
• Sovereign yields fall. Asian and European stocks slide, Nikkei -3%, FTSE -1.3%. U.S. equity-index futures decline. Brent crude, WTI fall; gold gains, copper little changed
• Looking ahead, heading into the US session highlights include US Factory
  Orders and ISM Non-Manufacturing Composite both due at 1500GMT/0900CST

US Econ Data

• 9:45am: Markit US Composite PMI, Dec. final (prior 53.8); Markit US Services PMI, Dec. final, est. 53.7 (prior 53.6)
• 10:00am: Factory Orders, Nov., est. -0.5% (prior -0.70%)
• 10:00am: ISM Non-Manufac. Composite, Dec., est. 58.0 (prior 59.3)

DB's Jim Reid concludes the overnight event summary

It’s been a tough start to the year for risk assets as further steep declines in oil markets caused equity markets to take a sharp leg lower yesterday. A softer German inflation print and further falls in Greek assets, which we will touch on later, did little to help sentiment but taking a quick look firstly at market moves the S&P 500 closed 1.83% lower yesterday - its biggest one-day slump since October 9th and the first four-day drop since December 2013. With regards to oil both WTI (-5.03%) and Brent (-5.87%) tumbled to finish the day at $50.04/bbl and $53.11/bbl, respectively. Unsurprisingly, energy stocks (-3.99%) were the main underperformer, dragged down further by declines for large cap names including Exxon Mobil (-2.74%) and Chevron (-4.00%), although in reality all sectors finished the day in the red.

Just touching on the moves in oil, WTI briefly fell below $50/bbl intraday for the first time since April 2009 whilst the close in Brent below $55/bbl takes it to the lowest level since May 2009. Yesterday’s moves appear to be fueled by a report from the Russian Energy Ministry on the weekend showing production out of Russia rising to a post-Soviet era high and news that Iraq exported the highest amount of crude in December since the 1980s. As well as this, an article on Reuters noted that Saudi Arabia made significant discounts to its monthly oil prices for European buyers yesterday, offering the lowest discount since 2009. The article also noted that the region made its fifth consecutive monthly price cut to US refiners. We’ve previously highlighted the effects of the slump at the micro-level and yesterday we saw further evidence with Canadian producer Syncrude reporting a 12% decline in production in December relative to November. The latest data out of Baker Hughes also paints a fairly bleak picture, reporting that oil rigs were cut by 17 this week, the sixth weekly decline in seven and follows data which showed that the Q4 rig count dropped by the largest quarterly amount since Q1 2009. After taking something of a pause for breath over the holiday period, US HY energy names widened 25bps yesterday to a spread of 789bps – the widest level since mid-December.

Turning over to fixed income markets, the risk-off tone gave a firm bid to US Treasuries with the benchmark 10y yield closing 7.7bps tighter at 2.0337%. That level is now the lowest since May 2013 with the 10y yield now 27bps off the December highs. At the longer end of the curve 30y yields closed 8.9bps tighter to 2.5994, now the lowest since August 2012. The recent bull flattening has now compressed the spread difference between 2y and 30y yields to 194bps – the tightest level since January 2009. The US Dollar also benefited with the DXY finishing +0.33%, helped by further gains versus the Euro (more later). Meanwhile, credit markets ended the day weaker with CDX IG closing 2.8bps wider and CDX HY closing nearly three-quarters of a point lower. Elsewhere, it was a fairly light day data-wise with December total vehicle sales coming in a tad under consensus at 16.8m (vs. 16.9m expected). In terms of Fedspeak, the San Francisco Fed President Williams was reported in the WSJ saying that he sees no rush to raise interest rates, although reiterated a mid-2015 lift off would be a ‘reasonable guess’. Although Williams highlighted an improving US economy, he noted that he ‘sees no reason whatsoever to rush tightening’ and that ‘these financial stability concerns that people do raise are real things we want to take into account, but doesn’t argue for moving today or in next the next few months relative to, say, later in the year’.

Before we look at the remainder of market moves yesterday, refreshing our screens this morning bourses in Asia are following the US lead and trading lower as we type. The Nikkei (-2.74%), Hang Seng (-1.59%), Shanghai Comp (-0.34%) and Kospi (-1.85%) are all weaker whilst credit markets have tumbled with Asian IG 9bps wider as we go to print. WTI is largely unchanged. The falls come despite modestly robust data out of China and Japan. Services PMI’s in both China (53.4 vs. 50.0 previously) and Japan (51.7 vs. 50.6 previously) have climbed relative to November’s readings. Staying on China, Bloomberg reported this morning that Premier Li Keqiang’s government has approved for the acceleration of ¥7tn ($1.1tn) of infrastructure projects for 2015. The projects are part of the ¥10tn plan which due to run until 2016.

Coming back to yesterday, European equity markets didn’t fare much better with the Stoxx 600 (-2.15%) and DAX (-2.99%) both declining sharply. There were similar losses for energy stocks (-5.02%) whilst the Euro tumbled after a softer than expected German inflation print and further worries over Greece. Indeed, the single currency weakened a further 0.57% versus the Dollar yesterday to $1.1933, although touched an intraday low of $1.1864 which marked the lowest level for nine years. With regards to data, German headline inflation was significantly weaker relative to November (+0.2% yoy vs. +0.6% previously) and below consensus of +0.3%. Our European colleagues noted that the decline in energy prices was unsurprisingly a factor (-6.6% vs. -2.5% previously) although the substantial drop in food prices (-1.2% vs. 0.0% previously) was a surprise. Our colleagues also reported that annual inflation was +0.9% in 2014 (versus +1.5% in 2013) which marked the lowest rate of the last 15 years excluding 2009, although they expect that the core rate averaged +1.4% compared to +1.2% in 2013 highlighting the disinflationary effects of energy markets. Bunds closed weaker, the yield on the 10y benchmark bouncing off Friday’s record lows to close 2bps wider at 0.517%.

Wrapping up Europe, with the market weighing up the potential implications of a ‘Grexit’ there were further sharp moves in Greek assets yesterday with 3y yields widening 131bps to 13.5% and the ASE closing 5.63% lower – its lowest close since November 2012. With various conflicting reports out over the weekend comments from the German Social Democratic Party’s Poss yesterday saying that ‘Europe can’t afford a Greek exit’ were perhaps on the more supportive side. French President Hollande took a slightly different view however, saying that ‘The Greeks are free to choose their own destiny. But, having said that, there are certain engagements that have been made and all those must be of course respected’.

Looking at the day ahead, the calendar steps up a notch today with the final December composite and services PMI prints due for the Euro-area as well as regionally in Germany and France. We’ll also get the December consumer confidence reading in the latter as well as the preliminary services and composite PMI prints for the UK. Across the pond this afternoon, we also get the final PMI composite and services reading in the US, as well November factory orders and the ISM non-manufacturing print.