In a somewhat surprising turn of events, this morning's futures reaction to last night's shocking start of a completely unexpected Yemen proxy war, which has seen an alliance of Gulf State launch an air, and soon land, war against Yemen's Houthi rebels, is what one would expect: down, and down big.
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This is surprising, because on previous occasions one would expect the NY Fed, or its pet hedge fund, Citadel, or the BOJ or ECB (via the CME's "Central Bank Incentive Program [38]") to aggressively buy ES to prevent a slide, something has changed, and for the BTFDers, that something may be very fatal with the e-Mini rapidly approaching a 1-handle yet again.
The offset to tumbling stocks, as previously observed, is oil, with WTI soaring over 6% in a delayed algo response to the Qatar headlines.
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WTI rose as high as mid-$52 before retreating modestly:
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"Rising prices could become a self-fulfilling prophecy if market participants see this as the beginning of a rally and start buying,” says Global Risk Management oil risk manager Michael Poulsen. “We are already seeing some reaction, as buyers start looking for protection from more costly oil."
It wasn't just oil: gold also soared briefly after European traders arrived in the office, but since then the BIS gold trading desk headed by Benoit Gilson has managed to get things mostly back in order.
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Why is tiny Yemen, which produced just about 133,000 barrels a day of oil in 2013, making it the 39th biggest producer, according to the U.S. Energy Information Administration, roiling the market? Bloomberg has a quick explainer [42]:
While Yemen contributes less than 0.2 percent of global oil output, its location puts it near the center of world energy trade. The nation shares a border with Saudi Arabia, the world’s biggest crude exporter, and sits on one side of a shipping chokepoint used by crude tankers heading West from the Persian Gulf. Global oil prices jumped more than 5 percent on Thursday after regional powers began bombing rebel targets in the country that produced less than Denmark in 2013.
"While thousands of barrels of oil from Yemen will not be noticed, millions from Saudi Arabia will matter,” said John Vautrain, who has more than 30 years’ experience in the energy industry and is the head of Vautrain & Co., a consultant in Singapore. “Saudi Arabia has been concerned about unrest spreading from Yemen.”
Shipping Chokepoint
Brent, the benchmark grade for more than half the world’s crude, gained as much as $3.30, or 5.8 percent, to $59.78 a barrel in electronic trading on the London-based ICE Futures Europe exchange on Thursday. West Texas Intermediate futures, the U.S. marker, jumped as much as 6.6 percent to $52.48 on the New York Mercantile Exchange.
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“Yemen is not an oil producer of great significance but it is located geographically and politically in a very important part of the Middle East,” said Ric Spooner, a chief strategist at CMC Markets in Sydney.
The Bab el-Mandeb strait is the fourth-biggest shipping chokepoint in the world by volume, and is 18 miles wide at its narrowest point, according to the EIA. It’s located between Yemen, Djibouti, and Eritrea, and connects the Red Sea with the Gulf of Aden and the Arabian Sea.
Transport Threat
In 2013, 3.8 million barrels a day of oil and petroleum products flowed through Bab el-Mandeb, EIA data shows. More than half of the shipments moved to the Suez Canal and SUMED Pipeline, which serve as the link between Egypt’s ports of Ain Sukhna on the Red Sea and Sidi Kerir on the Mediterranean.
Closure of the waterway may keep tankers from the Persian Gulf from reaching the Suez Canal and the SUMED Pipeline, diverting them around the southern tip of Africa, adding to transit time and cost, according to the EIA. Ships carrying oil from Europe and North Africa won’t be able to take the most direct route to Asian markets if Bab el-Mandeb is shut, the EIA said on its website.
“As the situation in Yemen has dramatically escalated, it’s seen primarily as a threat to international shipping and oil transport,” Theodore Karasik, an independent geopolitical analyst, said from Dubai. “There’s concern that the more ungovernable Yemen becomes, the more it could become a base for piracy in the Red Sea area.”
Saudi Arabia, the United Arab Emirates, Bahrain, Qatar and Kuwait responded to a request from Yemen’s President Abdurabuh Mansur Hadi, according to a statement carried by the official Saudi Press Agency.
Proxy War
Saudi Arabia led OPEC’s decision in November to resist calls to reduce its output target of 30 million barrels a day, a resolution that Iranian Oil Minister Bijan Namdar Zanganeh said was “not in line with what we wanted.”
OPEC’s decision and an expanding U.S. supply glut have driven global benchmark oil prices to a six-year low.
“In the longer term, Iran will be happy to disrupt oil supplies,” Vautrain said. “They literally want to control Saudi Arabia and Iraq. They would love that. They’re fighting a proxy war and they will continue to fight a proxy war.” The Houthis, who follow the Zaydi branch of Shiite Islam, say they operate independently of Iran and represent only their group’s interests.
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For now surging oil appears to be dragging the tightly correlated EURUSD by the bootstraps, and as a result the US Dollar despite it traditionally being a flight to safety during global proxy wars such as this one.
Looking at equities, overnight developments in Yemen have also been the key focus in early European trade after Saudi Arabia and a coalition of regional allies launched a military operation in Yemen against the Iranian-backed Houthi rebels, who deposed the US-backed Yemeni president last month. WTI crude futures rallied overnight, heading for its biggest 5 day gain since 2011 after Saudi Arabia and its allies confirmed that they had started military operations. Although Yemen is not a large oil-exporter, markets have become concerned by the situation in Yemen, largely because of the involvement OPEC nations in a Middle-Eastern conflict and because in a worst case scenario this conflict between Sunni and Shia Muslims could be used as a proxy for a larger conflict between Saudi and Iran. Alongside geopolitical concerns, European stocks are also being weighed upon by heavy selling in Asia, particularly in tech names, and with window dressing ahead of quarter-end.
Another slide in the USD led to moves across the FX space and a break above post-FOMC highs in EUR/USD and trades sources note large size (~EUR 1bln) bought on a break of 1.1000 in the pair. GBP sees some outperformance in early trade, gilts are underperforming and the short sterling strip lower following overnight comments from BoE's Miles (soft dove) who said he believes the next move by the BoE will be a hike. This followed comments made yesterday by BoE Deputy Governor Shafik (Soft Dove) who said that the next move in rates is likely to be higher and BoE’s Forbes who said that low inflation would be temporary.
Asian stocks mostly fell overnight in a continuation of similar moves seen yesterday in European and US equity markets, which saw the S&P 500 erase all of its gains for the year to close below its 50 DMA. Consequently, both the Nikkei 225 (-1.6%) and ASX 200 (-1.6%) finished in the red, the latter recording its steepest drop in more than 2-weeks. Elsewhere, the Hang Seng (+0.2%) and Shanghai Comp (+1%) bucked the negative trend, led by financials and energy names ahead of earnings from PetroChina and ICBC.
Bund have been supported this morning with flows seen out of equities and into core fixed income, alongside little supply this week and prelim month-end extensions fairly average. Concerns over the situation in Greece also continue to linger and have supported this morning’s bid in bund futures.
Barclays Prelim Pan Euro Agg month-end extensions +0.07yrs (Prev. +0.07yrs, Avg. Of last 12 months +0.08yrs) Barclays Prelim month-end extensions for US Treasury +0.09yrs (Prev. +0.13yrs, Average of last 12 months +0.10yrs).
WTI crude futures rallied overnight, heading for its biggest 5 day gain since 2011 after Saudi Arabia and its allies confirmed that they had started military operations. In early trade WTI broke above its 50DMA and both WTI and Brent are trading with gains of over USD 2.00 ahead of the US open. Concerns have not only led to a bit in crude and equity markets in Europe falling over 1%, but has also led to a bid in gold which earlier broke above USD 1,200/oz and its 100DMA.
In summary: European shares fall with the tech and financial services sectors underperforming and oil & gas, basic resources outperforming. Stoxx 600 trades near session low; European energy stocks outperform as Saudi Arabia directs bombing sorties at Shiite Houthi rebels in Yemen. Brent, WTI crude futures both gain. U.K. retail sales rise more than forecast. The German and Swedish markets are the worst-performing larger bourses, the U.K. the best. The euro is stronger against the dollar. German 10yr bond yields fall; U.S. yields decline. Commodities gain, with soybeans, corn underperforming and WTI crude outperforming. U.S. jobless claims, continuing claims, Bloomberg consumer comfort, Kansas City Fed index, Markit U.S. composite PMI, Markit U.S. services PMI due later.
Market Wrap
- S&P 500 futures down 0.9% to 2034.7
- Stoxx 600 down 1.7% to 391.1
- US 10Yr yield down 3bps to 1.89%
- German 10Yr yield down 2bps to 0.21%
- MSCI Asia Pacific down 0.8% to 148
- Gold spot up 1.4% to $1212/oz
- Eurostoxx 50 -1.8%, FTSE 100 -1.4%, CAC 40 -1.6%, DAX -2%, IBEX -1.4%, FTSEMIB -1.9%, SMI -1.8%
- Asian stocks fall with the Shanghai Composite outperforming and the Sensex underperforming.
- MSCI Asia Pacific down 0.8% to 148; Nikkei 225 down 1.4%, Hang Seng down 0.1%, Kospi down 1%, Shanghai Composite up 0.6%, ASX down 1.6%, Sensex down 1.7%
- Euro up 0.55% to $1.103
- Dollar Index down 0.7% to 96.3
- Italian 10Yr yield up 1bps to 1.35%
- Spanish 10Yr yield little changed at 1.29%
- French 10Yr yield down 1bps to 0.49%
- S&P GSCI Index up 2.4% to 414.6
- Brent Futures up 4% to $58.7/bbl, WTI Futures up 4.3% to $51.4/bbl
- LME 3m Copper up 1.8% to $6237.5/MT
- LME 3m Nickel up 0.9% to $13805/MT
- Wheat futures up 1.2% to 525.3 USd/bu
Bulletin Headline Summary from Bloomberg and RanSquawk
- Developments in Yemen overnight unsettle markets as Saudi intervene, leading to significant gains in oil overnight and European equities falling over 1%
- WTI crude futures trade higher by over USD 2.00 after rallying overnight and this morning, and heads for its biggest 5 day gain since 2011
- Treasuries rally overnight as Saudi Arabia launches air strikes in Yemen while U.S. aids Iraqi forces attacking Tikrit; week’s auctions conclude with $29b 7Y, yield 1.71% in WI trading vs. 1.83% award in February.
- Saudia Arabia considering ground troops in Yemen, according to Saudi state TV, citing a person it didn’t identify
- Oil headed for its biggest five-day gain since 2009, while gold rallied with the yen; global stocks retreated with U.S. equity-index futures
- Negotiators aim to conclude a political framework on Iran’s nuclear work by March 29, according to three diplomats with direct knowledge of the talks taking place in Switzerland this week
- China plans to push for the yuan to take prominence in projects under the Asian Infrastructure Investment Bank and the Silk Road Fund as it seeks broader global use of its currency, said people familiar with the matter
- U.K. retail sales rose 0.7% in February, more than economists forecast, amid declining inflation
- Sovereign 10Y yields mixed, Greek 10Y steady. Asian stocks drop, European stocks decline, U.S. equity-index futures fall. Crude, gold and copper rise
US Event Calendar
- 8:30am: Initial Jobless Claims, March 21, est. 290k (prior 291k)
- Continuing Claims, March 14, est. 2.4m (prior 2.417m)
- 9:45am: Markit U.S. Composite PMI, March preliminary (prior 57.2)
- Markit U.S. Services PMI, March preliminary, est. 57 (prior 57.1)
- 9:45am: Bloomberg Consumer Comfort, March (prior 44.2)
- 11:00am: Kansas City Fed Mfg Activity, March, est. 1 (prior 1)
DB's Jim Reid completes the overnight event recap
the US equity market is stalling like my unloved car at the moment. The S&P 500 (-1.46%), Dow (-1.62%) and NASDAQ (-2.37%) all fell – the latter having its largest single daily decline since April last year as weakness in tech stocks in particular dragged bourses down. Our base case remains that the post-QE environment will be a challenge for US equities and although the S&P 500 is still +0.10% YTD, its being left behind by most other developed markets. It’s now back to levels first crossed back on November 21st - only a few weeks after QE finally ended. Bloomberg also extended the analysis we included yesterday that states that the S&P 500 hasn't been this long without back to back gains (26 days now) since 1994. Quite a stat.
Soft US data helped support the generally weaker sentiment. The February reading for durable goods orders was a notable miss at -1.4% mom (vs. +0.2% expected) and was down significantly from the +2.0% print last month. The ex-transport reading fared little better with the -0.4% mom reading below expectations of +0.2%. Data for core capex orders meanwhile was also weak with the non-defense ex-aircraft (-1.4% mom vs. +0.3% expected) reading below market. The reading has now declined for six consecutive months. With US economic data surprises continuing to come in below consensus and extending the recent 6-year lows, the Atlanta Fed GDPNow tracking forecast was yesterday downgraded to +0.2% SAAR for Q1 of this year, having previously been running at +0.3%. With a raft of weak data prints of late, the forecast has in fact been lowered from an initial +1.9% back in early February. The Q4 reading is due this Friday, but it’ll be interesting to see where the market places Q1 growth forecasts following the data we’ve seen thus far.
There was plenty of chatter out of the Fed yesterday as well. Comments from the Chicago Fed’s Evans in particular were interesting, who noted that there is ‘no compelling reason’ to raise rates until the Fed is confident that inflation is moving back towards its 2% target. Specifically, Evans noted that lift-off in 2016 would be more appropriate, citing in particular the disinflationary effects of the Dollar putting pressure on US import prices. The Fed’s Lockhart, on the other hand, said that whilst he’s not ‘100% confident’ that the Fed will raise rates in June, July or September, ‘it’s quite likely’ (NY Times) it’ll be one of those months. Lockhart did however highlight that any reason for a move to come post-September would be due to a disappointment in the data. Elsewhere, Treasury yields were higher with the benchmark 10y yield finishing +5.2bps at 1.925% while Dollar weakness was a theme again, with the broader DXY closing -0.22%. Interestingly, Energy (+1.22%) was the one sector that had a better day yesterday as WTI (+3.58%) and Brent (+2.49%) rose. Overnight Oil is dominating the headlines with both WTI (+3.45%) and Brent (+2.80%) firmer again - both markets at one point trading over 5% higher intraday. Bloomberg is reporting that Oil has seen the biggest 5-day rally since 2011. Saudi Arabia's (and its allies) bombing of Shiite rebels in Yemen is seemingly to blame as tensions with Iran build.
Refreshing our screens elsewhere this morning, it’s a fairly mixed reaction in equity markets on the back of moves in Oil and weakness in the US overnight. The Nikkei (-1.40%) and Kospi (-0.95%) have both declined while the Hang Seng (+0.11%) and Shanghai Comp (+0.66%) are both trading higher. Credit markets are a touch softer while the Dollar has extended declines with the DXY -0.27%.
It was a similar story to the US in Europe yesterday, as a weaker day for tech stocks dragged equity markets lower. Indeed, the Stoxx 600 (-1.13%) had its largest one-day decline since January 14th, while the DAX (-1.17%) and CAC (-1.32%) both closed lower. Bond markets were more mixed however. 10y Bunds closed 1.6bps lower at 0.218% while 10y yields in Spain (-0.5bps), Italy (+0.8bps) and Portugal (+2.3bps) traded more mixed. Despite the generally weaker sentiment, data was in fact supportive on the whole yesterday. Specifically, the March IFO reading for Germany provided further evidence of positive momentum for the economy. The index rose 1.1pts to 107.9 and ahead of expectations of 107.3. The reading was in fact the highest since July last year. Both the current assessment (112.0 vs. 111.3 previously) and expectations (103.9 vs. 102.5 previously) readings bounced. Our colleagues in Europe noted that the breakdown by sector pointed to fairly broad based growth and believe that the reading, along with generally solid prints thus far for the economy, support upside risks for their +0.5% qoq GDP forecast for Q1.
In Greece the pressure on the government to push through its reform proposals by Monday will only have heightened yesterday after we learned that the Eurogroup rejected Greece’s claim for the return of €1.2bn in funds the government believes it is owed at the EFSF. The hopes that reform proposals will soon be provided to the Eurogroup have led to some more conciliatory comments of late, backed up again by the EC President Juncker who said that he believes that a successful conclusion for both Greece and the EU will soon be realized. The fragile situation persists in the near term however. Yesterday we also learned that the ECB increased the ceiling on the ELA to €71.3bn, from €69.8bn previously – highlighting further stress in deposit outflows at Greek banks. Equity markets in Greece were closed yesterday for a public holiday.
Elsewhere yesterday, following comments from the Bank of England’s Haldane last week that a rate cut might be needed, a fellow MPC member, David Miles, yesterday said that he expected the next move in rates to likely be up, specifically saying that ‘I can certainly imagine a situation where inflation is under the target level perhaps by a significant amount and the right strategy would be gradually to start a process of normalization and edging (rates) up’ (FT). Miles highlighted that so far he hasn’t seen any persistent underlying deflationary pressures in the economy and believes that prices should rise towards the end of the year.
Turning to today’s calendar, we kick off this morning in Europe with German consumer confidence data, followed closely by French GDP data and money supply readings for the Euro-area. Retail sales and CBI data out of the UK are also due this morning. This afternoon in the US employment indicators are highlighted by the initial jobless claims print while the composite and services PMI’s and Kansas City Fed manufacturing activity reading are also due.
