Global Stocks, US Futures Tumble As Emerging Market Turmoil Is Set For A Dramatic Comeback

Over the weekend, in its latest quarterly presentation, the Bank of International Settlements made what may have been a very premature assessment that China is now contained. To wit: 

In October, equity markets staged a remarkable recovery, recording their strongest one-month gain in recent years. Market nerves were partly calmed by receding fears over tail risk in China. The improvement was broad-based. European and American stocks recouped nearly all losses experienced in the third quarter, while China’s stocks also made up some lost ground

Judging by events in the past 24 hours, the reality is turning out to be anything but as China's "tail risk" appears to set to make a dramatic return and drag all emerging markets lower once again.

Starting first with China's November reserve outflow, which as reported yesterday was the 3rd highest monthly ever, crushing expectations of a slowdown in the Chinese capital exodus, then continuing with last night's dreadful export data (and import numbers which declined for a record 13 months, and which some watchers say may have been fudged to cover hot money outflows as China has done in the past), and finally in China's Yuan, which tumbled and saw its weakest close in 4-yrs following the PBoC's weakest fixing since Aug 27th in a reaction to yesterday's larger than expected decline in the nation's foreign reserves. One wonder what is the agreed upon period of time before a currency can be devalued after entering the IMF's reserve currency basket?

Just like in August, the Chinese weakness promptly spread to other emerging markets, who are further impacted by the latest drop in commodity prices and now have a Fed rate hike in one week to look forward to.  As Bloomberg notes, the MSCI Emerging Markets Index is on track for its lowest close since Oct.1. The gauge has sunk 16 percent in 2015, its worst year since 2011, and is close to being oversold. The so-called relative strength index has dropped to 33, the lowest in three months. A level of 30 or lower signals to some traders that selling is overdone. One would almost say we are back to the level from last August when the EM debt crisis tantrum put off the Fed's rate hike.

It would be very ironic if the Fed is thwarted from its Dec. 16 rate hike if over the next 8 days the world suffers another EM/China tantrum.

Elsewhere, crude oil rebounded after the biggest one-day drop since Sept.1. Monday's 5.8 percent decline took crude to its lowest level in six years after OPEC effectively abandoned its strategy of limiting output to control prices. Crude ended yesterday at $37.65 a barrel in New York. The next significant level for traders is the $33.98 closing price on Feb. 12th, 2009. Crude has plunged 40 percent in the past 12 months as OPEC maintains output to defend market share against higher-cost U.S. shale producers. Increased supply from Saudi Arabia, Russia and Iran has lifted global stockpiles to almost 3 billion barrels, according to the International Energy Agency.

And while Asia was certainly not happy with the most recent economic data (with the Shanghai Composite sliding -1.9%, the Nikkei down 1.0% and Australia -0.9%), this weakness has spread to Europe which is down more than -1%, especially after Anglo American announced it would scrap its dividend for the first time in six years as well as proceed to lay off 85,000 workers, while US equity futures are also deeply in the red.

• S&P 500 futures down 0.5% to 2071
• Stoxx 600 down 1.1% to 368
• FTSE 100 down 0.5% to 6191
• DAX down 0.6% to 10824
• German 10Yr yield up 2bps to 0.6%
• MSCI Asia Pacific down 1.3% to 130
• Nikkei 225 down 1% to 19493
• Hang Seng down 1.3% to 21905
• Shanghai Composite down 1.9% to 3470
• S&P/ASX 200 down 0.9% to 5109
• US 10-yr yield up less than 1bp to 2.23%
• Dollar Index up 0.03% to 98.69
• WTI Crude futures up 0.6% to $37.89
• Brent Futures up 1.3% to $41.24
• Gold spot up less than 0.1% to $1,072
• Silver spot up less than 0.1% to $14.26

A closer look at Asian markets, shows equities kicked off the week on the front foot following the strong lead from Wall Street. This came after the better than expected NFP report and upward revisions, which hinted at further strength in the US economy. As such,  the Nikkei 225 (-1.0%) has pared over half of Friday's losses, while the ASX 200 (-0.9%) was initially lifted higher by material names amid the gains seen in the precious metals complex. However, did pull off best levels with pressure from energy stocks after oil prices continued to find no reprieve with investors disappointed by OPECs decision to keep producing at record levels. Elsewhere, Shanghai Comp. (-1.9%) fluctuated between gains and loss with strength in healthcare names. Chinese stocks fell the most in a week after trade data signaled a deepening slowdown in the nation’s economy; yuan closed at its weakest level in 4 yrs. Japan’s stocks fell as a rout in oil and commodity prices dragged energy and material shares lower.

"Overall, today’s data underscored the continued weakness we are seeing in global trade," said Bernard Aw, a strategist at IG Asia Pte. in Singapore. “The overnight plunge in oil prices warranted greater attention. Much of the sell-off this morning was attributed to weakness in the energy and material sectors.”

Asia Top News

• China Nov. Exports Fall 6.8% Y/y in USD; Est. -5.0%
• China Nov. Retail Auto Sales Rise 17.6% on Year, PCA Says
• Japan’s Economy Grew in Third Quarter, Avoiding Recession: 3Q revised GDP rose annual 1% vs est. +0.2%
• China Minmetals Buys China Metallurgical in Step to SOE Reform
• Yuan Set for Weakest Close Since 2011 as Exports, Reserves Drop: PBOC cuts yuan’s reference rate to lowest in 3 mos.
• Woodside Abandons $8 Billion Takeover Bid for Oil Search: Woodside ditched offer for Papua New Guinea-focused Oil Search as crude traded near lowest level in >6 yrs amid speculation a global glut will persist
• ICBC Punishes 137 Staff as China Probes Graft in Financial Firms: Some workers expelled from Communist Party, others warned
• Najib Gets Chance to Remove Thorn as Zeti Term Ends in Malaysia: Investors say overt political influence would be detrimental
• AIG Sees India Claims Rising to Decade-High on Worst Floods: Trade body has pegged losses to businesses at $2.3b

In Europe, equities followed the trend lower set by their Asian counterparts (Euro Stoxx: -0.6%) and drifted lower since the open as markets continue to react to the soft energy prices . While energy names are among the sessions laggard, with WTI remaining near 6 year lows and below the USD 38.00/bbl handle for much of the morning, the notable underperformer has been material names. This comes after Anglo American (-7.4%) suspended their dividends for H2 2015 and 2016 and noted they foresee impairments of USD 3.7-4.7b1n, thereby weighing on the sector as a whole.

Despite the apparent risk off sentiment, Bunds have yet to see a tangible benefit and trade in modest negative territory. Of note analysts at ABN Amro suggest that the ECB's expansion of their bond purchasing program to include regional and local bonds is of benefit to German fixed income, with the move likely to have the consequence of alleviating scarcity in German debt.

European Top News

• U.K. Manufacturing Decline Signals Weak Start to Fourth Quarter: Manufacturing output dropped 0.4% from Sept. vs forecast for decline of 0.2%
• Bank of France Sees Weaker Fourth-Quarter Growth After Attacks: 4Q GDP to grow 0.3% vs original est. of 0.4%
• EU Strikes Cybersecurity Deal to Make Companies Boost Defenses: Would mandate all EU countries to share more intelligence and would require search engines, online cloud services and Internet retail sites, to ensure infrastructure is secure
• Orange Said in Early Talks to Buy Bouygues Telecom, Media Assets: Bouygues said to consider minority stake in new company
• Galapagos Gains Most in Nearly 4 Yrs; KBC Eyes ’Lucrative’ Deal: Co. said filgotinib met main goal of mid-stage study in Crohn’s disease.

In FX markets have seen a continuation of yesterday's moves in terms of commodity currencies, with the likes of CAD and AUD continuing to see softness, with the latter trading in close proximity to the 0.7200 handle. Separately, the most notable data of the European morning has come in the form of the UK industrial and manufacturing production, with the data fairly mixed for October, however the September figures all being revised higher (UK Industrial Production 0.1% vs. Exp. 0.10%, Prev. -0.20%, Rev. 0.00%) and as such a slight uptick was seen in GBP/USD to see the pair remain above the psychologically key 1.5000 level on the back of the release, however failing to sustain the level ahead of the North American crossover.

Over in Asia, CNY fell against the greenback and saw its weakest close in 4-yrs. This came after the PBoC weakened CNY fix the most since Aug 27th in a reaction to yesterday's larger than expected decline in the nation's foreign reserves. In turn, the latest lacklustre trade data could also provide the impetus for further deprecation in the CNY setting.

In commodities, the energy complex continues to reside near multi year lows, with prices still impacted by Friday's OPEC decision. In terms of price action today, the likes of Brent and WTI crude futures have grinded higher throughout the European session to reside in modest positive territory, however Brent Jan'16 futures reside below USD 41.50, while WTI Jan'16 futures remain below USD 38.00/bbl. In terms of the notable event of the day for energy traders, this comes in the form of API crude oil inventories, which last week showed a build of 1600k.

Separately, gold remains near yesterday's lows following the broad-based weakness seen across commodities during US trade, although like the energy complex is in modest positive territory for the day . Elsewhere, COMEX copper prices were relatively flat, although underperformance was seen in its Shanghai counterpart and Dalian iron ore futures were lower by 1% in continuation of the weak-China-demand triggered slump which has already pushed prices below USD 40/ton.

Today's US economic data calendar is light, with just the November NFIB small business optimism read, IBD/TIPP economic optimism print and the October JOLTS job opening data. While the latter is on a one month lag, the data is still important given its closely followed by the Fed. The quits rate in particular worth keeping an eye on.

Bulletin Headline Summary from RanSquawk and Bloomberg

• European equities followed the trend lower set by their Asian counterparts and drifted lower since the open as markets continue to react to the soft energy prices as well as downside in material names
• FX markets have seen a continuation of yesterday's moves in terms of commodity currencies, with the likes of CAD and AUD underperforming
• Today's calendar is fairly light in terms of data, with the notable highlight coming in the form of API crude oil inventories, while participants will also be looking out for comments from ECB's Makuch
• Treasuries lower led by 2Y and 3Y, curve flattens as overseas equity markets selloff amid declining commodity prices, China export data; $24b 3Y auction today, WI 1.26% vs 1.271% seen last month.
• Mining companies led a drop in stocks around the world and currencies of commodity-producing nations slid after another month of weak Chinese trade data underscored the global demand slump; Iron ore’s tumble into the $30s threatens the world’s biggest miners as prices approach break-even costs, according to Capital Economics Ltd
• As Swiss National Bank President Thomas Jordan and fellow policy makers gather for their quarterly meeting, they can take comfort after the ECB’s latest stimulus failed to live up to expectations. Economists forecast the SNB will keep the deposit rate at a record-low minus 0.75 percent on Thursday
• Euro-area growth in the 19-nation bloc rose 0.3% in the three months through September after expanding 0.4% in the prior quarter
• Japan’s GDP expanded 1% (annualized) in the 3Q rather than contracting 0.8% as previously thought, meaning the economy didn’t enter a recession earlier this year
• During a raucous rally in South Carolina on Monday night, Republican presidential front-runner Donald Trump expanded on his calls to temporarily prevent Muslims from entering the U.S., drawing cheers from the crowd
• Sovereign 10Y bond yields mostly lower. Asian, European stocks drop and U.S. equity-index futures fall. Crude oil and gold higher, copper falls

US Event Calendar

• 10:00am: JOLTS Job Openings, Oct., est. 5.580m (prior 5.526m)
• 10:00am: IBD/TIPP Economic Optimism, Dec., est. 45 (prior 45.5)
• 1:10pm: Bank of Canada’s Poloz speaks in Toronto
• 1:00pm: U.S. to sell $24b 3Y notes

Top Overnight News

• CP Rail Expected to Revise Bid Terms for Norfolk Southern: WSJ: New bid could include $32.86 in cash and 0.451 shares in a new holding co.; overall amount remaining at just over $30b
• Iron Ore Below $40 Is Seen Near Tipping Point for Largest Miners: Miners’ shares retreat, with BHP at lowest in 10 yrs and Rio Tinto Group dropped to the lowest since 2009
• Anglo Shares Tumble After Miner Suspends Dividends to Save Cash: Dropped to a new record low after scrapping its div. for the 1st time since 2009 and pledging deeper spending cuts
• Staples Vows to Fight U.S. Challenge to Office Depot Takeover: FTC said Monday it would seek to stop the combination
• Euro-Area Economy Grows 0.3% in Third Quarter on Domestic Demand: Growth bolstered by private consumption and government spending as exports suffered from a slowdown in global trade
• China Exports Decline for Fifth Month as Import Slump Moderates: Overseas shipments dropped 6.8% in Nov. in dollar terms y/y vs median forecast for 5% decline in survey
• Jarden, Newell Rubbermaid Said to Be Holding Merger Talks: Would create a consumer-products giant with combined $14b sales
• Time Running Out on New Tax Extension Plan, Republican Says: Congressional leaders are pushing to reach a deal on a must- pass U.S. government spending bill as a Friday deadline nears to avoid a federal shutdown
• Yahoo May Unveil Media Unit Restructure, Spinoff: Re/code: Co. preparing to restructure and consolidate media unit, press ahead with spinoff of 15% stake Alibaba stake, Re/code reports
• Valeant Said to Consider Selling Paragon Division: Reuters: Co. reaching out to potential buyers amid scrutiny from the FTC, Reuters reports, citing two unidentified people familiar
• LeBron James Signs Unprecedented Lifetime Contract With Nike
• Chipotle Closes Restaurant After Boston College Players Get Sick

DB's Jim Reid concludes the overnight recap

It was mostly an oil story as the hangover from OPEC's chaotic meeting on Friday continues. The collapse saw WTI close below $38 yesterday, finishing the session at $37.65/bl after plummeting -5.80% on the day. That saw it fall below the level we hit in summer and to a near 7-year low. It was the same for Brent, down -5.28% on the day at $40.73. The rest of the energy complex came under huge pressure too. Gasoline and Natural Gas finishing -4.79% and -5.44% respectively. In fact it was a pretty rough day for commodities all round yesterday. Gold (-1.39%) came under pressure as a result of the stronger Dollar, while industrial metals all closing with losses. Iron ore is hitting the headlines in Asia in particular after falling below $40/tn, the lowest price now with data back to 2009.

This deeper rout will likely continue to focus the spotlight on last week’s ECB decision. Unless this is a temporary move lower, oil anywhere close to these levels for a sustained period of time will keep a further lid on European inflation well below target. It's a tough one for the ECB as their policy has minimal impact on the price of oil but oil has a big impact on their inflation rate. Oil is also very volatile so to calibrate policy according to current levels is very tricky and risky. Overall though if oil stays low well into early 2016 it's likely the market pressure on the ECB to ease further will rise regardless of whether it's the right thing to do or not.
Before looking at the knock-on impact on other markets yesterday as a result of the slide in commodities, it’s over to Asia where there’s more important China data to look at with the November trade numbers out. The focus has been on the continued sluggish export numbers, with exports down -6.8% yoy in dollar terms which is pretty much where they were in October. That’s after expectations had been for a lift to -5.0% yoy. The latest number marks the fifth consecutive negative print. Imports were -8.7% yoy last month (vs. -11.9% expected) meaning the trade surplus narrowed slightly to $54.1bn from $61.6bn previously. There was better news to be had in the latest auto sales numbers in China however, where retail sales of vehicles were up +18% mom in November, the biggest monthly gain since February having been boosted by a government tax cut.

The data comes after China reported another fall in its FX reserves yesterday shortly after we went to print. Reserves were down $87.2bn to $3.44tn in November which was a slightly higher fall than expected ($3.49tn expected), with reserves now at the lowest level since February 2013. It’s worth highlighting that the data may also underestimate the full extent of the fall in reserves, given that it doesn’t capture transactions by the PBOC in the forwards market.

Chinese equity markets are down post the trade data. The Shanghai Comp is -0.78% and the CSI 300 is -0.70. The commodity slump yesterday is dominating much of the tone this morning with falls for the Hang Seng (-1.58%), Kospi (-0.60%) and ASX (-0.91%). The Nikkei (-1.02%) is also lower despite an upward revision to Japan’s Q3 GDP reading. The final print was revised up to +0.3% qoq from a -0.2% contraction in the first preliminary release. Nominal GDP was revised up also, to +0.4% qoq from 0.0%. In particular, upward revisions were made in private capital investment growth and the contribution from private inventories. Looking quickly at Oil this morning, WTI is up around half a percent in early trading.

Back to yesterday. Despite those huge slides in Oil and other commodities, the impact on risk assets was actually fairly well contained all things considered. Oil prices were already moving south in the European session but despite that, there was a modest rebound for European equities after the weakness post-ECB with the Stoxx 600 closing up +0.51%. European credit had a better session too, Crossover finishing 8bps tighter. The afternoon session saw US markets trend lower, although a late rebound into the closing bell helped the S&P 500 limit its losses to -0.70%. Energy stocks fell a combined -3.7% while materials names were down nearly -2%. Energy heavyweights Exxon Mobil, Chevron and Schlumberger finished with losses of nearly 3%.

Commodity sensitive currencies felt the full force of yesterday's move. The Colombian Peso dropped over 3% to lead losses in the FX space, in the process hitting a record low. The Russian Ruble was down nearly 2%, while there were big falls also for the South African Rand (fresh all-time low) and Canadian Dollar (hitting an 11-year low). The US Dollar firmed, with the Dollar index +0.38% while the flight to quality bid saw Treasuries rally, the 10y benchmark yield in particular falling over 4bps to 2.229%. In fact bond yields in Europe fell sharply too. 10y Bunds were down nearly 10bps in yield at 0.580%, snapping a three-day move which had seen yields move some 20bps higher.

Away from the moves in commodities, it was actually relatively quiet newsflow wise yesterday. The St Louis Fed President Bullard highlighted the importance of the Fed not being mechanical in its future moves after liftoff and that the Fed ‘have to be more willing to pause if the data is weaker and speed up if the economy’ accelerates. The Fedspeak takes a break now until post next week’s rate decision.

Data-wise yesterday, in the US we saw a slight drop in the November labour market conditions index to +0.5 (vs. +1.5 expected), a fall of 1.7pts. Consumer credit during October also came in lower than expected at $16bn (vs. $20bn expected), which followed an upwardly revised $28.6bn in the previous month. In Europe Euro area investor confidence ticked up 0.6pts in December to 15.7 (vs. 17.0 expected). Finally German industrial production for the month of October was softer than expected at +0.2% mom (vs. +0.8% expected).

In terms of the day ahead, we’re kicking off the European session this morning in France where we’ll get the latest business sentiment reading along with trade data. Over in the UK we’ll get the October readings for industrial and manufacturing production, shortly followed by the preliminary Q3 GDP reading for the Euro area (no change expected from the +0.3% qoq flash print). Over in the US this afternoon it continues to remain relatively quiet with just the November NFIB small business optimism read, IBD/TIPP economic optimism print and the October JOLTS job opening data. While the latter is on a one month lag, the data is still important given its closely followed by the Fed. The quits rate in particular worth keeping an eye on.