Yuan

Important pillars of the bull case evaporated throughout 2015. Global price pressures weakened, the global Credit backdrop deteriorated and the global economy decelerated. The huge bets on central bank policies left markets at high risk for abrupt reversals and trade unwinds – 2015 The Year of the Erratic Crowded Trade. Indeed, a global bear market commenced yet most remain bullish. Serious and objective analysts would view this ominously.

The deeper we dig into the story of Dubai's vaporized gold, the more skeletons just tumble out of the closet on what may be the world's biggest gold smuggling ring ever, one involving not just Turkey and Iran, but the mother of all gold smuggling: China itself...

For those wondering what comes to mind for the average Chinese web surfer with regard to nations in Europe, we present the following map from Foreign Policy who “plotted the most common Chinese-language Baidu query for each European nation.” Highlights include "likes to fight" for Russia, "why doesn't it annex Portugal" for Spain, and "beautiful women" for Ukraine.

The latest Chinese company to mysteriously "misplace" its books and as a result be unable to make an upcoming bond payment is China Shanshui Cement: "a former director of Shandong Shanshui, together with a group of gangsters, barged into the Headquarters by force on 27 December 2015, destroyed the properties in the offices therein and assaulted the employees of Shandong Shanshui."

Yesterday, in keeping with what has become a daily tradition, we asked a simple question: "Which hedge fund will close today." It turns out that despite our intention, the question was not rhetorical because just a few hours later Bloomberg answered, when it reported that the latest hedge fund casualty was another iconic, long-term investor: Scott Bommer's SAB Capital, which as of a year ago managed $1.1 billion, and which is now returning all outside money.

• Oil ends 2015 in downbeat mood; hangover to be long, painful (Reuters)
• Recession, retrenchment, revolution? Impact of low crude prices on oil powers (Guardian)
• Midwest Flooding Might Make the Oil Glut Worse (BBG)
• From Oil Glut to Shortage? Some Say It Could Happen (WSJ)
• Ten Years After Blowup, Amaranth Investors Waiting to Get Money Back (WSJ)
• China Fires a Warning Shot at Yuan Speculators With Bank Bans (BBG)

It has come down to this: a year in which the US stock market (led by a handful of shares even as the vast majority of stocks has dropped) has gone nowhere, but took the longest and most volatile path to get there, is about to close either red or green for 2015 based on what happens in today's low-volume session following yesterday's unexpected last half hour of trading "air pocket" which brought the S&P back to unchanged for the year.

With just two days left in 2015, the main driver of overnight global stocks and US equity futures remains the most familiar one of all of 2015 - crude oil, which, after its latest torrid bounce yesterday has resumed the familiar "yoyo" mode, and again stumbled dropping below $37 on yesterday's surprising API 2.9 million crude inventory build, as well several more long-term "forecasts" by OPEC members, with Kuwait now budgeting for $30 oil, while Venezuela's Maduro said the oil price fell to $28/bbl and is "headed downward." As a result U.S. futures declined and European stocks fell, extending their worst December drop since 2002 in thin volume on the last full trading day of the year.

For the first time since the August collapse, Offshore Yuan is trading over 1000 pips weaker (relative to the USDollar) than onshore Yuan, signalling outflows are once again escalating. Following the chaos in HIBOR money-markets, Offshore Yuan has crashed to 6.5970 (below August spike lows) to the weakest since Dec 2010. On the heels of this recent divergence between on- and off-shore Yuan, China has suspended some foreign banks from FX trading, we suppose to try and stem the capital outflows.

The U.S. dollar is currently accepted as the world’s reserve currency, but it hasn't always been this way...

• The World's Richest People Got Poorer This Year (BBG)
• Oil hovers near 11-year lows on abundant supply, slowing demand (Reuters)
• Oil-Producing States Battered as Tax-Gushing Wells Are Shut Down (BBG)
• A Bold Few Traders Earn Billions Flouting Rivals (WSJ)
• Islamic State ruling aims to settle who can have sex with female slaves (Reuters)
• Winter Storm Snarls Republican Presidential Traffic (BBG)
• Donald Trump Urges Supporters to the Polls (BBG)

Following yesterday's budget (deficit) and the 'sacrifice-the-people's-comfort-for-the-death-of-US-Shale' plan that we detailed here, it appears market concerns about Saudi Arabia's forward-looking health are rising. As Bloomberg reports, USDSAR 12-month forwards jumped 250pts (the most since December 2007) to 725bps (the highest level since March 1999) implying expectations of a looming de-pegged, devaluation. Perhaps just as worrying is this is the same pattern that played out in August as Yuan weakness sparked HIBOR stress, leading to SAR forward weakness and then US equity market collapse.

On the heels of the collapse in China 'B' shares last night, and continued stress in money-markets, China weakened the the Yuan fix to its lowest since June 2011 tonight. This has sent offshore Yuan spiralling lower breaking above 6.5700 for the first time since trhe August devaluation's collapse. Chinese stocks are on the weaker side, extending losses, and we now await the money-markets to see if this stress is escalating.

Update: *SHANGHAI B-SHARE INDEX PLUNGES 7.8% - MOST IN 4 MONTHS

We have seen this pattern before. In August, the first thing to tumble was Yuan FX rates, then money market rates exploded, and then the stock market tumbled. While it is a little premature, today's sudden plunge in Chinese stocks (as the afternoon session opens) following last week's spike in money market rates following the previous week's non-stop weakness in the Yuan does have a concerning smell of deja vu all over again.