China

Energy investors got clobbered in 2015, and are hoping for things to turn positive as we head into the New Year. What can we expect in 2016? Here is a rundown of some key trends to watch for...

Apple's shares broke below $100 in pre-market trading as analyst downgrades and further component producer outlook reductions weighed heavily on the "no brainer." It appears increasingly likely that Tim Cook's "rescue" email to Cramer on August was perhaps not the entire truth.. and the market is trading back to levels it first crossed in August 2014 (i.e. unchanged in 16 months). Of course, amid this carnage this morning, AAPL attempted to save the day and issued a quick statement proclaiming January 1st as the biggest App Store spending day in history... for now the stock is not excited about that.

• Today’s fixing was a big surprise, and impression is that upside risks to USD/CNY have grown
• PBOC’s actions are conflicting: there was suspected intervention yesterday and sentiment stabilized, but it set such a low fixing today
• Will help loosen monetary conditions; still, risk of capital outflows could increase concurrently
• Expect 5%-10% depreciation by end of the year, though this depends on the pace of PBOC’s intervention and health of macroeconomy

• Obama, wiping tears, makes new push to tighten gun rules (Reuters)
• Global stocks hit by China worries, North Korea nuclear test (Reuters)
• Oil hits 11-year low, Saudi-Iran row cuts chances of output restraint (Reuters)
• North Korea says successfully conducts first H-bomb test (Reuters)
• Valeant Planning to Appoint New Leader as CEO Remains Hospitalized (WSJ)
• Treasuries Extend 2016 Winning Start With Growth Outlook Clouded (BBG)

Before we go into details of the overnight carnage, this is where we stand currently: S&P futures now down 33 points or 1.63% while 2Y Treasury rallies pushing its yield back below 1% as EU stocks extend their drop after China weakened its currency, North Korea says it tested a hydrogen bomb; Brent crude falls to lowest level since 2004.

Many people start a new year with renewed optimism. However, "New Year, Same Problems" is the meme of 2016... and recent trading has dashed some of that optimistic 'This time it's different' hope.

Dow futures are down over 170 points from the cash close, testing the lows of the day following carnage in the Chinese currency markets. Despite the biggest drop in onshore Yuan since August devaluation, Offshore Yuan has collapsed to its lowest since September 2010. What is more worrisome (or positive for Kyle Bass) is that the spread between onshore and offshore Yuan has blown out to 1250 pips - a record - indicating dramatic outflows and/or expectations of further devaluation to come.

"The next step will be, once they've tested it with several flights, they will bring down some of their fighter air power - SU-27s and SU-33's - and they will station them there permanently. That's what they're likely to do."

Last year amid China’s ongoing financial crisis, the government there tightened some forms of capital controls (curiously while loosening others). For any Chinese citizen with savings right now, it’s pretty obvious what’s happening. And they want to get their money out of the country. Bitcoin has been a popular alternative in China because people can easily cross borders with vast sums of money encrypted inside their mobile phones. But there’s a new tactic that Chinese are using now: domains.

We are currently in a transitional phase of geo-political-monetary power struggles, capital flow decisions, and fundamental economic choices. This remains a period of artisanal (central bank fabricated) money, high volatility, low growth, excessive wealth inequality, extreme speculation, and policies that preserve the appearance of big bank liquidity and concentration at the expense of long-term stability. The potential for chaotic fluctuations in any element of the capital markets is greater than ever. The butterfly effect - the flutter of a wing in one part of the planet altering the course of seemingly unrelated events in another part - is on center stage.

For several years now, we’ve periodically observed that China’s increasingly aggressive crackdown on dissent serves as a harbinger of far more difficult times ahead. The thinking goes that if anyone is privy to the severe fragility the country’s economic situation, it would be Chinese leadership. As such, desperate moves by Chinese leadership should foretell drastically worse economic and social conditions to come.

The S&P 500 first crossed yesterday's levels in August 2014 - that is 501 days ago, confirming our belief that the stock market casino has just begun its descent has only been further reinforced. In terms of the fundamental economic and financial rot now coming to the visible surface, the analysis we presented last week is even more timely now.

"It is time to accept that what we have done has worked brilliantly for twenty years but does not work anymore and move on. We are confident our process will eventually work again – for the laws of economics will never be repealed – but for now they are suspended and may be for some time; an indefinite period involving indeterminate levels of risk during which we think it would be wrong for us to be the stewards of your money."