Futures Fade As Chinese Credit Tremors Get Ever Louder

Unlike most trading sessions in the past month, when the overnight session saw a convenient algo assisted USDJPY/AUDJPY levitation, tonight there has been no such luck for the permabullish E-Trade babies who are conditioned that no matter what the news, the next morning the S&P 500 will open green regardless. Whether this is due to ever louder fears that what is happening in China can not be swept under the rug this time will be revealed soon, but as of this moment both the USDJPY, and its derivative, US equity futures, are looking at a sharp lower open, as gold continues to press higher, while the traditional tension points such as Russia-Ukraine, and ongoing capital flight from some of the more "fringe" emerging markets, continues. Expect more of the same today as people finally peek below the Chinese surface to realize just how profoundly bad the situation on the mainland truly is. And while we realize macro news are meaningless, especially in Europe where the ECB is now the sole supervisor of all asset classes, the fact that Cyprus, Greece, Slovakia and Portugal, are all in deflation, and many more countries lining up to join the club, probably means that absent a massive global credit impulse, we have certainly reached the upward inflection point from the most recent $1+ trillion injection of liquidity by the Fed, not to mention the ongoing QE by the BOJ.

So looking at markets, we see that risk averse sentiment which dominated the price action during the Asian session swiftly carried over into the European session, prompting flight to quality since the get-go as concerns over credit markets in China remained at the forefront. As a result, basic materials related stocks were among the worst performing in Europe, with consumer goods leading the move lower. At the same time, flight to quality supported JPY and Swiss rates, with credit spreads also widening. Looking elsewhere, even though gold managed to hold onto gains made overnight, base metals and energy products suffered as concerns over the future growth prospects in China escalated. There was little in terms of tier 1 macroeconomic releases this morning and going forward market participants will get to  digest the release of the latest weekly DoE report, while the US Treasury will auction off USD 21bln in 10y notes.

Bulletin news summary from Bloomberg and RanSquawk:

  • Risk averse sentiment which dominated the price action during the Asian session carried over into the European session, prompting flight to quality as concerns over credit markets in China remained at the forefront.
  • WTI-Brent spread the widest since 6th of February at USD 9.35 as Chinese fears and larger API build weigh on WTI.
  • ECB's Linde says may have to take new measures in coming months ahead of LTRO expirations in 2015
  • Treasuries gain amid slide in global stock markets, copper trades near lowest level in 44 months amid concern over China’s credit outlook.
  • Shanghai Chaori Solar, the first company to default in China’s onshore bond market, said its notes may be delisted as a second solar-equipment maker had its securities halted
  • More defaults may follow Shanghai Chaori Solar’s, including by makers of nonferrous metals, said Qiu Xinhong, a bond-fund manager in Guangzhou at Golden Eagle Asset Management Co.
  • Closely-held steel mills in China are struggling to get funding at the moment and that’s led to panic selling of iron ore, according to Morgan Stanley
  • Ukraine warned Russia is amassing troops near its borders as Prime Minister Arseniy Yatsenyuk visits Washington to step up the search for financial aid; Russia calls U.S. aid to Ukraine illegal
  • Bill Gross cut holdings of Treasuries and U.S. government- related debt in Pimco’s Total Return Fund in February; DoubleLine’s Jeffrey Gundlach said 10Y yields will fall to 2.5% this year
  • Japanese Prime Minister Shinzo Abe looks set to drive an indicator of economic hardship to a 33-year high by increasing taxes and prices amid stagnant wages
  • Republican David Jolly won a special election in Florida’s  13th Congressional District, upsetting a Democratic rival in a swing district that Obama won in 2012
  • Week’s auctions continue with $21b 10Y notes, yield 2.75% in WI trading; drew 2.795% in Feb.
  • Sovereign yields mostly lower. EU peripheral spreads widen. Asian equities fall, with Nikkei -2.6%, Shanghai -0.2%. European equity markets, U.S. stock-index futures decline. WTI crude and copper lower, gold gains

Asian Headlines

PBoC is ready to cut bank reserves if growth falters and may cut the Reserve Requirement Ratio if GDP growth slips below 7.5% and towards 7.0%, according to sources which added that policy action could happen in Q2 given distorted Jan-Feb data. (RTRS)

- This follows a particularly poor set of Trade Balance figures, which showed an unexpected trade deficit after exports plunged over 18%. The RRR currently stands at 20%.

- Of note, Equity markets in Asia settled the session in the red, as concerns over more corporate defaults in China prompted broad based flight to quality.

EU & UK Headlines

ECB's Linde says may have to take new measures in coming months ahead of LTRO expirations in 2015. (RTRS) At the same time, ECB's Praet says publishing minutes may enhance communication strategy. (BBG)

EU Industrial Production SA (Jan) M/M -0.2% vs. Exp. 0.5% (Prev. -0.7%, Rev. -0.4%)

BoE's Bean says there is no urgency to raise interest rates. (BBG)

US Headlines

PIMCO total return funds cut US government related holdings to 43% in February from 46% in January. (BBG)


Stocks in Europe traded broad lower since the open, as concern over credit markets in China, together with the lingering uncertainty over the Ukraine/Russia, continued to weigh on sentiment. Of note, 13.5% of the FTSE-100 index traded ex-dividend this morning, which included the likes of Standard Chartered, HSBC and  British American Tobacco. In terms of notable stock movers, London listed Prudential shares are seen up almost 4% following earnings release shortly after the cash open.


Flight to quality supported JPY across the board this morning, which also saw the major pair move below the 50DMA line. Elsewhere, EUR/GBP continued to consolidate above the 100DMA line which in turn weighed on GBP/USD, which trades in close proximity to the 50DMA line.

For EM FX rates, it was reported citing Crimea Vice President that Crimea is to adopt the RUB. Of note, referendum is to be held in the region on March 16th.


WTI-Brent spread the widest since 6th of February at USD 9.35 as Chinese fears and larger API build weigh on WTI.

US refiners have begun to lobby against easing crude export limits. US energy secretary Ernest Moniz has commented that it might be time to take another look at the law, coming amid the recent rise in unrefined petroleum. (RTRS)

Iran says Russia has agreed to build two further nuclear plants in the country. (Al Jazeera)

US API Crude Oil Inventories (Mar 07) W/W 2600k vs. Prev. 1170k
- Cushing Crude Inventories (Mar 07) W/W -1300k vs. Prev. -2630k
- Gasoline Inventories (Mar 07) W/W -2150k vs. Prev. -1200k
- Distillate Inventories (Mar 07) W/W -839k vs. Prev. -270k

G7 may announce that Crimean annexation will trigger sanctions, according to a European official. There were also reports that acting Ukraine President Turchynov said Ukraine won't intervene in Crimea and will not attempt a military move to prevent the southern Crimean peninsula's breakaway in order not to expose its eastern border. (BBG/AFP)

India is working towards possibility of lifting gold import curbs and expects FY14 exports to be around USD 310bln, according to commerce secretary Rajeev Kher. (BBG)

South Africa has passed a new amendment to their mining law giving power over exports of some commodities to the minister of mineral resources. (Metal Bulletin)

* * *

We conclude with the traditional Jim Reid, DB, overnight recap:

By the end of this week we'll only have a couple of weeks left in Q1 and the reality is that outside of things like peripheral assets, DM credit, and some (but certainly not all) commodities, markets are generally struggling to gain much momentum in 2014. Even in the US which has been high up on the global equity performance lists, the S&P 500 is only up +1.04% for the year (+9.9% in Q4 2013 and 10.0% in Q1 last year), whilst the Dow is -1.36%. We've had the EM wobble, the Ukrainian problems and building concerns over Chinese growth, policy and corporate health. We've also had the Fed talk up the taper and the ECB talk down imminent action. This combination is less supportive for many markets in 2014 than it was in 2013. We're still long DM credit but it’s fair to say we're reviewing things given the strong recent performance and given less friendly central bank rhetoric than we expected at this stage. However credit still benefits from some pretty strong technicals so that has to be thrown into the mix.

On EM there was a thought provoking piece out overnight from our equity strategist JP Smith who again beats the drum of poor sovereign and corporate governance in his market. While the recent sell-off in Russia leaves him tactically less bearish he still thinks it merits a structural underweight. Indeed he feels there is a strong case to be made for using governance criteria to reclassify Russia as a frontier market. He feels that the prevailing methods of dividing global markets into developed, emerging and frontier categories are overly based on quantifiable liquidity and technical criteria, rather than the real drivers of risk, namely sovereign and corporate governance. He also has some concerns about the Chinese market on the same basis. On this its interesting that as we pointed out yesterday, the domestic Chinese equity market is actually lower now than it was when the S&P 500 hit its famous March 9th 2009 low despite the economy being 68% larger. Indeed its back to levels it first breached in July 2000 - since then the economy is 476% larger. This perhaps highlights the problems at the micro level. With regards to current thoughts on China, JP feels it’s becoming clearer that the reforms are making little real progress and that the risks for investors continue to rise. Overcapacity in key industries seems to be increasing, while investors are becoming more concerned about the potential risks emanating from corporate and local government-linked debt. JP continues to believe that the authorities will try to ease fiscal and/or monetary policy at some point during 2014, but the question mark is whether they can accomplish this without further undermining confidence among potential suppliers of capital. Elsewhere while he still finds the asset class structurally unattractive, Turkey and Thailand present relative long opportunities.

Turning to the overnight markets, Shanghai copper futures were again limit down today (-4% as we type) in a repeat of its performance on Monday. The price of the base metal on the Shanghai Futures Exchange has fallen to its lowest level since July 2009 following falls in 18 of the last 20 days. As we have written since the first wobbles in the Renminbi began several weeks ago, there has been a broad-based unwinding of copper-based financing deals as participants in the yuan carry trade pare back on positions. China is said to account for around 40% of global copper consumption though a significant amount of that was used to collateralise loans. The risk off tone has carried through to Asian equities today with the Nikkei suffering a 2.3% fall, followed closely behind by the KOSPI (-1.4%) and HSCEI (-1.9%). Chinese equities are having a relatively stronger day today (Shanghai Composite -0.5%) driven by reports that the PBoC could cut required reserve ratios (RRR) in a bid to shore up economic growth (Reuters). Though this is helping sentiment today (Chinese bank stocks are up 0.1%), we note that interbank funding rates have already fallen significantly in recent weeks driven by recent selling of the yuan, and so a RRR cut may prove to be more of a symbolic gesture at this stage. The AUDUSD is under further pressure today (-0.2%) after weaker than expected housing finance and consumer confidence data.

It’s not clear exactly what caused the global risk-off tone yesterday that started around 3pm London time. Perhaps it was the accumulation of negative China-related headlines or it was the sharp drop in copper in both London and Shanghai that spooked markets. Either way it was enough to send the S&P500 (-0.51%) to its second consecutive loss, and it wiped out nearly all of yesterday’s gain in the Stoxx600 (+0.03%). A number of newswires warned of the potential for China to see its second onshore bond default after Chinese equipment maker Baoding Tianwei Electric Co’s bonds and stock were suspended from trading due to accounting losses (Bloomberg). There are a number of aspects which make Baoding Tianwei an interesting litmus test. Firstly, the company’s shareholder register is ultimately central-government controlled according to Bloomberg. Secondly, the company’s RMB 1.6bn bond is unconditionally guaranteed by its central-government affiliated shareholder so it will be interesting to see how bondholders fare if the company falls into distress. Thirdly, the company and its shareholder have issued a combined RMB6.1bn of domestic bonds, making it a much larger issuer than Shanghai Chaori (RMB1bn) which defaulted last Friday. Outside of these two companies, there are fears that a number of other domestic issuers will fall into distress in the short term, particularly issuers from China’s renewable energy sector. Aside from the Chinese headlines, other newsflow was patchy at best.

Ukrainian headlines were subdued but there were suggestions from Western governments that a political solution to the crisis was now unlikely. Ukraine’s acting President Turchynov said that his country will not intervene militarily in the Crimean peninsula as “we would expose the eastern border (close to Russia) and Ukraine would not be protected” (AFP). He described the weekend Crimean referendum as a “sham”. Italian Bank Unicredit surprised by posting a record Q4 loss of EUR15bn on bad loan and goodwill writedowns, but many saw this as a deck-clearing exercise ahead of the ECB asset quality reviews and bank stress tests. On that note, the ECB released a 285-page manual for its asset quality review yesterday which outlines how the review will go about measuring asset values and loan impairments. In the UK, Governor Carney said that his estimate of spare capacity in the UK economy was closer to the top end of the 1 to 1.5% of GDP range that was outlined in the BoE’s inflation report - this weighed on the GBP. But this was in contrast to Martin Weale who said slack was under 1%. The data flow was mixed with US wholesale  inventories rising 0.6% MoM in January (vs 0.4% expected) and the NFIB small business optimism index falling to 91.4 (vs 94.1 prior and 93.8 expected). Poor weather may have been a factor in the latter. German exports and imports for January both came in better than market expectations which helped the DAX (+0.46%) outperform.

Looking at the day ahead, we have another rather light day on the calendar. Euroarea industrial production and US mortgage applications are the highlights on the data docket. There is a bit more on the EM calendar with inflation readings in Brazil and India, and current account numbers in South Africa and Turkey.


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