China's Stock Market Whiplash Extends As Greece, Crude Slump More

Now that China is on the same boat as the rest of the world, and its stock market is a direct reflection of hopes for constant liquidity injections by the central banks, nothing could be better for stocks than bad news, which is precisely what it got. After the biggest crash in the Shanghai Composite in 5 years, what China got just the bad economic update it needed, when it reported a PPI of PPI (-2.7%, Exp. -2.4%), the 33rd consecutive decline and a  CPI (1.4%, Exp. 1.6%), lowest since November 2009, when the big banks’ RRR rate stood at 15.5% vs. current 20%. And so hope of yet more PBOC interventions to halt China's deflation promptly reversed SHCOMP losses of over 4% on the session (at which point it was just shy of correction territory from recent highs hit just this week), and stocks surged to close up almost 3%, erasing half of yesterday's losses. This spike came despite reports Chinese regulators may limit brokerages' interbank borrowing.

And while the PBOC takes one day, it gives the next: the Yuan, which had earlier tumbled by 0.3% despite another stronger fixing by the PBOC, also proceeded to rise 0.14% after speculation the PBOC was injecting liquidity, according to HSBC.  "Yuan recovered from yesterday’s fear of funding squeeze on the back of repo collateral rules, as the fear proved to be overdone and there was talk of liquidity injection by the central bank today,” Hong Kong-based senior FX strategist Ju Wang says in interview.

So there you have it: tightening with one hand, leading the major market sell offs, and easing with the other, resulting in an almost equal and opposite reaction.

Elsewhere in Asia, the Nikkei 225 (-2.25%) tumbled to print a fresh low for the month weighed on by a strong JPY amid flight to quality. Although judging by the now Swiss Watchy rebound in the USDJPY, the Nikkei should do just fine.

And while the biggest Asian markets, and the 2nd and 3rd largest in the world, now trade like Pennystocks on hopes of what central bankers may or may not do, the far more important market right now for everyone, that of crude oil, continues to plumb new depths, with Brent and WTI extending losses. In fact, crude may drop as low as $40/bbl if OPEC solidarity breaks, according to an Iran oil ministry official. API data yday showed crude stockpile gain, contrary to forecasts for decline in today’s EIA report. Jan. Brent -$1.20 at $65.64 at 10:28am London time; intraday low $65.64. Jan. WTI -$1.41 at $62.41; RSI for CL1 generic contract ~25%. Brent-WTI widens to $3.22, settled ydy at $3.02. "We got another set of bearish news overnight," says Commerzbank commodity analyst Carsten Fritsch.  “EIA shrinking is very unlikely given the API news yesterday”

European equities are trading higher having pared some of the China/Greece inspired sell-off that was seen yesterday. The turn in sentiment comes after lower than expected inflation data overnight in China (CPI/PPI) has increased expectations of potential easing from the central bank and as such has been supportive for the mainland stock index, where the Shanghai Comp closed up 2.9%. Despite the positive mood Greek assets have remained under pressure amid a continuation of Tuesday’s aggressive move with the GE/GR 10yr government bond yield spread trading wider by 62bps, while the Athens exchange is down another 2.0%.

In other US related news, The Fed passed a proposal on Tuesday for risk-based surcharges of up to 4.5% on the 8 US banks to maintain an additional capital supply based on the institution's system importance. The framework for these charges would be phased in beginning January 2016 through January 2019. Says eight banks face aggregate USD 21bln shortfall today. Says most of eight banks already meet requirements. (CNBC/BBG)

US Congressional leaders have reached an agreement on an USD1.1trl spending bill ahead of Thursday evening’s deadline. This agreement would prevent a government shutdown and fund the federal government until September 2015 and is expected to be passed by Congress this week. (BBG)

To summarize: European shares remain higher with the financial services and tech sectors outperforming and basic resources, oil & gas underperforming. Greek market falls for second day. Brent crude resumed its decline. China’s CPI lower than expected. The German and Italian markets are the best- performing larger bourses, Swiss the worst. The euro is little changed against the dollar. Greek 10yr bond yields rise; Portuguese yields increase. Commodities decline, with WTI crude, Brent crude underperforming and soybeans outperforming. U.S. mortgage applications, monthly budget statement due later.

Market Wrap

  • S&P 500 futures little changed at 2057.1
  • Stoxx 600 up 0.6% to 342.4
  • US 10Yr yield down 1bps to 2.2%
  • German 10Yr yield down 0bps to 0.68%
  • MSCI Asia Pacific down 1.2% to 138
  • Gold spot down 0.3% to $1226.9/oz

Bulletin headline Summary from RanSquawk and Bloomberg

  • Shanghai Composite closes up 2.9% reversing some of yesterday’s sharp losses as weak inflation data (CPI/PPI) increases expectations of further easing from the PBoC.
  • Greek assets remain under pressure in a continuation of yesterday’s move, however the news is having less of an effect on the broader market.
  • Looking ahead today’s US session has a commodity focus with the DoE releasing their weekly oil inventory (1530GMT/0930CST) report and with the latest crop update due from the USDA at 1700GMT/1100CST.
  • Treasuries steady, curves continue to flatten as week’s auctions continue with $21b 10Y notes; WI bid at 2.215% vs. 2.365% in November.
  • OPEC cut the forecast for how much crude it will need to provide in 2015 to the lowest in 12 years amid surging U.S. shale supplies and reduced estimates for global consumption
  • Brent crude traded near a five-year low as an Iranian official predicted a further decline in prices if solidarity among OPEC members falters
  • China’s producer-price index dropped 2.7% in November from a year earlier, a record 33rd-straight decline and the biggest fall since mid last year. Consumer prices rose 1.4 percent, compared with the 1.6 percent increase in October
  • ECB Executive Board member Peter Praet said falling oil prices could push euro-area inflation rate below zero, just as policy makers prepare to examine options for quantitative easing
  • Greek bonds extended a rout that pushed 3Y yields above 10Y yesterday after Prime Minister Samaras renewed political turmoil by bringing forward the process for choosing a new president, a move that risks triggering parliamentary elections
  • RBS will pull out of fixed-income trading in Japan, according to two people familiar with plan, who didn’t want to be named because details aren’t public; co. to slash staff numbers by >200 to ~30, with most jobs going by February, one person said
  • Deutsche Bank eliminated or moved as many as CDS 10 traders in London and related indexes as it trims that part of its fixed-income business amid new regulations, said people with knowledge of the matter
  • JPMorgan, already facing the highest capital surcharge under  international rules, may need more than $20b in additional capital by 2019 to meet a new Fed requirement
  • The ruble’s slide this year is damaging to Russia, prompting the government to start talks with large companies to ensure “more rhythmic” sales of their foreign revenue, Prime Minister Dmitry Medvedev said today
  • Russia’s central bank will probably raise borrowing costs to avert threats to financial stability as oil prices near the lowest in more than five years and sanctions over Ukraine risk the ruble’s collapse
  • Sovereign yields mixed. Asian stocks mixed, Nikkei -2%, Shanghai +2.9% after yesterday’s 5.4% gain. European stocks gain, U.S. equity-index futures decline. Brent crude and gold fall, copper gains

US Event Calendar

  • 7:00am: MBA Mortgage Applications, Dec. 5 (prior -7.3%)
  • 2:00pm: Monthly Budget Statement, Nov., est. -$65b (prior - $135.226b)


In FX markets, the JPY has continued its strengthening trend supported by its flight to quality bid given the macro-developments in China and Greece with USD/JPY trading down over 40 pips into the North American. Elsewhere, the USD-index remains broadly flat and that is being reflected in both EUR/USD and GBP/USD which has seen minimal movements today. More, specifically EUR/USD remains in close proximity to a vanilla option expiry at 1.2390-1.2400 for today's NY cut 10am (1500GMT), according to an unconfirmed source.


WTI crude continues its downward trend with the low on Dec 8th coming in at USD 62.25 with focus on yesterday’s API Crude Oil Inventories data which showed a build of 4400k vs. Prev. -6500k, ahead of today's DoE numbers. In addition, analysts at BofA said yesterday that WTI may drop to USD 50/bbl and there is a risk of Brent dropping to USD 60/bbl showing concern for a possible further slide in oil prices. Meanwhile, precious metals trade in minor negative territory however, have still maintained a bulk of the sharp gains seen yesterday on the back of the flight to quality bid and weaker USD.

DB's Jim Reid concludes the overnight summary

Santa Claus got lost somewhere between Greece and China yesterday but the US launched a late rescue mission to give markets a chance of a happy Xmas. As we went to print yesterday China was trading notably higher, however a couple of hours later at the close the broader Shanghai Comp index was down -5.43% (a full intra-day swing of nearly 7.5%), the worst day since August 2009. Similar moves were felt in the CSI 300 yesterday which ended the day around -4.5% lower following the sharp intraday swings. The volatility has extended into the overnight session with the Shanghai Composite having crossed between gains and losses 10 times (and possibly still counting) and is +1.29% as we go to print with a peak-to-trough range of 3.3%. Elsewhere in Asia, sentiment is generally weaker with the Nikkei (-2.57%) and Kospi (-1.20%) all lower as we type, although the Hang Seng is +0.14%. China's tightening announcement around onshore corporate bond repo transactions was the key story yesterday but the weak November CPI and PPI prints overnight is also a worrying sign for underlying fundamentals. We'll delve a little deeper into these Chinese stories below but first let's take a look at Greece which was a key driver for the European weakness yesterday.

As we discussed yesterday, the balance of probabilities are that we will have a general election early in the new year as the numbers look challenging for a successful presidential candidate being found by the current Government. This was always the most likely outcome over the next few months with the only change in the last 48 hours being the accelerated timing. However the market was clearly in a state of shock as the ASE was down 12.8%, the worst day since December 1987. It’s stunning that it was a worst day than any at the height of the sovereign crisis. There was also some significant price action in Greek bonds yesterday. 10y benchmark yields widened 93bps to 8.066% although the dramatic moves were at the shorter end of the curve as 3y yields surged 182bps to trade at 8.196% and inverting the yield curve in the process. The sovereign’s CDS also closed 93bps wider at 837bp. Our expert George Saravelos thinks the amount of likely yes votes went down the 180 needed yesterday, so the early election probabilities increased again. SYRIZA vs. the EU is shaping up to be potentially one of the big themes of early 2015.

Away from China and Greece, there was a notable turn around in equity markets in the US yesterday which saved the session. The S&P 500 (-0.02%) was virtually unchanged at the close after having pared back losses of some -1.3% in early trading. Similar moves were seen in Treasuries, with 10y benchmark yields trading as much 7.6bps tighter intraday only to then weaken towards the late-afternoon and close 4bps tighter at 2.213%. Energy stocks helped fuel part of the recovery. The component gained +0.85% following a rebound in both WTI (+0.77%) and Brent (+0.65%) to $63.82/bbl and $66.84/bbl respectively. Macro data was supportive yesterday. Indeed the NFIB small business optimism (98.1 vs. 96.5 expected) and IBD/TIPP economic optimism (48.4 vs. 47.0 expected) surprised to the upside – the former hitting a seven year high - whilst the JOLTS print showed job openings come in 0.1% higher at 3.3% with a modest 0.1% tick down in the quits rate to 1.9%.

Elsewhere wholesale inventories notched higher to +0.4% mom (vs. +0.2% expected).

In terms of other notable US stories yesterday, the Fed announced proposals to increase capital requirements for the larger banks in a bid to minimise the reliance on short term funding. Although the proposal is subject to public consultation, early reports from Fed officials estimate that banks face a surcharge of anything from 1 to 4.5% of risk weighted assets and that most of banks have adequate liquidity to comply, although the Fed’s Fisher did point out that one bank in particular will need to fund the majority of the shortfall.

Back to China, overnight the November CPI came in below consensus at +1.4% yoy (vs. +1.6% expected). This is a fall from +1.6% in October and marks the lowest monthly inflation reading since November 2009. PPI continued to struggle and came in at -2.7% yoy (vs. -2.4% expected). Chinese PPI has been in negative territory since Feb 2012 with little signs of this trend abating. Consumer prices may well be a reflection of the slump in global oil and commodity prices but PPI continues to signal the challenges around excess capacity in Chinese industrials. The bulls may well argue that soft prices are inevitably ‘policy friendly’ which gives authorities more room to ease although the bears would probably argue that the recent run up in Chinese equities may have complicated the planned easing bias.

Staying in China, for those interested in the specific tightening measures announced by the local regulator around repo rules our China rates strategist has published a note on it. In a nutshell the temporary approval suspension of lower quality bond issuance for repo is part of a cleaning up process of local government debt and also aimed at reducing the attractiveness of leveraged carry positions in these credits. We estimate about RMB460bn (c.US$80bn) of corp bonds are affected by this which accounts for about 9% of China's total onshore credit markets.

Before we move on, our Global Macro colleagues published their world outlook yesterday. We’ve copied a link to the document below, but in terms of themes there’s a topical focus on oil as well as downgrades to global growth forecasts which they now have at 3.6% in 2015, rising to 3.8% in 2016 having previously expected 3.9% and 4.0% respectively. There are downward revisions to China, Russia, Brazil and other EM economies. Regionally our colleagues maintain their guidance for a midyear lift off in 2015 for the Fed, whilst expecting a sluggish pickup in growth in Europe along with public QE by the end of Q1 next year. They also expect above trend growth for Japan over the next two years.

Rounding up the market moves yesterday, before the recovery in US markets, markets in Europe closed at their lows yesterday with the Stoxx 600 receding -2.33% and Xover drifting 16bps wider. In terms of data, Germany printed a trade surplus wider than expected in October supported by a slower than expected decline in exports although imports softened greater than consensus (-3.1% mom vs. -1.7% expected). There was also softer data in the UK with both industrial (-0.1% mom vs. +0.2% expected) and manufacturing (-0.7% yoy vs. +0.2% expected) production coming in below consensus. On the micro side of things, Tesco was a notable underperformer yesterday after management significantly cut its earnings forecast following its fourth profit warning in a year. The share price was down as much as 17% at one point before recovering to around 6.6% lower on the day. Credit spread movement was also dramatic with Tesco’s 5Y CDS jumping 30bps yesterday to 168bps to the widest since December 2008. As credit analysts we are watching with some interest here if all this will translate into further pressure on its borderline IG rating. Tesco is rated Baa3/review for possible downgrade by Moody's, BBB-/Neg by S&P and BBB-/Neg by Fitch.

Today’s calendar is particularly data light with just the October print for French industrial and manufacturing production and trade data out of the UK this morning. Over in the US the notable release is the November budget statement with the market looking for a reduction in the deficit to $65bn.

So all eyes on Greece and also whether China's market move is already out of date by the time you read this!!