As reported last night, now that the PBOC has devalued the Yuan to a level China's central bank is comfortable with, if only for the time being,and having done so by unleashing a "murderous" short squeeze "to deter bearish bets and helping to stabilize equity markets", manifesting itself in the offshore Yuan 1 week deposit rate exploding to a record 82%...
... markets are content that the Chinese debacle seems to be contained if only for a while, and so the attention of both traders and algos alike has focused on oil, which earlier in the session dragged global equities lower as it dropped by 3%, just shy of the $30 level, a new 11 year low, before staging another dramatic rebound in minutes, wiping out all losses in the aftermath of what appears to be a deadly suicide bomber explosion (unclear if this one is real or staged) on a square the middle of Istanbul's historic district.
And since the Paris terrorist attacks taught everyone that terrorism is bullish for stocks via the "OPEC wealth effect channel", after starting off the session in the red, and sliding as low at 1900, US equity futures have staged yet another furious rebound, and have risen nearly 30 points since roughly the European open, with the bulk of the surge coming after the Turkish news with a little lie from Nigeria, which earlier said that "OPEC May Meet Soon as Oil Even Hurting Saudi Arabia", also helping oil. (Incidentally, OPEC quickly denied Nigeria's attempt to boost oil with Bloomberg citing delegates who said that the organization currently has no plan to meet before the scheduled June conference.)
Here is where we stand now:
- S&P 500 futures up 0.7% to 1929
- Stoxx 600 up 1.5% to 345
- FTSE 100 up 0.9% to 5925
- DAX up 2.5% to 10066
- German 10Yr yield up 4bps to 0.58%
- Italian 10Yr yield up 5bps to 1.63%
- Spanish 10Yr yield up 5bps to 1.85%
- MSCI Asia Pacific down 1.7% to 121
- Nikkei 225 down 2.7% to 17219
- Hang Seng down 0.9% to 19712
- Shanghai Composite up 0.2% to 3023
- S&P/ASX 200 down 0.1% to 4925
- US 10-yr yield up 1bp to 2.19%
- Dollar Index up 0.21% to 98.93
- WTI Crude futures down 1% to $31.09
- Brent Futures down 0.3% to $31.47
- Gold spot up less than 0.1% to $1,094
- Silver spot up less than 0.1% to $13.88
A quick recap of global markets, we find Asian stocks traded mixed as stock markets found some mild respite following the recent market turmoil, although markets in Japan underperformed as they play catch-up on their return from their extended weekend which saw Nikkei 225 (-2.7%) wipe out all of last year's gains.
The Shanghai Composite Index rose 0.2 percent after dropping below the 3,000 level for the first time since September. The gauge sank 5.3 percent on Monday, extending the world’s biggest selloff this year, even after state-controlled funds intervened in the market last week.
"Everyone rational wants to sell, while everyone official has been told to buy," Michael Every, head of financial markets research at Rabobank Group in Hong Kong told Bloomberg. "By throwing good money after bad, it just delays the inevitable."
Well, isn't that the whole point of central banking: to delay the inevitable.
The Hang Seng China Enterprises Index dropped 0.8 percent to trade at 6.3 times trailing earnings, the cheapest level in 14 years. Hong Kong’s Hang Seng Index slid to its lowest level since September 2012.
Elsewhere, the ASX 200 (-0.1%) traded relatively flat as continued energy sector weakness pressured the index with WTI at its lowest since 2003. Elsewhere the Shanghai Comp. (+0.2%) opened higher led by financials after the largest broker CITIC Securities reported earnings however, the index then fluctuated between gains and losses as weakness in commodity linked sectors capped gains. Finally, 10yr JGBs saw mild gains amid weakness in Japanese stocks region, while the BoJ also entered the market to purchase JPY 890b1n in bonds.
Top Asian News
- In Rush to Exit Yuan, China Traders Buy Sinking Hong Kong Stocks: Chinese investors add 23.7b yuan of the city’s equities
- Singapore’s Next Bond Default Looms in Pacific Andes Tussle: Bond trustee HSBC alleges 2017 notes have breached terms
- Modi Seen Failing to Cut India Subsidy Bill Despite Oil Fall: India spending on fuel subsidies said to hit budget target
- Uber China Raises Financing at $7 Billion Valuation: Co. raised cash from local investors to fund battle with local rival Didi Kuaidi
- Macau Gaming Sees ‘Very Strong Start to the Year,’ JPMorgan Says: Macau GGR for first 10 days of Jan. estimated to be ~20% higher than Dec.
In Europe, the Stoxx Europe 600 Index rose 1.5, even as the MSCI All-Country World gauge was still 0.1 percent lower, extending its loss this year to 6.6 percent, after Japan’s Topix index tumbled 3.1 percent in a sixth day of declines.
Equities have seen modest upside today (Euro Stoxx: +0.2%), and while retail names did help bolster sentiment in early trade, the impact of the aforementioned commodity slump has taken its toll as the session has continued, with the material and energy sectors among the worst performers on the continent.
Top European News
- SAP Sales Top Estimates as New Software Cycle Takes Hold: S/4 Hana customers reach 2,700, double end of previous quarter
- Villeroy Says ECB Can Act If Needed as Inflation Remains Too Low: New Bank of France Governor says ECB policy is effective
- Orange Won’t Do Bouygues Deal If Too Risky to Execute, CEO Says: Says ‘in-depth’ review of possible deal is under way
- Airbus Wins Order for Three A380s, Breaking Sales Drought: Deal revealed in sales data; buyer -- or buyers -- not named
- RBS Recommends Bunds, Treasuries on Potential Crisis, Telegraph Says: Major stock mkts may fall 20%, oil may reach $16
Commodities have been at the centre of attention yet again today, with WTI and Brent breaking below USD 31.00/bbl overnight and printing 11 and 12 year lows respectively. Although oil futures have come off their worst levels by mid-morning the outlook remains bearish, with many looking closely at the USD 30.00/bbl handle as a key level ahead of tomorrow's DoE inventories, which are expected to show a build while many investment banks have downgraded their forecast in recent days.
Perhaps there will be a few more terrorist suicide bombings around the globe to lift oil, and thus energy stocks, and overall trader sentiment...
In FX, oil is also the leading story affecting FX this morning, so no surprise to see the CAD weaken further as both WTI and Brent target USD 30.00 — holding above here as yet. USD/CAD has now pushed the upside to a tick shy of 1.4270, with cross/JPY setting fresh 3+ year lows ahead of 82.0. USD/JPY has found some stability in the mid 117.00's, as Nikkei losses in Asia were tempered by China actions to contain CNH volatility and narrow the spread vs CNY. AUD weakness contained ahead of Monday lows. Cable pushed below the Monday lows under 1.4500 after some weak industrial/manufacturing stats. EUR/USD continues to sit it out on the side lines, struggling ahead of 1.0900 today.
In commodities, the main story has been the abovementioned rebound in oil, even as copper has come under renewed pressure in early LME trade this morning, with prices hitting the lowest levels for over six-and-a-half years, as a result of increasingly negative sentiment. Copper fell below USD 4,360 per tonne, as earlier short-covering and attempts to regain the USD 4,400 level proved futile. Perhaps we need suicide bombers to blow up a few copper mines?
Negative sentiment has hit other LME metals, with LME Zinc prices falling under the USD 1,450 per tonne level for the first time since June 2009 and LME Nickel continues to underperform this week with prices hammered down to May 2003 lows.
Iron ore has continued to decline amid increases in China stockpiles and a fear of increasing closures of Chinese steel producers, which has been exacerbated by tighter anti-pollution measures by Chinese authorities.
With China dictating price action in metals, participants await the country's trade figures tomorrow, whereby the imports will be a barometer for the pace of domestic demand in the economy, while the export figures could show the extent of slower global demand, according to BNZ.
The main event on the US calendar is the JOLTS job opening report for November where the quits and hiring rates are set to be closely watched; we also get the January IBD/TIPP economic optimism print and December NFIB small business optimism reading. Today’s Fedspeak is set to come from Lacker who is due to speak on the US economic outlook at 8.15pm GMT. US President Obama’s State of Union Address, due shortly after lunchtime, will also be worth keeping an eye on. There’s little to report on the corporate earnings front before the banks at the end of the week.
Global Top News:
- China Steps Up Yuan Defense as Soaring Offshore Rates Slam Bears: Interbank yuan lending rates jump to records in Hong Kong
- Oil Extends Losses From 12-Year Low as Stockpiles Seen Expanding: Inventories probably rose 2m barrels last week
- Petronas Predicts More Tough Years as $30 Oil Seen on Oversupply
- Several Dead After Blast in Istanbul’s Old City Tourist District: Police investigating whether blast caused by suicide bomber
- China’s Richest Man Buys ‘Godzilla’ Maker for $3.5b: Dalian Wanda buys Legendary Entertainment
- McDonald’s Faces Antitrust Attack as Unions Complain to EU: Coalition of consumers, unions say firm abuses its dominance
- Senate Democrats Pressure White House for More Iran Sanctions: House expected to vote Wednesday on a separate sanctions bill
- U.S., Major Automakers Set to Announce Safety Accord, Reuters Says: Seeks to improve vehicle cyber security, use of early-warning data to detect potential defects
- Icahn Says He Doesn’t Own Any Shares in Time Warner, CNBC Reports: New York Post reported Sunday Icahn was thought to be buying up shares
- AIG Investors Want Change, Bernstein Says Following Survey: Strategy has very little support among investors that may own as much as a third of shares
- FTC Said Uninterested in Settling With Staples on Merger, NYP Says: Offer to sell corporate contracts isn’t much given they are one-year contracts
- Starbucks Plans to Add 500 More China Stores in Fiscal 2016: Aims for >3,400 stores in China by 2019
- GE Said to Get Bids From Midea, Haier for Appliances Unit: Chinese companies offer more than $3b for business
- Delta Passes United to Become No. 2 in U.S. After American: Merger with Continental has hurt United’s focus, analyst says
- Apollo Global Said in Talks to Buy Apollo Education, DJ Says: Could pay $1b for Apollo Education
Bulletin Headline Summary by RanSquawk and Bloomberg:
- Commodities have been at the centre of attention yet again today, with WTI and Brent breaking below USD 31.00/bbl overnight and printing 11 and 12 year lows respectively
- CAD weakens further as both WTI and Brent target USD 30.00, while USD/JPY has found some stability in the mid 117.00's
- Today's highlights include US JOLTS job openings and IBD/TIPP economic optimism and comments from Fed's Lacker, BoE's Carney and ECB's Praet and Weidmann
- April 2011.
China stepped up its defense of the yuan, buying the currency in Hong Kong, pushing the cost to borrow yuan overnight in the city’s interbank market to 66.82%, more than five times the previous high on Monday
- “A 66% rate is murderous for others being swept up in this who are not speculating,” Rabobank strategist Michael Every said; the surge in Hibor reflects “further PBOC efforts to stamp out speculation”
- Betting against the yuan will fail and calls for a large depreciation are “ridiculous” as policy makers are determined to ensure the currency’s stability, a Chinese senior government official said
- Merkel moved swiftly to tighten asylum rules in response to public outrage over New Year’s Eve sexual assaults as the German leader warned that failing to gain control of the region’s refugee crisis is putting Europe at risk
- Swedish police, responding to accusations of a cover-up, said on Monday that they were investigating why the public had not been informed about sexual assaults by men reported to be migrants at a festival in Stockholm last summer: NYT
- Third Avenue Management, which took the rare step of freezing redemptions in a distressed debt mutual fund last month, saw investors also pull money from its equity funds, contributing to a 21% decline in the firm’s assets last quarter
- Obama is coming under pressure from his own party to advance new penalties to punish Iran for its recent ballistic missile tests even as a landmark nuclear deal, which would loosen international sanctions, is on the verge of being implemented
- A suicide bomb in the heart of Istanbul’s main tourist district on Tuesday morning left 10 people dead and injured another 15
- Sovereign bond yields higher. Asian stocks fall, European stocks higher, equity-index futures higher. Crude oil steady, copper and gold fall
US Event Calendar:
- 6am: NFIB Small Business Optimism, Dec., est. 95.0 (prior 94.8)
- 8:55am: Redbook weekly sales
- 10am: JOLTS Job Openings, Nov., est. 5.450m (prior 5.383m)
- 10am: IBD/TIPP Economic Optimism, Jan., est. 47.5 (prior 47.2)
- 11:30am: U.S. to sell $45b 4W bills
- 1pm: U.S. to sell $24b 3Y notes
- 3:15pm: Fed’s Lacker speaks in Columbia, S.C.
- 4:30pm: API weekly oil inventories
- 5:30am: Fed’s Fischer speaks in Paris
DB's Jim Reid completes the overnight recap
This morning at the midday break we’ve seen a bit of a rebound for the Shanghai Comp (+0.48%), CSI 300 (+1.13%) and Shenzhen (+0.49%), albeit not without a decent amount of volatility as the currency continues to generate plenty of headlines. While the CNY fix was kept unchanged for the third consecutive session, more PBoC buying of the offshore CNH saw it at one stage rally as much as +0.6% from the day’s lows and achieve parity with the onshore CNY. It’s off the intraday high as we type but the intervening has seen liquidity drained with the Hong Kong overnight interbank rate (CNH Hibor) climbing a huge 53 percentage points to nearly 67%. That’s after we highlighted it surging to over 13% yesterday. While the government will claim that the interventions are intended to crack down on speculators and create some stability, concerns that a bigger devaluation may be around the corner have not necessarily dissipated.
Meanwhile in the rest of Asia this morning, having been closed yesterday, markets in Japan are playing catch up this morning with the Nikkei (-2.59%) falling sharply. Elsewhere the Hang Seng is +0.10% but well off the early highs while the Kospi (-0.07%) and ASX (-0.13%) have fallen slightly. Credit markets are largely unchanged along with US equity futures.
Yesterday saw a late rally on Wall Street in the last hour of trading bringing to an end three consecutive days of heavy losses for the S&P 500 after the index crept into positive territory (+0.09%) by the closing bell. There was no shortage of volatility however after markets initially opened with a positive tone, shrugging off those steep falls in China, only to then fall as low -1.1% intraday before that late rally as attention quickly turned to more huge falls in the Oil complex. WTI finished -5.28% lower by the end of play, or nearly $2 lower while Brent ended the session down -5.96% with both close to creeping below $31 following further moves lower this morning. WTI in particular closed at the lowest since 5th December 2003 yesterday although there appeared to be little new news to spark the latest leg lower, with the focus still on the overriding supply and demand story as well as the turmoil in China. It was enough to see losses of 6-7% for shares in Chesapeake, Anadarko and Marathon. Staying on the energy theme, yesterday also saw US coal miner Arch Coal file for creditor protection with the WSJ suggesting that over a quarter of US coal production is now in bankruptcy. Notably, the company will now begin the process of restructuring some $4.5bn of debt, including five outstanding USD bonds.
With earnings season around the corner, the latest batch of quarterly reports in the energy sector will be a big theme once again this quarter. Speaking of which, yesterday saw Alcoa unofficially kick off the season after the closing the bell. Despite a miss at the top line, earnings beat consensus (4c vs. 2c expected) which helped in sending the shares up a couple of percent in extended trading although it’s worth highlighting that previous market forecasts for the quarter were as much as 14c at the beginning of October, so it shows how far expectations have fallen in the last few months.
Closer to home, a late stumble saw European equity markets close broadly lower yesterday. The Stoxx 600 continued its torrid start to the year by closing -0.33% and has now fallen on five of the six trading days this year so far. Across rates markets, Spanish bonds were the notable underperformers, finishing some +9bps wider (Bunds +3bps, Treasuries +6bps) post the news of the formation of the government in Catalonia. In a note yesterday, DB’s Marco Stringa highlighted that he expects the new Catalan government to carry on with the unilateral independence pledge with a 15-20 month timeframe, with the last-minute formation of a pro-independence government increasing the pressure to form a government at the national level. The issue remains however of there being no straightforward solution for the unprecedented post-electoral fragmentation in Spain with the belief that even if a government is formed it will be short-lived and with a limited mandate. Marco also believes that rationally, a unilateral declaration of independence is in the interest of neither Catalonia nor Spain. Catalonia would likely by cut out of the EU while the economic impact on the Spanish economy would likely be large. There is, however, a risk that the election leaves a deeply divided Catalonia and a deep division between Catalonia and the Central Government, so a negative outcome cannot be excluded.
Elsewhere yesterday, comments from Atlanta Fed President Lockhart suggested that in his mind there was unlikely to be enough new data to justify a rate hike in the first quarter of this year. With FOMC meetings scheduled for January and March, the market is currently pricing in a 39% chance of a hike in that time. When questioned on the current turmoil in financial markets, Lockhart also went on to say that ‘if the volatility continues for several weeks, I may have to revise my view that I don’t know see a connection between financial markets abroad and the real economy’.
Wrapping up yesterday and what was a fairly quiet session for data. In the US the December labour market conditions edged up 0.2pts to 2.9 (vs. 0.4 expected) from an upwardly revised November print. Prior to this in Europe the only data of note was the latest Euro area investor confidence reading for this month which tumbled 6.1pts to 9.6 (vs. 11.4 expected) – the lowest print since this time last year.
Looking at today’s calendar, it’s a fairly quiet start to proceedings in Europe this morning with the main releases of note out of the UK where we’ll get the November industrial and manufacturing production reports. Over in France we’ll get the December business sentiment reading. This afternoon in the US the main release of note is the JOLTS job opening report for November where the quits and hiring rates are set to be closely watched. As well as this we will receive the January IBD/TIPP economic optimism print and December NFIB small business optimism reading. Today’s Fedspeak is set to come from Lacker who is due to speak on the US economic outlook at 8.15pm GMT. US President Obama’s State of Union Address, due shortly after lunchtime, will also be worth keeping an eye on. There’s little to report on the corporate earnings front before the banks at the end of the week.