Oil Slides Dragging Global Stocks, US Futures Lower, After Saudi Aramco Supply Comments

After the biggest two-day surge in oil in seven years, early in the overnight session both Brent and WTI continued their run for a third day, entering a bull market, 20% up from recent lows hit just last week (yet still 15% down on the year) when Saudi Arabia spoiled the momentum party after  the world’s biggest crude exporter said it’s keeping up investments in energy projects while diesel consumption in China dropped for a fourth consecutive month, signaling an industrial slowdown.

WTI reversed course and futures dropped as much as 4.1% in New York when Saudi Aramco Chairman Khalid Al-Falih announced his company hasn’t reduced its investment capacity amid lower crude prices, suggesting that oil will remain oversupplied for the foreseeable future. As a result, West Texas Intermediate for March delivery dropped as much as $1.33 to $30.86 a barrel on the NYMEX and was at $31.14 at pixel time after rising as high as $32.74 earlier. “The Saudi news surely would give a little bit of a worry that production would remain strong,” Daniel Ang, an investment analyst at Phillip Futures, said by phone from Singapore. “The main reason for oil losing steam still comes from the fact that oil markets are currently in oversupply.”

Khalid al-Falih, the chairman of Saudi state oil giant Aramco, addresses the 10th Global Competitiveness Forum on Monday. He said that a moderate oil price would be reached before long. Photo: Agence France-Presse/Getty Images

Elsewhere, diesel use in China dropped 5.6% in December compared with a year earlier and gasoline consumption grew at the slowest pace in more than two years, confirming it is not just growing supply but slowing demand - something the DOE confirmed last week - that is the culprit for record oil stockpiles. “The China demand figures is a stark reminder that consumption growth may not be stellar in 2016,” Bjarne Schieldrop, Oslo-based chief commodities analyst at SEB AB, said by phone. “Prices needs to stay weak for some time at least in order to keep excess production out and help rebalance the market later.”

Since algos continue to track every risk tick-for-tick with oil, as seen by the Bloomberg chart below showing the near record correlation between equities and oil, global stocks and US equity index futures initially rose only to slide following the Saudi Aramco comments, as stocks and the currencies of exporters were dragged down, while havens, including gold and the Japanese yen, rallied.

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“The correlation between oil prices and equities has turned positive,” former Goldmanite Erik Nielsen, chief global economist at UniCredit Bank AG, wrote in a report to clients on Sunday. It’s “wrong, and therefore temporary,” he wrote. “When oil prices drop, it reduces the transfer of income and wealth from oil-consuming countries, like Europe, to oil-producing regions, like the Middle East and Russia. Since the ‘winners’ in Europe have lower savings ratios than the ‘losers’ this is all good for growth.”

For now, of course, it is Nielsen who is wrong as the latest snapshot of global risk confirms:

  • S&P 500 futures down 0.3% to 1893
  • Stoxx 600 down 0.1% to 338
  • MSCI Asia Pacific up 1.2% to 120
  • US 10-yr yield down 2bps to 2.03%
  • Dollar Index down 0.15% to 99.42
  • WTI Crude futures down 2.1% to $31.50
  • Brent Futures down 1.6% to $31.66
  • Gold spot up 0.5% to $1,104
  • Silver spot up 0.9% to $14.16

Flipping quickly through regional markets, we start in Asia where equity markets traded higher in a continuation of the gains seen late last week amid prospects of central bank easing and a rebound in the energy complex . The ASX 200 (+1.8%) and Hang Seng (+1.4%) were led higher after crude posted its largest 2-day gain in 7yrs to climb back above USD 32/bbl. Shanghai Comp (+0.6%) was further bolstered by reports that the PBoC are planning as much as CNY 800bIn of mid-term liquidity support, while the Nikkei 225 (+0.9%) surpassed the 17000 level after shrugging off weak Japanese trade figures, underpinned by a weaker JPY. 10yr JGBs traded higher despite the firm risk on tone in the region, supported by hopes of further central bank easing while the BoJ were also in the market for 5yr-10yr government debt.

Elsewhere in Japan, BoJ Governor Kuroda said Japan's underlying price trend currently looks solid and reiterated that the BoJ will not hesitate on further easing if needed to reach its price target, but could not comment on whether BoJ will ease this week or not.

Top Asian News

  • Mirae Asset Buy $2 Billion Stake in Daewoo Securities: Mirae Asset agreed to buy a 43% stake in Daewoo Securities for 2.39t won ($2b), will create South Korea’s largest brokerage by assets
  • PBOC’s Year of Monkey Challenge Opens With Calming Money Markets: 7-day repos done at 4.5% last week, highest since June
  • Hong Kong Scores Record in Survey of Priciest Home Markets: Sydney ranked second priciest, followed by Vancouver
  • J.C. Flowers to Buy Chi-X Exchange Business in Australia, Japan: Head of Japan unit aiming for 5% to 10% market share
  • INCJ Fund Says Sharp Needs Just $2.5 Billion to Revive Growth: Fund CEO says no agreement has been reached on rescue

In Europe equities have been choppy this morning, despite initially following Asia's lead and opening in positive territory (EuroStoxx -0.10%). Equity indices are mixed as North American participants come to their desks, as the risk tone for markets is somewhat uncertain.  Total SA and BP Plc lost more than 1 percent on Monday, while Rio Tinto Group also dropped 1 percent after oil weighed in early trading after Aramco's comments.

Banca Monte dei Paschi di Siena SpA advanced for a third day, taking its surge in the period to a record 50 percent. Greece’s ASE Index climbed 1.5 percent after Standard & Poor’s upgraded the country to B- from CCC+, with a stable outlook.

Bunds have failed to benefit from lingering uncertainty in markets, trading in only very mild positive territory. Prices have been weighed upon by this week's upcoming supply, with around EUR 11 bIn (equiv. to 77K Bund futures) expected this week.

Top European News

  • VW Given Deadline to Come Clean by Second-Biggest Shareholder: Given three months by the prime minister of Lower Saxony, its 2nd-biggest shareholder, to provide a full account of the roots of the diesel-emissions scandal
  • Rabobank Said to Hold Talks for $4.9b Leasing Unit Sale: Is in preliminary talks with banks, institutional investors and private-equity firms that may bid for its leasing unit, De Lage Landen, in a sale that may fetch as much as EU4.5b
  • Russian Economy Shrinks Most Since 2009 as Oil Prices Plunge: GDP drops 3.7% in 2015 after growth of 0.6 percent in 2014, less than 3.8% fall seen in survey
  • Airbus Jets, French Cars on Shopping List as Iran’s Rouhani visits Europe
  • Portuguese Consensus Candidate Sousa Wins Presidential Election: Marcelo Rebelo de Sousa will become president after winning more than 50% of 1st-round vote Sunday, avoiding runoff
  • Kingfisher Shares Drop on Cost to Implement Strategy Revamp: 5-year plan to boost profit will come at a cost to short- term earnings
  • Google Agrees to Pay $185m in U.K. Tax Settlement: Google will adopt a new approach for U.K. taxes, and the settlement covers taxes going back to 2005
  • Timid Inflation Pickup First Clue for Draghi Pondering Stimulus: Inflation picked up to 0.4% in Jan. from 0.2% the previous month, according to a Bloomberg Survey before data due Friday
  • Anglo Platinum Sees $740 Million Loss on Mine Write-Offs: To report a bigger-than-expected loss after reported impairments and write-offs amounting to 14b rand

In FX, the yen halted a two-day decline after Bank of Japan Governor Haruhiko Kuroda showed little appetite for an immediate expansion of stimulus as the central bank prepares to set policy this week.

Japan’s currency has gained versus all its 16 major counterparts since the start of the year as a China-led stock selloff and a tumble in oil prices spurred demand for haven assets. Hedge funds and other large speculators raised net bullish yen positions to the highest in almost four years last week. The BOJ is scheduled to meet Jan. 28-29 and announce its monetary-policy decision on Jan. 29.

Kuroda said in an interview on Jan. 22 in Davos, Switzerland, that “we don’t think the current market situation has been affecting corporate behavior unduly.”

The Canadian dollar and Mexico’s peso declined with the ruble as currencies of commodity producers fell with crude. South Korea’s won strengthened 0.5 percent before data forecast to show South Korea’s economic growth quickened. 

In commodities, West Texas Intermediate dropped as much as 4.1 percent. Saudi Arabian Oil Co. is maintaining investment in oil and natural gas projects as it studies options to sell shares in its parent company and refining and chemical operations, Chairman Khalid Al-Falih said Monday. The state-run producer, known as Saudi Aramco, can sustain low oil prices for “a long, long time,” he told reporters in Riyadh.

Aramco, which supplies all of Saudi Arabia’s crude, pumped 10.25 million barrels a day in December, adding to a global supply glut as the Organization of Petroleum Exporting Countries effectively abandoned production limits to defend market share.

Gold advanced as investors weighed the prospects of the metal as a haven. Bullion for immediate delivery rose 0.5 percent to $1,103.78 an ounce, according to Bloomberg generic pricing. The metal climbed 0.8 percent last week as turmoil in global stocks renewed interest in the metal as a store of value. Copper in London added 0.2 percent to $4,451 a metric ton, while nickel dropped 0.6 percent to $8,650 a ton.

On the US calendar today the only event today is the Dallas Fed manufacturing activity update for January, which is estimated at -14, up from a prior -20.1.

Global Top News:

  • Johnson Controls Said in Talks to Merge With Tyco International: Johnson is continuing with its plan to spin off its automotive-seating operations, said people familiar; terms weren’t immediately available
  • Twitter Loses Product, Engineering Chiefs in Major Shake-Up: Losing four members of its executive leadership team, including its product and engineering chiefs; will this week add 2 new board members to help guide it through a turnaround, according to a person familiar with the matter
  • New York Gets Back on Track After Storm, Washington Slower: Stock, bond, and commodities markets in New York are planning to operate on regular schedules Monday, spokeswomen said; Federal offices in Washington will be closed on Monday, the Office of Personnel Management said
  • German Business Sentiment Falls as Market Woes Cloud Outlook: Ifo institute’s business climate index dropped to 107.3 from a revised 108.6 in Dec.
  • AT&T Sees $2.2b Pretax Gain on Pension, Benefit Changes: Gains were partially reduced by returns on assets that fell short of AT&T’s estimates
  • Apple’s Growth Seen Slowing as IPhone Demand Wanes: Earnings due tomorrow; Apple Executive Leading Electric-Car Project Said to Depart
  • Federal Realty Investment Trust to Replace Broadcom in S&P 500
  • VMware Said to Cut About 900 Jobs in Restructuring: The job reductions may be announced on Tuesday when the company reports quarterly earnings or a day earlier
  • U.S. IPO Market on Track for Slowest Month Since Recession: Zero listings so far this month as volatility shakes stocks
  • ‘Revenant’ Climbs to Box-Office Lead After Oscar Nominations: Collected $16m in U.S. and Canadian theaters, Rentrak said
  • Goldman’s Cohn Says Sell Treasuries; Morgan Stanley Is Bullish: Goldman Sachs President Gary Cohn says Treasury yields will probably rise, just as Morgan Stanley predicts the opposite
  • Puerto Rico Electric Maintains Talks After Debt Plan Expires: Puerto Rico’s main electricity provider and its bondholders are continuing negotiations even after a plan to restructure nearly $9b of debt terminated Friday
  • SandRidge Said to Explore Debt Restructuring Options: Reuters: Has been in talks with investment banks, law firms about hiring restructuring advisers
  • Greenlight Capital to Get SunEdison Board Seat, WSJ Reports: Greenlight likely to pick director from outside firm, WSJ said
  • Yahoo Said to Speed Up Stock Option Vesting: Business Insider: Co. to accelerate stock option grants to begin vesting after 1 mo. rather than 1 yr in attempt to stem departures
  • Samsung Bioepis Delays Nasdaq IPO, The Bell Reported: Co., which had aimed to list shrs on Nasdaq in 1H, “indefinitely” delays IPO plan, The Bell reported in a story available to subscribers on Jan. 22
  • Ford to Exit All Operations in Japan, Indonesia This Yr: Reuters
  • Hilton Says New Tru Hotels May Become Company’s Biggest Brand

Bulletin Headline Summary from RanSquawk and Bloomberg

  • Oil has sold off in European trade, following comments from Saudi Aramco's Chairman that they will continue to sustain investments in the wake of lower oil prices
  • European equities are mixed, with last week's Draghi-effect no longer at the forefront. FX is taking a breather after a tumultuous start to the year
  • Looking ahead at the calendar today, highlights include speeches from ECB's Lautenschlager and ECB's Draghi as well as earnings from McDonalds, Kimberly-Clark and Halliburton
  • Treasuries rally overnight led by long-end as world equity markets mixed; week offers Fed rate decision on Wednesday and $90b UST note auctions beginning tomorrow with $26b 2Y.
  • Federal Reserve Chair Yellen and her colleagues have so far found themselves wrong-footed by the stronger dollar after they raised interest rates last month for the first time since 2006
  • ECB’s Draghi is about to receive his first major clue of 2016 on Friday as to whether the euro area needs more stimulus with inflation still only a fraction of the goal of just under 2% -- a target the ECB president hasn’t met in nearly three years
  • BOJ Governor Kuroda spoke at Davos ahead of what could be an agonizing decision about whether to add to the central bank’s record asset-purchase program
  • The PBOC is adding administrative orders to its toolbox to calm money markets amid record capital outflows and a surge in cash demand, ordering some banks to cancel repurchase agreements at interest rates it deemed excessive
  • German business confidence fell for a second month in January in a sign that companies in Europe’s largest economy are increasingly worried about slowing global growth
  • Russia’s economy, facing renewed pressure from plunges in energy prices and the ruble, contracted the most since 2009 last year on oil’s decline and sanctions over the conflict in Ukraine that curbed access to international financing
  • In today’s bond market, there’s plenty of hand-wringing about liquidity, or rather, the lack of it. But it’s become so pervasive that even in the market for U.S. Treasuries buyers are gravitating to the newest, easiest-to-sell debt
  • $28.825b IG corporates priced last week along with $1.3b HY. BofAML Corporate Master Index OAS 2bp lower Friday at +196 to end week 7bp wider; 2015 range 180/129. High Yield Master II OAS tightened 26bp to +787 to end week 2bp tighter; 2015 range 733/438
  • Sovereign 10Y bond yields mostly steady except for Greece will widen 19bp. Asian stocsk rally, European stocks mixed; U.S. equity-index futures drop. Crude oil drops, copper and gold higher

US Event Calendar

  • 9:30am: Dallas Fed Mfg Activity, Jan., est. -14 (prior -20.1)

Central Banks

  • 1:00pm: ECB’s Draghi speaks in Frankfurt

Jim Reid completes the overnight wrap

The market's allergic reaction so far in 2016 has eased for now and we're actually only 2% off a bull market in Oil (based on the March WTI contract) after an 18% rally since the lows near Wednesday's close. That included a 9% surge on Friday alone and while the prospects for further central bank stimulus and a general bounce off the recent record lows are playing their part, some comments out of Saudi Arabia suggesting that $30 oil is irrational as well as the prospect of those extreme winter conditions in the US over the weekend were also to partly to blame.

In fact, as much as last week felt horrible for large parts of it it's worth pointing out that the S&P500, DAX, CAC, FTSE and Oil were up +1.41%, +2.30%, +3.01%, +1.65% and +5.92% respectively on the week. Elsewhere crossover was 15bps tighter and CDX IG 6bps tighter. US HY energy spreads finished the week 20bps wider but that included a 101bp move wider on Wednesday alone, with spreads actually 80bps tighter in the last two days of the week. Although we continue to think the global financial system is fundamentally broken and the global economy is in a secular stagnation funk we do think that the cycle has a few quarters of life left in it yet even if recent events have made us much more nervous that the next downturn could come a year earlier than we've been thinking for some time. When inflation is this low central banks can still play a part keeping the plates spinning and when oil is this low the consumer can offset the severe structural issues for a while.

Indeed on the former, Draghi's assertion on Thursday that more was likely to be done in March proved that Central Banks can still have influence even though many in the market have given up on them. It's another big week on this front with the FOMC (Wednesday) and the BoJ meeting on Friday to anticipate. It feels unlikely they will be negative events for the market even if there is no actual hard signs of a Fed relent or fresh stimulus this month from Kuroda. As a minimum we should hear hints of more dovish soundbites relative to their last meetings.

Following on from a strong performance across most Middle Eastern bourses over the weekend on the back of that rally in Oil, the momentum has continued into the Asia session this morning where there have been broad based gains across most of the region. The Nikkei (+0.59%), Hang Seng (+1.37%), Shanghai Comp (+0.59%), Kospi (+0.80%) and ASX (+1.84%) are all currently up as we go to print, with oil markets generally up another 1% this morning. The iTraxx Asia is a couple of basis points tighter while US equity index futures are flat.

The early data this week has come out of Japan where the notable takeaway has been a slightly softer than expected export number for December (-8% yoy vs. -7% expected). Imports were also less than expected last month (-18% yoy vs. -16.4% expected) which has helped to swing the trade balance back to a surplus. The Yen has been trading between gains and losses post the data although some of the focus this morning has been on BoJ Governor Kuroda’s comments from the weekend in Davos where the Governor has appeared to keep his cards close to his chest, saying that ‘at this stage, we don’t think the current market situation has been affecting corporate behavior unduly’, but that ‘the market is the market, and markets could affect the real economy – so we carefully watch’.
Quickly recapping the news and price action from Friday. The direction across the bulk of the markets was pretty much one-way and owed to that biggest daily gain for Oil since August last year. Equities closed strongly, the S&P 500 (+2.03%), Dow (+1.33%), Stoxx 600 (+3.00%), DAX (+1.99%) finishing with strong gains. US credit was a notable outperformer (CDX IG 4.5bps tighter) relative to Europe (Main 1bp tighter) most probably reflecting the exposure to energy, while US Treasury yields crept higher for the second consecutive day, the benchmark 10y yield up a couple of basis points to 2.053%.

As well as the obvious focus on Central Banks this week, as you’ll see in the week ahead earnings season is set to kick up a gear in the US with a number of the bellwether tech names set to report. The only notable report from Friday was a mixed set of quarterly numbers from General Electric, with a beat in earnings but falling well short of revenue expectations after an unsurprisingly weak quarter for the oil and gas segment. All told with 73 S&P 500 companies having reported, we’ve seen a healthy 78% beat earnings expectations but just 48% beat consensus estimates at the top line. Regular readers will recognize that this follows a recent trend. Q1, Q2 and Q3 2015 earnings beats amounted to 73%, 75% and 74% respectively based on Bloomberg data, while sales beats failed to break 50% during any of the quarters (48%, 49% and 44% respectively). So its early days but a similar pattern is already emerging. A lot of the big Oil names are still to report and will likely be the main focus for analysts. Speaking of which, Friday saw Moody’s place 120 energy issuers credit ratings on review for downgrade, a large proportion of which are based in North America in what was the rating agency’s largest warning sign of potential downgrades since the financial crisis.

In terms of the macro, the US economic data was fairly unexciting on the whole on Friday. Existing home sales were up a much better than expected +14.7% mom in December (vs. +9.2% expected). The Conference Board’s leading index for last month declined -0.2% mom as expected, although the flash January manufacturing PMI rose unexpectedly by 1.5pts to 52.7 (vs. 51.0 expected).
Meanwhile, the latest set of European flash PMI’s for January were a little more disappointing than the market had hoped. The Euro area composite declined 0.8pts this month to 53.5 and below expectations of 54.1. Both the manufacturing (-0.9pts to 52.3; 53.0 expected) and services (-0.6pts to 53.6; 54.2 expected) components fell, while regionally the decline was led by Germany where the composite was down 1pt to 54.5 (vs. 55.1 expected). France’s composite actually rose 0.4pts to 50.5 (vs. 50.3 expected) while our European economics expect that the weakness in the Euro area services PMI was also likely driven by the periphery, although we have to wait until the final PMI’s to assess this fully. At face value the data still points to quite strong growth of +0.4% qoq for the Euro area, although it’s still worth highlighting the disappointment of hard data relative to surveys in Q4 so caution is warranted.

Elsewhere, in the UK we saw December retail sales come in softer than expected last month at -0.9% mom (vs. -0.3% expected) excluding autos fuel sales and -1.0% mom (vs. -0.3% expected) including. Staying with the UK, on Friday our UK Chief Economist George Buckley highlighted that he has now pushed back his call for a BoE rate hike from May to November this year. George notes that the previous forecast was becoming more difficult to justify in light of inflation expected to rise more slowly than previously thought, wage growth disappointing, the economy showing signs of slowing and global growth/financial markets looking fragile.