The Selling Is Back: S&P Futures Tumble Below 1,900; Sterling Crashes, Gold Soars

While the prevailing dour (or perhaps sour) overnight mood was a continuation of the weak oil theme which started yesterday after Iran said the production freeze proposed by Saudi and Russia as "ridiculous", and Saudi oil minister Al-Naimi said that Saudi won't cut supply and that high-cost producers need to either "lower costs, borrow cash or liquidate” (ideally the latter), risk sentiment was further dented when BOJ Governor Kuroda says he won’t target FX rates or stocks, which is clearly nonsense, and further spooked Japanese asset prices (Nikkei -0.85), while sending JGB yields to fresh record lows as follows: 10-year at -0.055%, 20-year at 0.600%, 30-year at 0.915% and 40-year at 1.035%. 

As Bloomberg adds, with the introduction of negative-rate policy, investors particularly banks are investing excess cash in govt bonds yielding more than zero, says Hideo Suzuki, chief manager, forex and financial products trading at Mitsubishi UFJ Trust & Banking, in an interview; says there’s a sense among investors that unless they buy positive-yielding debt now, they won’t be able to purchase them. Well there are always positive yielding US Treasurys, though maybe not for much longer.

Going back to oil, it seems that finally the headline chasing algos have run out of steam: "the Saudi comments stating the obvious that the output deal was really not a deal” is weighing on prices, says Global Risk Management oil risk manager Michael Poulsen, with API also pulling prices lower. It’s "maybe an overreaction to things that were clear days ago, so might be some bargain hunters cashing in their chips."

"Once again we are seeing lower oil prices halting the emerging confidence in global markets," added Ole Hansen, head of commodity strategy at Saxo Bank A/S. "Lower oil prices continue to raise concerns about EM growth, a credit event among weak oil producers and selling from sovereign wealth funds."

So with the marketwide short squeeze now officially over, global selling of stocks has resumed, dragging down everything from banks to commodity producers as well as emerging markets, while in the US S&P futures have tumbled back down to, or rather just below, the psychological support level of 1900 (and below DeMark's breach level) driven by another day of tumbling USDJPY, but also by the latest surge higher in gold - something which according to Goldman which has by now been stopped out of its gold "short" means systemic risk is once again rising.

 

Indeed, the bullish euphoria that had gripped markets as recently as Monday is all gone: "It will take some time before market sentiment does turn,” Kerry Craig, global market strategist at JPMorgan Asset Management, told Bloomberg TV in Melbourne. “It’s still very pessimistic. Most investors are very risk averse. You need catalysts or triggers such as an oil price stabilization, clarity about what the Fed is actually going to do and what we see happening with the Chinese currency and economic data."

How much changes in just 48 hours based on nothing but HFT algo stop hunting price action and a confirmation of what everyone already knew: that there will be no oil production cuts.

While the rest of the risk moves have seen the now all too familiar correlations (Treasuries in Europe and US surging as stocks tumble), another notable plunge has taken place in cable which continues to sell on Brexit fears and overnight dropped below 1.3900. Effectively Boris Johnson has had a more favorable impact on the British currency than a few hundred billion in BOE QE - the local stock market should be cheering on Brexit.

 

Oh, we almost forgot the key event of the night: Trump's juggernaut in Nevada virtually assures him the GOP presidential nomination barring some calamity. The market is desperately trying to explain to itself if this is bullish or bearish for risk.

In summary: European shares dropped the most in two weeks and U.S. stock-index futures also sank. Crude fell through $31 a barrel in New York, after sliding last session, when Iran’s oil minister derided a plan forged by Saudi Arabia and Russia to lock production at January levels. The Russian ruble retreated with Malaysia’s ringgit and the pound weakened below $1.40 for the first time since 2009 on concern the U.K. may exit the European Union. The cost of insuring investment-grade corporate debt rose for the first time in three days, while Treasuries and the yen advanced.

Where markets stand now:

  • S&P 500 futures down 0.8% to 1900
  • Stoxx 600 down 2.2% to 320
  • FTSE 100 down 1.6% to 5867
  • DAX down 2.5% to 9182
  • German 10Yr yield down 4bps to 0.14%
  • Italian 10Yr yield down less than 1bp to 1.53%
  • MSCI Asia Pacific down 0.9% to 119
  • Nikkei 225 down 0.8% to 15916
  • Hang Seng down 1.1% to 19192
  • Shanghai Composite up 0.9% to 2929
  • US 10-yr yield down 3bps to 1.69%
  • Dollar Index up 0.22% to 97.7
  • WTI Crude futures down 3.1% to $30.89
  • Brent Futures down 2.2% to $32.55
  • Gold spot up 0.6% to $1,233
  • Silver spot down less than 0.1% to $15.29

Global Top News

  • Hong Kong Forecasts Slowing Economic Growth as Tourism Slumps: Economy may expand by 1% to 2% in 2016, slower than 2.4% gain last year
  • This Is Why Kyle Bass Is Wrong on China Collapse, Says CICC: China International Capital questions parallels between Japan in 1990, China now
  • Goldman’s Ex-Southeast Asia Chairman Leissner Leaves Firm: Tim Leissner helped build the investment bank’s Malaysia business
  • Asia Hedge Funds Top Rankings as Jiang Pounces in Panicky Market: Performance by Segantii, Sylebra, Greenwoods, Tybourne shows industry matured in Asia
  • Steven Cohen’s Point72 Said to Add Ai Yoshino as Trader in Asia: Yoshino most recently worked for Mitsubishi UFJ Securities as equity sales trader
  • Wanda to Announce ‘Major Deal’ This Week, Chairman Wang Says: Chinese conglomerate has been on an acquisition spree this year
  • Fortescue CFO Sees $1 Billion Firepower to Further Reduce Debt: Cutting debt remains company’s strategic focus, CFO Stephen Pearce says
  • Chinese Coal Miners Said to Lobby Government for Price Floor: A request to Premier Li Keqiang was made in January in Shanxi

Looking at regional markets, Asian equities traded lower following the negative close on Wall St. driven by the decline in oil prices after the Saudi Oil Minister dismissed a production cut, while the latest API figures showed a significant build of 7.1mIn bbls. ASX 200 (-2.16%) and Nikkei 225 (-0.85%) were pressured from the open with the latter back below 16000, while sentiment in Australia was further dampened by several poor earnings results from the likes of Fortescue, BHP and Wesfarmers. Chinese markets also conformed to the negative tone, with casino losses leading the declines in Hong Kong, while the Shanghai Comp (+0.88%) saw relatively subdued price action amid a lack of any significant catalyst and the PBoC remaining relatively neutral on the CNY reference rate. 10yr JGBs traded higher (10yr yield reached record low of -0.04%) amid weakness in riskier assets while the BoJ also entered the market for JPY 1.26tr1 of government debt.

Asian Top News

  • Hong Kong Forecasts Slowing Economic Growth as Tourism Slumps: Economy may expand by 1% to 2% in 2016, slower than 2.4% gain last year
  • This Is Why Kyle Bass Is Wrong on China Collapse, Says CICC: China International Capital questions parallels between Japan in 1990, China now
  • Goldman’s Ex-Southeast Asia Chairman Leissner Leaves Firm: Tim Leissner helped build the investment bank’s Malaysia business
  • Asia Hedge Funds Top Rankings as Jiang Pounces in Panicky Market: Performance by Segantii, Sylebra, Greenwoods, Tybourne shows industry matured in Asia
  • Steven Cohen’s Point72 Said to Add Ai Yoshino as Trader in Asia: Yoshino most recently worked for Mitsubishi UFJ Securities as equity sales trader
  • Wanda to Announce ‘Major Deal’ This Week, Chairman Wang Says: Chinese conglomerate has been on an acquisition spree this year
  • Fortescue CFO Sees $1 Billion Firepower to Further Reduce Debt: Cutting debt remains company’s strategic focus, CFO Stephen Pearce says
  • Chinese Coal Miners Said to Lobby Government for Price Floor: A request to Premier Li Keqiang was made in January in Shanxi

In Europe, equities can be seen suffering once again this morning, with Euro Stoxx drifting lower throughout the morning (-1.9%), taking the impetus from a lacklustre Asian session and with the usual suspects of energy, materials and financial sectors weighing on the indices. Given the aforementioned underperformance, high profile material names BHP Billiton (-7.2%), Glencore (-5.8%) and Anglo American (-6.1%) are all among the worst performers in Europe, while Standard Chartered (-5.2%) have also seen a continuation of weakness after yesterday's earnings.

European Top News

  • Draghi Has Two Weeks to Map ECB Plan That Won’t Let You Down: When ECB policy makers meet from March 9-10, they’ll consider whether negative interest rates and EU60b a month of debt purchases is enough to revive consumer prices
  • Bayer Names Werner Baumann to Succeed Marijn Dekkers as CEO: Named chief strategy and portfolio officer Werner Baumann to succeed CEO Marijn Dekkers after April shareholders meeting
  • Airbus Profit Gains 1.6% on A350 Ramp-Up, Break-Even on A380: 2015 Ebit before one-offs EU4.1b, est. EU4.38b; figures held back by higher development spending; cranks up production after order rush for new jets; says 2016 earnings set to be stable
  • Peugeot Promises New Profit Plan With Restructuring Complete: To resume paying a dividend, 1st since 2011, from this year’s earnings, 5% oper. margin was more than double 2018 target
  • Delta Lloyd Shares Surge After Rights Offer Cut to $715m: Bowed to investor pressure and cut the size of a rights offer to EU650m; said in Nov. aimed to raise as much as EU1b
  • Man Group Declines After Profits Fall on Performance Fees Drop: FY adj. pretax fell to $400m vs $481m y/y, est. $455m
  • How Low Could Pound Go in a ‘Brexit’? Economists See 1985 Levels: 29 of 34 economists see drop to $1.35 or below on leave vote; GBP already at seven-year low as EU campaign heats up

In FX, it has been a busy morning and certainly so if you are GBP trader with a brief respite in Cable through 1.4000 quickly followed up by heavy selling, talking the pair down below 1.3900, the lowest level since the 2009 crisis. The focus is already on the 2009 lows just under 1.3500. EUR/GBP has been pushed higher, and we are nearing the .7900 level here despite moderate losses in EUR/USD, which has traded below the previous session lows — to just under 1.0975. More bids seen to 1.0950. USD/JPY is lower, but cross/JPY likely to be seeing more of the flow — the spot rate holding off the Tuesday base as yet. GBP/JPY is through 156.00, EUR/JPY 123.00. The oil related currencies are all softer along with WTI and Brent, but no panic moves like we saw earlier in the year. Even, so USD/CAD is back through 1.3800.

Lower crude prices dragged on the currencies of oil exporters Russia and Malaysia. The ruble dropped 2.5 percent and the ringgit fell 0.6 percent.  The Bloomberg Dollar Spot Index added 0.2 percent. Japan’s yen climbed versus all of its major counterparts, strengthening 0.3 percent to 111.81 per dollar.

China’s yuan fell for a fourth day as the People’s Bank of China set its reference rate at the lowest level in almost three weeks. Figures from the nation’s foreign-exchange regulator released Tuesday afternoon showed banks net sold overseas currencies to their clients for a seventh straight month in January. The yuan weakened 0.13 percent to 6.5359 against dollar, according to China Foreign Exchange Trade System prices. The central bank cut the reference rate by 0.04 percent to 6.5302 following a 0.17 percent reduction on Tuesday.

In commodities, it remains all about oil, as WTI futures slid as much as 3.3 percent in New York, below $31 once again this time on the April contract. Saudi Arabia’s proposal to cap output at January levels puts “unrealistic demands” on Iran, Oil Minister Bijan Namdar Zanganeh said Tuesday, according to the ministry’s news agency Shana. Ali Al-Naimi, his counterpart from Saudi Arabia, said at a conference in Houston that high-cost producers should bear the burden of reducing the current surplus and reaffirmed the kingdom’s commitment to last week’s accord.

Crude is down 17 percent this year on speculation a global glut will persist amid the outlook for increased shipments from Iran and brimming U.S. supplies, which are at the highest level in more than eight decades. The nation’s stockpiles expanded by 7.1 million barrels last week, the industry-funded American Petroleum Institute was said to report Tuesday.

Copper led losses in industrial metals on concerns that rising stockpiles in China signal continued weak demand in the world’s biggest consumer. Inventories in warehouses tracked by the Shanghai Futures Exchange have more than doubled to a record since the end of August, bourse data show. Copper for delivery in three months slid 1 percent in London.

On the US calendar there will be some focus on the flash services (expected to nudge up 0.3pts to 53.5) and composite PMI’s for February, while January new home sales data is also due out. The latest Fedspeakers due up will be Lacker who is set to talk on monetary policy and growth, as well as Kaplan later this evening who is due to talk on current economic conditions and monetary policy.

Bulletin Headline Summary from Bloomberg and RanSquawk

  • European equities take the impetus from the weak Asia lead with the usual suspects (Financial, Material and Energy) leading the region lower.
  • GBP yet again underperforms amid the continuous concerns surrounding a potential Brexit with GBP/USD printing fresh 7-yr lows.
  • Looking ahead highlights include US services PMI, DoE crude inventories reports as well as comments from Fed's Lacker, Bullard, Kaplan and BoE's Cunliffe
  • Treasuries higher overnight as global equity markets and commodities, ex-precious metals, resume selloff; U.S. auctions continue today with $34b 5Y notes, WI yield 1.17%, compares with 1.496% awarded in January.
  • A British exit from the European Union would be so devastating for the pound that 29 out of 34 economists in a Bloomberg survey see it sinking to $1.35 or below within a week of a vote to leave -- levels last seen in 1985.
  • China scrapped limits on the amount of funds that foreign institutional investors can put into its interbank bond market, the latest step to lure capital from abroad as outflows weigh on the yuan
  • China International Capital Corp’s economists published a rebuttal of hedge-fund manager Bass’s assessment where he stated that China’s banking system may see losses of more than four times those suffered by U.S. lenders during the 2008 credit crisis
  • U.S. Treasury Secretary Jacob J. Lew downplayed expectations for an emergency response to global market turbulence when Group of 20 finance chiefs and central bankers meet this week in China
  • JPMorgan’s investment bank said revenue from sales and trading has tumbled about 20% this year, providing an early gauge of the pain inflicted on Wall Street’s biggest firms by the global market rout battering investors
  • Donald Trump’s dominating victory in the Nevada caucuses pushes him further out ahead of his nearest competitors for the Republican presidential nomination, giving his unorthodox candidacy a major boost heading into Super Tuesday contests next week
  • $11.15b IG corporates priced yesterday (YTD volume $255.4b) and $250m HY priced (YTD volume $11.375b)
  • Sovereign 10Y bond yields mostly steady; European, Asian markets drop; U.S. equity- index futures lower. Crude oil and copper fall, gold rises

US Event Calendar

  • 7:00am: MBA Mortgage Applications, Feb. 19 (prior 8.2%)
  • 8:00am: Fed’s Lacker speaks in Baltimore
  • 9:45am: Markit US Services PMI, Feb. P, est. 53.5 (prior 53.2); Markit US Composite PMI, Feb. P (prior 53.2)
  • 10:00am: New Home Sales, Jan., est. 520k (prior 544k)
  • 1:00pm: U.S. to sell $34b 5Y notes; New Home Sales m/m, Jan., est. -4.4% (prior 10.8%)
  • 1:15pm: Fed’s Kaplan speaks in Dallas
  • 7:00pm: Fed’s Bullard speaks in New York

 

DB's Jim Reid concludes the overnight wrap

Markets have been soft over the last 24 hours not helped by China's weaker Yuan fix yesterday and a 4.5% drop in oil. While the fix was little changed this morning (set 0.04% weaker) a further tumble for Oil overnight (now approaching $31/bbl) has kept risk assets firmly on the back foot in Asia this morning. The Nikkei (-1.36%), Hang Seng (-1.60%), ASX (-2.26%) and Shanghai Comp (-0.62%) in particular are all in the red, while credit indices are also a tad weaker. Not helping sentiment is the latest MNI consumer sentiment reading out of China, with the February reading declining 3.6pts to 111.3 and to a four-month low.

The latest twist in the Oil saga yesterday came about as headlines out of both Saudi Arabia and Iran hit the wires. The former’s Oil Minister, Ali al-Naimi, did initially say that freezing output at current levels is the beginning of a process and that high inventory levels will probably decline in due time if we can get all the major producers to agree to not add additional barrels. It was a follow up to this comment which appeared to spook the market however, with al-Naimi warning that ‘this is not the same as cutting production’ and that ‘that’s not going to happen’, while also suggesting that ‘there is less trust then normal’ between nations. Chatter from Iran’s Oil Minister Zanganeh didn’t help, saying that the Saudi-Russia freeze plan is ‘ridiculous’ and that the proposal puts ‘unrealistic demands’ on Iran. ConocoPhillips CEO seemingly summed up the confidence at a corporate level, saying that Oil companies ‘have to prepare for the worst case’ and that you ‘can’t count on a Saudi freeze working’.

Combined with the already dampened sentiment after the CNY fix, it was a broadly weaker day across equity markets yesterday. In Europe we saw the Stoxx 600 close -1.22%, DAX -1.64% and FTSE MIB -1.95%. A softish German IFO survey did little to help with the expectations component in particular down 3.5pts to 98.8 and the lowest since late 2012.

Across the pond the S&P 500 (-1.25%) finished near enough at its lows for the day with a rough session for financials following some bleak but perhaps unsurprising comments about difficult trading conditions so far this year from JP Morgan not helping. Credit markets appeared to largely ignore the intraday volatility in Oil with Main finishing half a basis point tighter and sub-fins also outperforming (5bps tighter). US credit did weaken slightly into the close with CDX IG finishing 2bps wider although a second consecutive high volume session in the primary market kept sentiment relatively upbeat.

Elsewhere, Treasury yields tracked the move lower with Oil with the closing level of 1.723% for the 10y (-3bps) masking what was a pretty big high-to-low swing after yields had crept up over 1.812% prior to the latest headlines. Gold (+1.51%) and the Yen (+0.73%) were the beneficiaries from the broader risk selloff, while Sterling was another sharp leg lower against both the Dollar (-0.90% to $1.402) and Euro (-0.82% to €1.273) and has in fact dipped below $1.40 during the Asia session this morning. Moves have also come following comments from the BoE’s Carney yesterday who said that the BoE has ‘considerable room’ should additional stimulus be required.

Away from the focus on Oil markets yesterday, the US data was something of a sideshow although the fall in consumer confidence did turn a few heads. The February print declined a fairly sharp 5.6pts to 92.2 (vs. 97.2 expected) which was the lowest since July last year with the expectations component down 6.4pts and to the lowest since February 2014. Elsewhere the Richmond Fed manufacturing index reading unexpectedly declined 6pts this month to -4 after the consensus had been for no change. Existing home sales were up in January by +0.4% mom (vs. -2.5% expected) while the S&P/Case-Shiller home price index was a smidgen behind market at +0.80% mom for December (vs. +0.85% expected).

Yesterday’s Fedspeak offered some interesting contrasting comments. Kansas City Fed President George argued that a potential March move ‘absolutely should be on the table’ and that ‘at this point I would not say that the data have suggested there has been a fundamental shift in the outlook’. Dallas Fed President Kaplan was a lot more dovish in his comments to the FT saying that ‘in order to reach our inflation objective we may need to be more patient than we previously might have thought’ and that ‘if that means we take an extended period of time where we stop and don’t move, that may also be necessary’. Speaking overnight meanwhile, Fed Vice-Chair Fischer probably sat somewhere in the middle of his colleague’s comments, saying that ‘if the recent financial market developments lead to a sustained tightening of financial conditions, they could signal a slowing in the global economy that could affect growth and inflation in the US’. At the same time however, Fischer also opined that ‘we have seen similar periods of volatility in recent years…that have left little visible imprint on the economy, and it is still early to judge the ramifications’.

Running over today’s calendar, this morning in Europe the only data of note is out of France where we’ll receive the latest consumer confidence print and the UK where CBI reported sales data is due. In the US this afternoon there will be some focus on the flash services (expected to nudge up 0.3pts to 53.5) and composite PMI’s for February, while January new home sales data is also due out. The latest Fedspeakers due up will be Lacker (at 1pm GMT) who is set to talk on monetary policy and growth, as well as Kaplan later this evening (at 6.15pm GMT) who is due to talk on current economic conditions and monetary policy. Away from this the EC’s Tusk and Juncker are due to speak in EU Parliament this afternoon on the outcome of the EU summit with Brexit expected to be a hot topic. The BoE’s Cunliffe is also due to speak tonight.