S&P Futures Tumble As Epic One-Day Rally Fizzles

On any other day, a 1.5% drop in the S&P futures would be cause for alarm; however after yesterday's historic 5% surge in US stocks it merely prompts a shrug, because even with ES sliding -36 points, it is roughly where it was trading at 3:35pm yesterday.

Whether because we went from a near record oversold market to overbought in one day, or just because traders concluded that yesterday's surge was nothing more than a bear market rally, the kind of which we saw on so many occasions during the depths of the financial crisis...

... nearly a third of yesterday's rally fizzling, wiped out in overnight trading, with S&P futures sliding for the past 6 hours and after an early spike which pushed the Emini briefly above 2480, the contract has since dropped as much as 60 points and is prompting renewed concerns about the sustainability of yesterday's bullish reversal.

That said, even with the previous session’s surge, it’s still a horrible month for American stocks, with the S&P 500 down almost 11%.

Meanwhile, even as futures dropped, world stocks bounced off a near two-year low on Thursday, lagging Wall Street's dramatic surge, though the first fall in Chinese industrial profits in three years and renewed Italian banking worries offered a sobering reminder of the problems weighing on the world economy.

“The relentless selling which prevailed leading up to Christmas has mercifully halted as U.S. stock markets recorded significant gains,” said Stephen Innes, trader at OANDA. According to Innes, the rally was partly due to a Mastercard Inc report that sales during the U.S. holiday shopping season rose the most in six years in 2018, helping allay concerns about the health of the U.S. economy. "The surge in online purchases over the holiday season should be a reminder for the markets never to underestimate the purchasing power of the U.S. consumer."

Stocks in Asia and Europe took their cue from the Wednesday rally and opened strongly, pushing the MSCI world equity index, which tracks shares in 47 countries, 0.4% higher. The index had already spiked 2.3% in the previous session, rising off a 22-month low hit on Christmas Eve.

However, the global rally fizzled in Europe where shares opened higher 0.5%, then erased most of the early gains and the Stoxx 600 was trading down -0.9% at last check, dragged lower by Italian stocks. Milan was hit by renewed concerns over the country’s banking sector after lender Banca Carige was denied a cash call by its largest shareholder. The news weighed on Italian government bonds too, curbing a month-long rally and pushing 10-year yields higher on the day.

Top European News

  • Italian Bonds Slip as Traders Prepare for Final Auctions of 2018
  • EU Won’t Allow France 2nd Deficit Overshoot: Oettinger to Funke
  • ECB Sees Ongoing Economic Growth With Increased Downside Risks
  • European Retail Shares Lead Gains With Tesco, Kering Rising
  • Euro Zone’s Northern Tip Ends Year on a Low as Confidence Sinks

Earlier, MSCI’s index of Asia-Pacific shares ex-Japan rose 0.6% and away from eight-week lows while Japan’s Nikkei managed to pull out of bear market territory, to closing 3.9% higher while Australian shares jumped 1.9 percent. But Chinese shares did not join the rebound, with mainland shares closing at session lows as well as Hong Kong down 0.4 percent.  The Shanghai Composite Index erased morning advance and closed at session lows as China Petroleum & Chemical Corp. fell the most in more than two months, after Sinpoec shares tumbled as much as 8.6% after the company announced that Chen Bo, president of Chinese oil trading giant Unipec, and Zhan Qi, co.’s communist party secretary, have been suspended.

Also, as reported previously, earnings at China’s industrial firms dropped in November for the first time in nearly three years.

Top Asian News

  • China’s Industrial Profits Drop for First Time Since End 2015
  • Vietnam Economy Remains Outperformer as Growth Tops 7% Mark
  • Trade Losses at China Oil Giant Said to Spur Sinopec Suspensions
  • Huawei’s Revenue Growth Rebounds Despite ‘Storm- Tossed’ 2018
  • NEC Pushes Deeper Into Services With $1.2 Billion Deal for KMD
  • PBOC’s Ma Says Replenishing Bank Capital Key to GDP Growth: CSJ

Meanwhile, US Treasuries led advances in global bonds amid renewed skepticism about recent risk-asset gains and rekindled demand for the safety of government debt. Yields on 10-year U.S. notes fell toward the lowest level since April as the market was supported by a futures block trade equivalent to a DV01 of $717,000. As a result, the 10Y has cut its losses in half, and was yielding 2.772%, 5bps lower than where it closed Wednesday's session.

The dollar also gave up some of its overnight gains, but losses were limited to around 0.3% against a basket of currencies. Against the yen, a perceived safe haven, it was off 0.5% at 110.82 yen. It had risen nearly 1% overnight, booking its largest single-day gain against the yen since late April. The Bloomberg Dollar Spot Index pared Wednesday’s rally with the dollar slipping against most peers; yen and euro both gained at least 0.4% while Aussie and kiwi drop on renewed China growth concerns.

Commodities were also hit, with concerns over a faltering global economy and signs of a crude oil glut pressured oil prices, sending Brent futures 2.4% lower to $53.26 a barrel and partly reversing the previous day’s 8% jump, the biggest in two years. Another safe-haven, gold, was up 0.4 percent, remaining just below a six-month peak hit earlier this week.

Market Snapshot

  • S&P 500 futures down 1.6% to 2,432.50
  • STOXX Europe 600 down 0.5% to 333.53
  • MXAP up 1.8% to 145.41
  • MXAPJ up 0.4% to 471.83
  • Nikkei up 3.9% to 20,077.62
  • Topix up 4.9% to 1,501.63
  • Hang Seng Index down 0.7% to 25,478.88
  • Shanghai Composite down 0.6% to 2,483.09
  • Sensex up 0.6% to 35,853.59
  • Australia S&P/ASX 200 up 1.9% to 5,597.20
  • Kospi up 0.02% to 2,028.44
  • German 10Y yield fell 2.4 bps to 0.226%
  • Euro up 0.4% to $1.1396
  • Italian 10Y yield unchanged at 2.471%
  • Spanish 10Y yield fell 0.3 bps to 1.398%
  • Brent futures down 1.7% to $53.54/bbl
  • Gold spot up 0.5% to $1,273.46
  • U.S. Dollar Index down 0.3% to 96.77

Top Overnight News from Bloomberg

  • Donald Trump said that he has no plans to withdraw American troops from Iraq, speaking to reporters at Joint Base al Asad in Iraq on Wednesday, making his first visit to troops in a combat zone as commander-in-chief a week after dismissing his defense secretary in a dispute over Middle East strategy
  • Japanese shares rallied for a second day, with the Topix index climbing more than 5% and poised for its biggest advance in two years
  • Oil held its biggest gain in two years, after being swept up in a rebound across risk assets spurred by optimism about the global economy
  • A U.S. government delegation will travel to Beijing in the week of Jan. 7 to hold trade talks with Chinese officials, two people familiar with the matter said
  • President Donald Trump won’t try to fire Federal Reserve Chairman Jerome Powell, a top White House economic adviser said. Kevin Hassett told reporters “yes, of course, a hundred percent” on Wednesday after he was asked whether Powell’s job is safe
  • President Trump said he won’t relent on the partial government shutdown unless Congress funds his proposed border wall, and wouldn’t say whether he’d accept less than $5 billion for the project
  • Profits of Chinese industrial companies fell for the first time in almost three years, highlighting the effects of slowing economic growth, falling prices, and the trade war with the U.S.
  • Replenishing capital of Chinese banks is key to boost lending growth and support the economy, People’s Bank of China adviser Ma Jun was cited as saying in a front-page report in China Securities Journal

US Event Calendar

  • 8:30am: Initial Jobless Claims, est. 215,500, prior 214,000; Continuing Claims, est. 1.68m, prior 1.69m
  • 9am: FHFA House Price Index MoM, est. 0.25%, prior 0.2%
  • 9:45am: Bloomberg Consumer Comfort, prior 58.8
  • 10am: Conf. Board Consumer Confidence, est. 133.7, prior 135.7; Present Situation, prior 172.7; Expectations, prior 111
  • 10am: U.S. Census Bureau to delay New Home Sales data amid shutdown