In the aftermath of the latest Chinese near-panic intervention to keep its currency from an out of control collapse when as reported yesterday, the PBOC announced it would raise the RRR for offshore Yuan deposits, a move which would reduce the amount of the currency available in the market, squeezing supply further (and breaking Hong Kong HIBOR markets again in the process) and making it more difficult and expensive for speculators, the Chinese stock market went exactly nowhere, closing up 0.44% suggesting that when it comes to manipulating asset classes, China can do either stocks or FX (or soon corporate bonds once that particular - and most epic - bubble bursts), but not both at the same time.
So, with the US closed today for Martin Luther King Holiday (futures are open until 1pm ET before closing until 6pm), global risk tone has once again been set entirely by oil, which opened sharply lower at fresh 12 year lows on fears of an Iran oil glut, but has steadily rebounded on the latest OPEC comments, and at last check both WTI and Brent were mostly unchanged trading in the low $29's on muted volume.
A quick recap of the key oil market highlights: in a report just released by OPEC, the now defunct cartel hopes non-OPEC production will fall by 700,000b/d, even as Iran begins pumping an extra 500,000b/d while Saudi exports jumped by a whopping 355,000b/d to 7.719MM b/d in November from 7.364MM b/d in October.
The rest of the OPEC headlines:
- OPEC PREDICTS OIL MARKET WILL BEGIN TO REBALANCE IN 2016
- OPEC SEES NON-OPEC OIL SUPPLY FALLING BY 0.7M B/D IN 2016 AMID LOW PRICES
- OPEC OUTPUT FELL 0.2M B/D TO 32.2M B/D IN DECEMBER
- OPEC SEES DEMAND FOR ITS OIL RISING 1.7M B/D TO 31.6M B/D IN 2016
- OPEC'S JANUARY REPORT INCLUDED DATA FOR REINSTATED MEMBER INDONESIA
With Asian markets mixed, European shares swung between gains and losses, while the yen weakened as China stepped up efforts to curb foreign speculation against its currency. Crude oil rose from a 12-year low after the Organization of Petroleum Exporting Countries forecast a decline in supplies from rival producers.
However, after weeks of relentless selling, there may be some respite if only a brief technical one: as the following chart from HindeSightletters.com shows, Brent is approaching the upper range of the recent 2-week selling channel, and a break around $30 could push Brent into the low to mid-30's.
Some other market levels as of this moment:
- S&P Futs: 1881.5, +6.25
- Dow Futs:15,970, +58
- Dax: 9,519, -26
- Stoxx 600 329.7, unch
- Shanghai:2913.8, +0.44%
- Nikkei: 16,955, -1.12%
- 10 Year: 2.03%, unch
- EURUSD: 1.0888,
- USDJPY: 1277.78, +0.12%
- Gold $1,091, +0.2%
Looking at the markets that are open today, we start with Asian stocks which traded mixed following Friday's negative close on Wall St. where continued weakness in energy prices dampened sentiment, although a mild rebound in oil saw the region come off worst levels. Nikkei 225 (-1.1%) underperformed after a relatively firm JPY weighed on Japanese exporters, while the ASX 200 (-0.7%) was dragged by the energy sector following the lifting of Iranian sanctions. The Shanghai Comp, (+0.4%) outperformed following an improvement in property price data, coupled with news that the CSRC will open up China's capital market to foreign investors this year, while the Hang Seng (-1.1 %) was led lower by financials after the PBoC announced new RRR rules for offshore banks on CNY deposits. Finally, 10yr JGBs traded higher amid inflows into safer assets following the continued weakness seen in Asian equities, while the BoJ also entered the market to purchase JPY 890BN in government debt.
Selling resumed in European equity markets following reports of the PBOC attempting to further suppress capital outflows. Oil once again takes centre stage, both benchmark futures trading firmly below the USD 30.00bbl handle, following the Iranian sanctions relief. However, panic in oil markets seems to have dissipated and oil has seen an uptick in recent trade despite Nomura analysts warning that we could see USD 25.00 bbl in today's session.
The Stoxx Europe 600 was little changed as of 12:15 p.m. London time, with banks declining on concern the quality of their assets may harm profits. Polish bonds fell after the country received its first-ever sovereign downgrade. . Brent crude futures climbed 1 percent to $29.23 a barrel. The Bank of America Merrill Lynch Market Risk Index, which tracks volatility in different assets worldwide, was at the highest since Oct. 1 on Friday.
In FX, the yen declined against all of its 16 major counterparts and the franc also weakened after China’s central bank helped calm investors’ nerves by strengthening the yuan fixing by the most in almost a month. As havens fell, higher-yielding currencies rebounded, with the Brazilian real outperforming all of its major peers and the Canadian dollar climbing for the first time this year.
Japan’s currency, the best performer among major counterparts this year, was down 0.4 percent at 117.40 per dollar, while the euro traded 0.2 percent lower at $1.0891 and the franc slid 0.3 percent. The Canadian dollar added 0.4 percent after earlier sliding to an almost 13-year low. Russia’s ruble depreciated 1.4 percent to 78.693 against the dollar.
The offshore yuan strengthened 0.4 percent, building on its biggest weekly gain since October. The cost of borrowing yuan on a weekly basis in Hong Kong rose, while overnight lending rates fell. The People’s Bank of China said it will impose reserve-requirement ratios on yuan deposited onshore by overseas financial institutions from Jan. 25, without saying what level would be used.
In commodities all eyes were on oil again, with Brent oil earlier extended its decline below $28 as international sanctions on Iran were lifted, paving the way for increased exports from the OPEC producer. Futures fell intraday to the lowest since November 2003, before rebounding as OPEC, which supplies about 40 percent of the world’s oil, predicted production outside its members would drop this year by 660,000 barrels a day, deepening the decline from its previous estimate by 270,000 barrels a day.
Nickel led most base metals higher in London on optimism that China will see an increase in demand and its economy will avoid a hard landing. The metal used to produce stainless steel rose as much as 2.6 percent to $8,615 a metric ton.
Bloomberg adds that Iran could get five times more from oil exports by year end and plans to add lmin bpd of oil sales in 2016.
US Event Calendar
- Markets closed
DB's Jim Reid concludes the overnight wrap
Tomorrow's dump of Chinese data (Q4 GDP, industrial production, fixed asset investment and retail sales) could be an important moment for markets in the near-term but the decision to lift sanctions on Iran over the weekend has raised the spectre of even more oversupply in the Oil sector. This morning it's down -1.36% although it has pared much heavier early losses of as much as -4% (and falling below $29) at the open. Bourses in Asia are down but have also rallied back in line with the Oil moves following an initial plummet lower. The Nikkei is -0.67% after being nearly 3% down while the Hang Seng (-0.70%), and ASX (-0.70%) have also pared back much steeper losses while the Kospi is back to flat. Interestingly it’s China which is leading the way with Shanghai Comp (+1.11%) and CSI 300 (+1.14%) both up, again after a softer opening and perhaps reflecting the latest property price data which showed new home prices rose in 39 cities last month, having risen in 33 cities in November.
Meanwhile the offshore CNH is +0.5% stronger this morning following the news over the weekend that China is to raise offshore Yuan reserve requirements for banks in a bid to bring some stability to the currency and prevent excessive speculation. The onshore CNY is little moved.
The moves this morning follow ugly falls in Middle Eastern markets on Sunday with a number of equity indices hitting multi-year lows. Bourses in Saudi Arabia, Jordan, UAE and Kuwait declined anywhere from 4 to 7% with much of the focus on the Iran news. Over the weekend the nuclear related sanctions which had been placed on the country were lifted after Iran was seen as completing the steps which had to be fulfilled following the July agreement.
According to the WSJ, Iran’s nuclear activities are set to be severely constrained and will be subject to major oversight, however the lifting allows the nation to now step up its production of nuclear fuel. Much of the chatter is that Iran will increase production by 500k barrels a day as an immediate response, before lifting production even more down the line.
The prospect of this was blamed for the huge leg lower in Oil on Friday with WTI (-5.71%) and Brent (-6.28%) down below $30/bbl and $29/bbl respectively. Risk assets were hammered as a result. European equity markets were down anywhere from 2-3% while the S&P 500 (-2.16%) was down a similar amount but managed to pare heavier losses of more than 3%, while taking its YTD loss now to 8%. A lot of the pain is coming through in credit markets as well. Both CDX IG and Main widened 6bps on Friday. The eye watering move was in US HY energy however after spreads blew out 102bps to close at 1,640bps. With spreads at fresh all time wides, Friday’s move was the largest single day move wider on record based on our data while last week alone saw spreads move more than 230bps wider.
US earnings season is still yet to get going properly, but expect there to be a lot of focus on Schlumberger’s results on Thursday – the first of the big oil names to report. Bank results are the focus for the moment however after both Citigroup and Wells Fargo reported better than expected results on Friday (beating both revenue are earnings expectations) although analysts were quick to highlight some concerns in the details with Citigroup’s share price in particular down over 6%. One of the interesting takeaways from the banks so far has been exposure to and the impact from tumbling energy prices. As per the FT, Citigroup was said to have recorded a 32% rise in non-performing corporate loans in Q4 mainly related to its North American energy book. JP Morgan has said it will add another $750m of reserves should Oil stay at $30 (having boosted energy loan-loss reserves by $550m last year) while Wells Fargo reported net charges of $831m last period mainly related to oil (largest since Q1 2013).
Not helping sentiment on Friday too was the US economic data. Despite December headline retail sales coming in line with expectations at -0.1% mom there were notable misses for the ex auto (-0.1% mom vs. +0.2% expected), ex auto and gas (0.0% mom vs. +0.4% expected) and control group (-0.3% mom vs. +0.3% expected) components which as a result saw the Atlanta Fed downgrade their Q4 GDP forecast by two tenths to 0.6%. As well as that, industrial production last month also fell more than expected (-0.4% mom vs. -0.2% expected), while the Empire manufacturing print was the biggest downside surprise after tumbling over 13pts to -19.4 (vs. -4.0 expected) – the lowest since March 2009. It was unsurprising then to see manufacturing production also miss (-0.1% mom vs. 0.0% expected) while business inventories in November (-0.2% mom vs. -0.1% expected) were also soft. Elsewhere the December PPI reading printed in line at -0.2% mom while the lone beat came in the form of the preliminary University of Michigan consumer sentiment reading which rose 0.7pts to 93.3 (vs. 92.9 expected) with the expectations component in particular up strongly. That being said, one-year inflation expectations did however dip two-tenths to 2.4%.
Fedspeak on Friday highlighted the obvious concern in markets at the moment but offered little new information on the whole. San Francisco Fed President Williams opined that the main concerns to the US economy are international and that ‘China’s the wild card’, while also noting that it will be an ‘ongoing challenge’ for the Fed to get markets on the same page as policy makers. On this topic, NY Fed President Dudley said that ‘projections will adjust as incoming information changes the economic outlook’ and that ‘I would expect convergence over time’. Dudley did however warn that ‘should the economy unexpectedly weaken, then this fall in inflation expectations would become more concerning’.
Just before we take a look at the week ahead, Portuguese sovereign bonds have been the notable underperformer YTD so far which is reflecting some of the concerns in the country’s banking system following the recent Novo Banco issue. 10y Portugal bond yields are +23bps wider this year so far which compares to moves tighter for both Italy (-2.7bps) and Spain (-1.4bps), while 10y Bunds are nearly 9bps lower so far this year. This has come after Portugal imposed steep losses for Novo Banco bondholders late last year after the Portuguese Central Bank moved 5 of the 52 senior Novo Banco bond issues to the bad bank carved out from failed lender Banco Espirito Santo. The Bank of Portugal has since said on Friday that it intends to resume a sell process of Novo Banco but the knock on effect has already seen peripheral banks come under a decent amount of pressure with nerves around Portuguese banks in particular. One to watch.
Onto this week’s calendar now. With US markets closed for Martin Luther King Day, today is an unsurprisingly quiet start to the week for data with nothing out in either Europe or the US. OPEC’s monthly report, due out around lunchtime should be worth keeping an eye on though. Tuesday morning is all about China where we will get the all important Q4 GDP print (6.9% expected) along with retail sales, industrial production and fixed asset investment data. During the European session we’ll get the final German CPI report for December along with the UK CPI/RPI/PPI reports and the German ZEW survey. Across the pond on Tuesday the only notable data is the NAHB housing market index print. Turning to Wednesday, German PPI and the UK employment report are the morning highlights. That’s before we turn to the main release of the week in the US with the December CPI print (headline 0.0% mom expected, core +0.2% mom expected). As well as this we will get the December housing starts and building permits data. The early data release on Thursday comes in France where we will get the latest confidence indicators in France. The final revisions to Euro area inflation for December follow this before the ECB meeting due around lunchtime. It’s pretty quiet in the US on Thursday with just initial jobless claims and the Philly Fed business outlook due. We close out the week on Friday with the January flash manufacturing PMI out of Japan in the Asia session. That’s before we get the flash manufacturing, services and composite readings for the Euro area, Germany and France along with UK retail sales data. The US finishes the week also with the flash manufacturing PMI reading, while the conference board leading index and existing home sales data wrap things up.
With the FOMC meeting around the corner there’s no Fedspeak scheduled this week so the focus will also be on the corporate earnings with 43 S&P 500 companies due to report including Bank of America, IBM, Morgan Stanley and UnitedHealth on Tuesday, Goldman Sachs on Wednesday, Verizon and Schlumberger on Thursday and finally GE on Friday.