Global Markets Slide, US Futures Wipe Out Overnight Gains In Volatile Session

It has been another choppy, illiquid, volatile overnight session, which started with weakness out of China, whose Shanghai Composite dropped 20% into another bear market in early trading, then further slammed by news of a terrorist attack in Jakarta, only to rebound back over 3000 as the Chinese National Team decided to intrevene again, this time in the ChiNext small cap index, pushing it higher by 5.6%.

Then after China faded from center stage, the big mover, both in FX and cross-assets, was the EUR, which soared nearly 100 pips just after the European open on reports the ECB is content for current policy measures to filter through. This in turn slammed the carry trade of choice, the USDJPY, and ultimately trickled down to US equity futures which after hitting overnight highs just shy of 1,900 have since tumbled 22 points to session lows, at 1,879, down 0.2% on the session.

Finally, moments ago Europe was hit by a double whammy when Renault shares plunged 20%, most since August, after Agence France-Presse reported that French fraud investigators seized computers from the automaker as part of an apparent probe into emissions testing. Other carmarkers across Europe were likewise slammed...

... and since there has been no official statement from the company, nobody knows what is really going on and the selling has persisted to this moment, as the primary concern fueling the 2016 drop remains: “Everything boils down to concerns about global growth,” said Ralf Zimmermann, a strategist at Bankhaus Lampe in Dusseldorf. “There are few people out there willing to buy the dips because everyone is scared that the selloff will be deeper the next day. And it has been. I would sell any highs -- there is definitely potential for bigger losses in the short term.”

To summarize: European shares tumbled, wiping out gains from a two-day rally, Asian stocks slid and the cost of insuring corporate debt rose as investor concern over global growth prospects resurfaced. U.S. equity-index futures pared gains of as much as 0.9 percent. Government bonds rose, with yields falling to records in Japan and China amid anxiety over the world economy. U.S. crude prices stabilized after dropping below $30 a barrel on Tuesday to touch the lowest since 2003 as Iran moved closer to boosting exports. South Korea’s won slid after the central bank kept interest rates unchanged and Indonesia’s stocks and currency dropped after several people were killed in explosions and gunfire in central Jakarta.

Top overnight news stories include Goldman’s job cuts on fixed income desk, Jakarta bombings, JPMorgan AM mandate from BlueCrest, German GDP, Blue Coat IPO managers, scrutiny towards Buffet’s Clayton Homes.

Drilling down into regional markets, Asian stocks traded with firm losses following Wall St.'s negative close, as the slump in energy prices continued to weigh on sentiment. The Nikkei 225 (-3.0%) continued to underperform as Japanese exporters were pressured by a firmer JPY, while Japanese Machine Orders printed their largest decline since May 2014. Elsewhere, the ASX 200 (-1.6%) was led lower by the energy sector as Brent crude fell back below the USD 30/bbl level for the 1st time since 2004, while Chinese bourses fluctuated as the Shanghai Comp (+2.0%) declined into bear market territory, having fallen 20% from its recent December 2015 highs, but then saw an influx of bargain hunting to recover in late trade. Finally, 10yr JGBs were initially higher amid weakness in Asian equity markets which saw the 10yr yield decline to a record low of 0.190%, while the BoJ also entered the market for JPY 1.27tr1 in government debt. However, prices then reversed as stocks came off their worst levels with Nikkei 225 climbing back above the 17000 level.

Top Asian News:

• Several Killed as Explosions Rock Jakarta, Police Battle Gunmen: Islamic State had warned of shining “spotlight” on Indonesia.
• Indonesian Stocks Decline With Rupiah After Deadly Explosions: Bank Indonesia cuts key rate for first time since February.
• Indonesia Assesses Offer for $1.7b Stake in Freeport Unit: FCX has offered Indonesia a stake of ~11% of its local unit for $1.7b, according to govt. official.
• Herro Says Now Is a Time for True Investors to Profit From Panic: Sees opportunities in beaten-down shares, oil-related firms.
• China Stocks Pull Back From Bear-Market Brink as Smallcaps Jump: ChiNext cos. pledge to stabilize market by not selling.
• Yuan Bears Frustrated by Intervention Sell Freely Traded Aussie: Australian dollar is off to worst start to a year since 2009.

In Europe, Equity indices (Stoxx -2.6%) have been weighed upon in European trade following the source reports which point to a lack of further action by the ECB, while questions remain regarding the health of both the Chinese and US economies. The Stoxx 600 has fallen to its lowest since Aug 24th, with markets opening firmly in the red, but taking another leg lower in the wake of reports that a number of members on the ECB governing council are cynical as to whether the central bank needs to unveil further policy action in the near term as existing measures need time to take effect.

Meanwhile, despite the ECB sources suggesting a lack of upcoming stimulus, Bunds have also seen an uptick today amid the heightened risk off sentiment, with the Mar'16 contract having now broken above the high seen on Jan 7th at 160.19 and could now test 160.66 to the upside which marks the 27th Nov high. Also of note, today's Spanish issuance, which hit Spanish paper after uninspiring bid to covers, concludes the raft of supply that was set for this week, combined equivalent to around 120K Bund futures, while net cash flow for this week is negative EUR 15.97b1n, with the Netherlands, Italy and Austria paying coupons/redemptions.

Top European News

• German Economy Defied 2015 World Slowdown With Faster Growth: rose 1.7% after gain of 1.6% in 2014, Federal Statistics Office said at press conference in Berlin on Thursday.
• Pound Touches 11-Month Low Versus Euro Before BOE Announcement: At weakest level since Feb. versus euro before the Bank of England’s first policy decision of 2016.
• European Dark Pools Expand in Face of Rules Limiting Their Use: European dark pools had 45% jump in value of trading they handled in 2015, according to broker, equity-market operator Investment Technology Group Inc., vs 28% increase for public exchanges.
• Burberry, Richemont Say Mainland China Luxury Sales Rebounding: Co. says luxury-goods market returned to growth in mainland China at end-2015, as sales in Hong Kong kept slumping.
• Fiat Chrysler Accused of Falsifying Sales: Automotive News: 2 Chicago-area dealerships filed racketeering lawsuit against Fiat Chrysler, alleging co. offered dealers money to falsify sales.

In FX, The euro strengthened versus all of its 16 major peers and the yen pared a decline as stocks slid, bolstering demand for the safest assets. The currencies of commodity producers including New Zealand, Australia and Canada were among the worst performers versus the dollar.

The pound dropped to 75.90 pence per euro, the weakest level since February, before the Bank of England’s first policy decision of the year. The central bank cited sterling strength as a factor in dragging prices down in the minutes of its previous meeting on Dec. 10, when its nine-member Monetary Policy Committee voted 8-1 to keep the key rate at a record-low.

The won depreciated 0.8 percent against the dollar and Indonesia’s rupiah slid 0.6 percent, leading declines in emerging-market currencies. A gauge of 20 exchange rates slipped 0.1 percent.

The Hong Kong dollar weakened as much as 0.3 percent -- its biggest intraday loss since 2003 -- to HK$7.7823 versus the U.S. dollar. Speculation mounted in the options market that the city’s 32-year-old currency peg will break as investors lose confidence in Chinese assets.

One-year implied volatility on the Hong Kong dollar has doubled this month to a 12-year high of 3.43 percent. Prices for the derivatives indicate there’s a 24 percent chance the Hong Kong dollar will have weakened beyond its permitted trading range of HK$7.75-HK$7.85 versus the greenback by the end of this year, up from 9.5 percent on Dec. 31, data compiled by Bloomberg show.

Poland’s zloty dropped 0.2 percent versus the euro before the central bank decides on interest rates. While policy makers are expected to keep borrowing costs on hold Thursday, the ruling Law & Justice party, which won elections in October, has said it supports rate cuts and wants the central bank to help spur economic growth. Five of its candidates will join the 10-member rate-setting council for its next meeting in February.

In commodities, the Bloomberg Commodity Index, which tracks raw material returns, was little changed after dropping to the lowest since 1991 on Tuesday.

West Texas Intermediate oil for February delivery swung between gains and losses, with prices rising after attacks in Indonesia. Futures were up 1 percent at $30.78 a barrel after earlier dropping as much as 0.7 percent. Brent added 1.3 percent to $30.71 a barrel.

Most industrial metals traded lower on the London Metal Exchange. Copper for delivery in three months lost 0.3 percent to $4,380 a metric ton after touching a six-year low. Only aluminum managed to eke out a gain, advancing 1 percent to $1,476 a ton.

On today's US event calendar we have the import price index print along with last week’s initial jobless claims data. Fedspeak wise we’ve got the Fed’s Bullard. US earnings will also be a focus with JP Morgan kicking off for the banks, while in the corporate space Intel is also scheduled to report.

Top Global News

• Goldman Said to Mull Cutting Fixed-Income Staff More Than 5%: Co. considering cutting >5% of its fixed-income traders, salesmen later this quarter, according to person familiar.
• Ackman’s Pershing Square Down 11% in 2016 After ’15 Losses: Fund lost 11.4% this year through Jan. 12, according to its website.
• JPMorgan to Manage $1.2b of BlueCrest Hedge Fund Money: Asset Management unit will take over managing GBP804m for BlueCrest All Blue Fund Ltd.
• Pfizer Said to Weigh Sale of Pump Unit Acquired in Hospira Deal: Co. weighing sale of the pumps, devices business that could fetch up to $2b, according to people familiar.
• Boeing, Engineers Reach Pact Bringing Long-Term Labor Peace: New terms reached during formal talks well before existing contract expires in October, co. said Weds.
• Blue Coat Said to Pick Morgan Stanley, JPMorgan for IPO: Internet security-software co. backed by Bain Capital, picked Morgan Stanley, JPMorgan, according to person familiar.
• Glencore Mine Sale Said to Draw Interest From Ex-Barrick CEO: Former Barrick Gold Corp. CEO Aaron Regent among remaining bidders for Glencore’s Lomas Bayas copper mine in Chile, according to people familiar.
• Buffett’s Mobile-Home Unit Should Be Probed: Legislators: U.S. lawmakers called for federal investigations into Clayton Homes, the mobile-home business at Warren Buffett’s Berkshire Hathaway Inc.
• Twitter Accused in Widow’s Lawsuit of Allowing IS Use: Co. accused in lawsuit by widow of man killed at a police training center in Amman, Jordan, of knowingly allowing Islamic State to spread its terrorist message through its service.
• Extra Space Storage to Replace Chubb in S&P 500 Index: Change to take place after close Jan. 15.
• Cheniere Sabine Pass Approved to Export Extra 600bcf of LNG: Exports approved to take place over 2-yr period, U.S. DoE says in order issued Wednesday

Bulletin Headline Summary From RanSquawk and Bloomberg

• The big mover in FX this morning is the EUR after reports the ECB is content for current policy measures to filter through sent the single unit higher across the board
• Energy prices trade modestly higher after Brent crude briefly broke below USD 30/bbl for the 1st time since April 2004 yesterday
• Today's highlights include BoE rate decision & minutes, ECB minutes, US weekly jobs data and comments from ECB's Draghi, Fed's Lockhart and Bullard
• Treasuries gain for a third day amid losses in global equity markets, Islamic State attack in Indonesia; week’s auctions conclude with $13b long bonds, WI 2.850% vs. 2.978% in Dec.; 30Y yield 3.016% at start 2016.
• Chinese stocks headed for a bear market while government bond yields fell to a record as central bank cash injections and a stable yuan fixing failed to shore up confidence in the world’s second-largest economy
• Lost in all the Chinese stock and currency market gyrations, policy missteps and mixed data is this economic reality: The government is constrained by a credit bubble that has ballooned to $28 trillion in an economy growing at its slowest pace in 25 years
• Hong Kong’s dollar sank by the most in more than a decade and speculation mounted in the options market that the city’s 32-year-old currency peg will end as investors lose confidence in Chinese assets
• The Islamic State assault in Jakarta began when a suicide bomber blew himself up inside a Starbucks; militants then opened fire and detonated further bombs, including one outside a nearby police post; at least two were killed
• The number of refugees entering Europe in the first 10 days of 2016 is already three times the level in all of January 2015, signaling no letup in the pressure facing the region’s leaders amid the biggest wave of migration since World War II
• The German economy expanded about a quarter of a percent in 4Q, with record employment and expansionary monetary policy fueling domestic consumption at a time of weakening global trade
• Renault SA shares plunged as much as 20% after a union said French fraud investigators seized computers from the automaker as part of an apparent probe into emissions testing
• Donald Trump told Bloomberg’s With All Due Respect just minutes after he finished a rousing speech to a capacity crowd of 10,000 inside a Pensacola, Florida, arena that he’s building a movement bigger than Reagan’s
• Goldman is considering cutting more than 5% of its fixed- income traders and salesmen later this quarter as it contends with an industrywide revenue slump, according to a person with knowledge of the matter
• Sovereign bond yields lower. Asian stocks slide with the exception of China, European stocks decline, equity-index futures steady. Crude oil higher, copper and gold lower

US Event Calendar

• 8:30am: Import Price Index m/m, Dec., est. -1.3% (prior -0.4%); Import Price Index y/y, Dec., est. -8.4% (prior -9.4%)
• 8:30am: Initial Jobless Claims, Jan. 9, est. 275k (prior 277k); Continuing Claims, Jan. 2, est. 2.210m (prior 2.230m)
• 8:45am: Bloomberg U.S. Economic Survey, Jan.
• 9:45am: Bloomberg Consumer Comfort, Jan. 10 (prior 44.2)
• 1:00pm: U.S. to sell $13b 30Y bonds in reopening

Central Banks

• 7:00am: Bank of England bank rate, est. 0.5% (prior 0.5%)
• 7:30am: ECB account of monetary policy meeting
• 9:15am: Fed’s Bullard speaks in Memphis, Tenn.

DB's Jim Reid concludes the overnight wrap

Yesterday saw another big turnaround in markets with positive momentum from the European session quashed. For the fourth day in the row the S&P 500 got off to a reasonable start, however much like the previous three sessions the index quickly turned on a dime and headed south in a hurry. The previous two days had seen the market recover in the last hour or so into the close to finish in positive territory but there was no such rebound this time round with the index eventually closing with a -2.50% loss. That was the biggest one-day loss since September 28th as the index finished below the 1,900 level for only the fifth time in the last 15 months. The Dow finished 365pts lower (or -2.21%) with its YTD loss now close to -7.5% while the Nasdaq sold off a heavy -3.41%. Meanwhile small cap stocks in the US entered a bear market following yesterday’s moves with the Russell Index closing -3.30% to fall -22% from the all time highs made in June last year.

Along with events in China, a lot of the blame for weakness in risk assets so far this year has clearly been on the plummeting Oil price. This was partly the case again yesterday after Oil tumbled 4% from the day’s highs in a matter of moments following some bearish inventory data which saw Brent temporarily dip below $30. However, it was interesting to see that energy stocks weren’t actually the biggest underperformers on a sector basis yesterday. Of the ten sectors in the S&P 500, energy (-1.78%) was actually the fourth best performing sector yesterday (behind the more non-cyclical utilities, telecoms and consumer staples sectors). Instead, consumer discretionary (-3.38%), healthcare (-2.93%), tech (-2.79%) and financials (-2.60%) led yesterday’s broader sell-off in a signal that some of the equity weakness is filtering into the broader economy sectors.

Yesterday was also a rough day for US credit markets with CDX IG leaking +6bps wider (and +8bps wider from the early tights). CDX HY was +20bps wider also with the spread of 536bps now the widest since November 2012. The big US HY ETF (HYG) marked a fresh six and a half year low, while US HY energy spreads were a whopping +43bps wider at 1,489bps. Of note also was Reuters reporting that the SEC is to start a review into the potential liquidity risks posed by HY fund managers in light of the recent collapse of a US credit fund, adding to the already poor sentiment.

Looking at our screens this morning bourses outside of China are following much of the lead from the US yesterday, although markets in China have rebounded post the midday break. The biggest falls have come in Japan where the Nikkei and Topix are -2.56% and -2.34% respectively. Elsewhere the Hang Seng is -0.91% while in China the CSI 300 (+0.95%) and Shanghai Comp (+0.66%) have recovered after a poor start. The CNY fix was again set unchanged this morning, but we’ve seen the onshore and offshore currencies weaken 0.2% and 0.6% respectively since. Some slightly better than expected Australian employment data has failed to lift the ASX (-1.80%) while the Aussie Dollar (-0.3%) continues to trend lower along with other EM currencies this morning. As we go to print, reports of an explosion in Jakarta has seen markets there tumble along with the Indonesian Rupiah also selling off.

Yesterday also saw a distinctly more dovish tone to the Fedspeak. In particular it was comments from the Boston Fed President Rosengren which attracted some attention. The Fed official made reference to the fact that ‘policy makers should take seriously the potential downside risks to their economic forecasts and manage those risks as we think about the appropriate path for monetary policy’. Rosengren opined that these ‘downside risks reflect continued headwinds from weakness within countries that represent many of our major trading partners, and only limited data to support the projected path of inflation’. Meanwhile, Chicago Fed President Evans reiterated his view that ‘we are likely headed toward a lower resting point’ for the fed funds rate relative to the past, while also citing that the policy of normalization should be ‘very gradual’ to bring inflation to target in a reasonable amount of time.

Having been a bit of a non-event of late, the Fed’s Beige Book also had a few interesting takeaways yesterday. The report confirmed that seven of the twelve districts reported ‘modest’ growth in the past six weeks, with two citing ‘moderate’ growth, one ‘upbeat’ and the other ‘essentially flat’. Further labour market improvement was made, but the same issues with a lack of wage pressure was evident once more as ‘price increases tended to be minimal’ with districts reporting ‘little overall change in wage and price pressures’. Of interest, auto sales ‘were somewhat mixed, as activity has begun to drop off from previously high levels in some districts’. Manufacturing sectors were said to have weakened generally as ‘several districts reported the strong dollar’s negative impact on demand’. Unsurprisingly weakness in oil and gas sectors was again a feature.

In terms of the rest of the price action yesterday, European stocks closed well off their intraday highs, declining with the moves across the pond. The Stoxx 600 finished +0.41% although it had been up as much as +1.8%. Interestingly energy stocks were the best performing sector there. Rates markets firmed up meanwhile. 10y Treasury yields extended their move lower to 2.093% although it did go as low as 2.040% before a late move higher. Some of early rally in rates was also helped by a strong US 10y auction, the bid-to-cover ratio of 2.77 the highest since December 2014.

In terms of yesterday’s data, in Europe we saw the soft regional industrial production reports confirm a -0.7% mom decline for the Euro area (vs. -0.3% expected) during November. Over in France the December CPI print came in a tad better than expected during the month at +0.2% mom (vs. +0.1% expected). In the US meanwhile we learned that the December trade deficit was wider than expected at $14.4bn (vs. $10.0bn expected).

Looking at the day ahead, it’s another relatively quiet session for data in Europe this morning with the calendar year GDP print out of Germany the main release of note. There’s some central bank action for us to follow however with the BoE decision due around midday (no change expected but the focus will be on the minutes) while we’ll also get the ECB account of the last monetary policy meeting which could be fascinating given the disappointments seen in markets after it. In the US we will receive the December import price index print along with last week’s initial jobless claims data. Fedspeak wise we’ve got the Fed’s Bullard due to speak at 2.15pm GMT, while in Europe the ECB’s Draghi and Coeure are due to participate in a Eurogroup meeting in Brussels this afternoon so it’ll be worth seeing if anything comes out of that. US earnings will also be a focus with JP Morgan kicking off for the banks, while in the corporate space Intel is also scheduled to report.