With just two days left in 2015, the main driver of overnight global stocks and US equity futures remains the most familiar one of all of 2015 - crude oil, which, after its latest torrid bounce yesterday has resumed the familiar "yoyo" mode, and again stumbled dropping below $37 on yesterday's surprising API 2.9 million crude inventory build, as well several more long-term "forecasts" by OPEC members, with Kuwait now budgeting for $30 oil, while Venezuela's Maduro said the oil price fell to $28/bbl and is "headed downward."
As we warned yesterday, with oil equities reflecting an implied oil price of $65-70, this is hardly supportive of energy stock valuations.
As a result U.S. futures declined and European stocks fell, extending their worst December drop since 2002 in thin volume on the last full trading day of the year. Equities were weighed down by oil prices, which retraced a rally after industry data showing U.S. stockpiles increased last week. The Russian ruble, Norwegian krone and South African rand led a retreat in commodity currencies. The freely traded offshore yuan weakened to a five-year low, after China suspended at least two foreign banks from conducting some cross-border transactions until late March, according to people with direct knowledge of the matter.
Simplifying the market, we agree with Chihiro Ohta, general manager of investment information at SMBC Nikko Securities in Tokyo who said that “we’ll keep on being moved by the oil price. We’ll have to keep being aware of this for the first three months or the first half of next year as well."
Meanwhile, as shown yesterday, despite US equity markets hugging the unchanged line for 2015, global equities are heading for their steepest annual drop since 2011, dragged lower as the weakening of China’s economy exacerbates the biggest yearly retreat in commodity prices in seven years. The Bloomberg Commodity Index is down about 25 percent in 2015, while global bonds lost 2.7 percent, according to a Bank of America Merrill Lynch index.
In other words, with the USDJPY no longer working to push ES algos into a buying frenzy, and with oil short squeezes fading fast, only VIX and VXX are left as the market manipulation tools of choice.
A quick wrap of where global markets stand:
- S&P 500 futures down 0.2% to 2068
- Stoxx 600 down 0.1% to 369
- FTSE 100 down 0.4% to 6290
- DAX down 0.4% to 10821
- German 10Yr yield up 1bp to 0.64%
- Italian 10Yr yield up less than 1bp to 1.64%
- Spanish 10Yr yield down 3bps to 1.78%
- MSCI Asia Pacific up less than 0.1% to 132
- Nikkei 225 up 0.3% to 19034
- Hang Seng down 0.5% to 21882
- Shanghai Composite up 0.3% to 3573
- S&P/ASX 200 up 1% to 5320
- US 10-yr yield down less than 1bp to 2.3%
- Dollar Index up 0.11% to 98.21
- WTI Crude futures down 2.5% to $36.93
- Brent Futures down 1.8% to $37.12
- Gold spot up less than 0.1% to $1,069
- Silver spot down 0.4% to $13.90
A look at regional markets shows a modest increase across Asian stocks, which rise for third day with Australian, mainland China stocks outperforming. 6 out of 10 sectors rise with utilities, consumer staples outperforming and materials, energy underperforming. As reported last night, the top story coming out of Asia was the latest dramatic escalation in China's capital controls after China suspended at least two foreign banks from conducting some cross-border transactions until late March, suggesting outflows are far greater than even worst case estimates expected.
As a result, the freely traded offshore yuan weakened to a five-year low, however in another sharp intervention by the PBOC, the currency was little changed as of 5:04 p.m. in Hong Kong, having been down 0.5% some 40 minutes earlier. Earlier, the offshore Yuan dropped as low as 6.6105 per dollar, weakest since Jan. 2011, with the maximum intra-day loss of 0.5% was biggest drop in four months. The story of China's capital outflows and unstable currency will continue to dominate newsflow for all of 2016.
Also in Asia, keep a close eye on infamous Noble Group, whose bunds plunged after its Moody's downgrade to junk as expected here since August, and whose stock plunged 9% overnight as the endgame now appears inevitable.
Elsewhere, Bloomberg reports that Chinese shares in Hong Kong extended the biggest sell-off in Asia this year on concern the nation’s deepening economic slowdown will sap corporate earnings. After China’s suspension of cross-border yuan operations, the currency’s exchange rates at home and abroad diverged by the most in three months. The offshore yuan weakened to a five-year low.
“The China market is likely to remain volatile in the first half as growth will slow further and the yuan is expected to weaken,” said William Wong, head of sales trading at Shenwan Hongyuan Group Co. in Hong Kong. “H shares are vulnerable as more U.S. rate hikes will affect the economy in Hong Kong as well as market sentiment.”
Australia’s S&P/ASX 200 climbed 0.9 percent for a ninth straight advance, while its New Zealand counterpart gained 0.4 percent to close a record. Japan’s Topix index added 0.3 percent. Volumes were at least 20 percent below average across Asia.
Other Asia Top News
- China Said to Suspend Foreign Banks’ Cross-Border Yuan Business: At least 2 banks given 3-mo. bans.
- China Seen Ending Share Sale Ban That Drew Foreign Scorn: Six-mo. restriction on equity sales set to expire next week.
- Noble Group Ends a Turbulent Year With Cut to Junk From Moody’s: Co. says Noble Agri deal will help improve its metrics.
- Zuckerberg’s India Backlash Imperils Vision for Free Global Web: Criticism centers on net neutrality and impact on startups.
- GE, KKR Among Cos. That May Bid for Toshiba Health Unit: Kyodo: Cos. may join Fujifilm as candidates to acquire majority stake in Toshiba Medical Systems.
In Europe, equities are heading for a monthly drop of 4.2 percent. While they recouped some losses in the final weeks of the year, that hasn’t been enough to overcome a slide earlier this month amid disappointing European Central Bank stimulus measures and a deepening rout in commodity and crude prices. Still, the Stoxx 600 is heading for its fourth straight annual advance.
The Stoxx Europe 600 Index lost 0.1 percent at 10:25 a.m. in London, after climbing 1.4 percent on Tuesday. The number of shares changing hands was about half the 30-day average. Markets will shut on Friday for New Year. Some including Germany, Switzerland and Italy, will also close Thursday for New Year’s Eve, while others will have shorter trading hours. Germany’s DAX Index declined 0.4 percent on its final trading day of the year. It has surged 10 percent in 2015, outperforming the Stoxx 600 and the MSCI All Country World Index. Strategists see more gains for the benchmark in 2016.
Other European Top News
- Portugal Imposes Losses on Some Novo Banco Senior Bondholders: Portuguese central bank ordered transfer of some unsubordinated bonds at Novo Banco back to Banco Espirito Santo ahead of latter’s liquidation, effectively imposing losses on their holders.
- Abengoa Says in Talks With Creditors, Expects to Reach Accord: Co. expects to reach accord to ensure financial stability by March 28 deadline set by court, co. says. Banks Want Abengoa to Start Insolvency Proceedings: Cinco Dias
- Apple Agrees to Pay EU318m in Tax Owed to Italy: La Repubblica: Italy’s tax authority says Apple evaded taxes from 2008-2013 by booking ~EU880m in profits to an Irish unit.
In commodities, oil fell after industry data showed an unexpected increase in crude inventories last week. West Texas Intermediate dropped 2.4 percent to $36.96 a barrel and Brent slid 1.6 percent to $37.17.
The American Petroleum Institute was said to report Tuesday that crude stockpiles rose by 2.9 million barrels last week. Inventories are projected to have dropped by 2.5 million barrels in a separate Bloomberg survey before data published by the U.S. Energy Information Administration Wednesday.
U.S. natural gas fell after reaching a six-week high Tuesday on forecasts for colder weather. February futures dropped 4.9 percent to $2.255 per million British thermal units.
Copper in Shanghai rose 1.6 percent to 36,530 yuan a metric ton, the highest in nearly seven weeks as metals markets in China extended an end-of-year rally. Metals in China have advanced over the past month on speculation that supply cuts and a stabilization of demand may push up prices from multi-year lows. Nine of the biggest copper producers have agreed to cut sales by 200,000 tons in the first three months of 2016, people with knowledge of the matter said Tuesday. Elsewhere, Nickel declined 0.4 percent. Gold was little changed at $1,068.12 an ounce in thin trading.
There is little on the US economic calendar in the second to last calendar day of 2015 with just Pending Home sales data at 10 am Eastern, and the 7 Year Treasury auction on deck later in the day: with the issue not anywhere close to trading "special" in repo, the risk for a big tail - like in yesterday's 5Y auction - is high.
Top Global News
- China Resources Said to Revise Offer Terms for Fairchild Bid: Group led by China Resources, Hua Capital revised some terms of its offer for Fairchild Semiconductor in attempt to win backing from FCS’s board: people familiar.
- Icahn Prevails Over Bridgestone in Bidding War for Pep Boys: Bridgestone’s shares rose most in 2 weeks in Tokyo after tire maker said it won’t counter $18.50/share bid made by Icahn on Monday.
- BofA Sees $600 Million Writedown Tied to Merrill Securities: Bank to post pretax writedown in 4Q as it redeems $2b of trust preferred securities tied to its 2009 acquisition of Merrill Lynch.
- Julius Baer Says It Will Pay $547m to End U.S. Tax Probe: Payment to settle U.S. investigation of how it helped Americans evade taxes clears way for other Swiss banks to resolve similar criminal probes.
- AMBAC, FGIC Demand Puerto Rico Transfer Rum Taxes to Bondholders: 2 cos. that guarantee almost $900m of Puerto Rican govt authority’s debt backed by federal taxes on rum demanded that commonwealth return as much $94m it diverted from bondholders to pay other creditors.
- GameStop Says We’re No RadioShack as Investors’ Doubts Increase: Cos. such as Activision Blizzard do more business online today, making discs look obsolete.
- Bill Gross’s Love Affair With Mexico Debt Shows Signs of Fatigue: Mexican assets were no longer in the top 10 holdings of Gross’s $1.3b Janus Global Unconstrained Bond Fund as of Nov. 30, according to most recent data on Janus’s website. Pimco Main Fund Climbs Back Near Top in Yr After Gross Exit
- Hillary Clinton Targets Drug Speculators, Cites Martin Shkreli,: Clinton told supporters that pharmaceutical industry is afraid of her; she intends to tackle skyrocketing drug prices.
- Southwest Airlines, TWU 555 Reach Tentative Labor Agreement: Local 555 represents more than 12,000 Southwest ground operations, provisioning, cargo agents.
- North American Box-Office Revenue Rises to Record $11 Billion: Industry researcher Rentrak Corp. said Tuesday in statement.
Bulletin Headline Summary from Bloomberg
- Treasuries gain heading into last full trading day of 2015, with $29b 7Y notes on tap for 1pm; WI yield 2.12%, highest since June, vs. 2.013% in November.
- China has suspended at least two foreign banks from conducting some cross-border yuan business until late March, limiting their scope to profit from a widening gap between onshore and offshore rates, according to people with direct knowledge
- Chinese regulators drafting rules, some of the world’s strictest, designed to prevent traders from flooding exchanges with orders they don’t fill by charging market participants fees for habitual cancellations; Chinese proposal echoes a plan by Hillary Clinton
- The offshore yuan rebounded from a five-year low, spurring speculation PBOC intervened to pare its discount to the rate in Shanghai
- Wall Street is searching for new ways to protect corporate bond investments amid concern that traditional hedging tools aren’t working properly as default rates rise
- Bolstered by its military campaign, Russia is moving closer to securing a chance for Syrian President al-Assad to extend his rule in 2017 elections as opposition in Washington is weakening against Russia’s insistence he be allowed to compete
- Donald Trump’s criticism of Bill Clinton’s personal life comes as Mrs. Clinton mentions him in almost every speech, praising his economic record. But now other candidates and even a prominent newspaper columnist are suggesting that Mr. Clinton’s sexual history is fair game: NYT
- Sovereign 10Y bond yields mixed. Asian stocks mixed, European stocks mostly lower, U.S. equity-index futures drop. Crude oil, gold and copper fall
US Economic Calendar
- 10:00am: Pending Home Sales, m/m, Nov., est. 0.7% (prior 0.2%) Pending Home Sales (NSA), y/y, Nov., est. 4.0% (prior 2.1%)
- 1pm: U.S. to sell $29b 7Y notes