It was a relatively calm overnight session in which European stocks wobbled modestly, Japan was up, China was down following the Yuan's weakest fixing since 2011 as the PBOC continues to aggressively devalue since the SDR inclusion (stoking concerns capital outflows are once again surging), EM stocks stocks were weak and the dollar was unchanged ahead of today's retail sales data and next week's Fed meeting, and then suddenly everything snapped.
First it was oil, which after falling calmly all session suddenly hit an air pocket following the latest IEA report, in which the energy agency said global oil markets will remain oversupplied at least until the end of 2016 as demand growth slows and OPEC output booms, putting oil prices under further pressure, the International Energy Agency said on Friday.
The IEA said the global oil glut was set to worsen in the months to come as additional supplies from Iran - when and if Western sanctions on the country are removed - would push more oil into storage.
The immediate result: Brent slid below $39 for only the first time since 2008, while WTI is fast approaching the dreaded $35 handle. Ironically, several days ago when we noted that Brent and iron ore were both at $40 we said the two are racing each other to $0. Today, both Brent and Iron Ore hit $38. So far nobody is winning.
Almost at the same time EM currencies woke up to the threat of a USD rate hike next week, and proceeded to mini tantrum once more taking China's stealth devaluation lead, with the South African rand continuing its collapse from yesterday when in the aftermath of the sacking of the finance minister all local risk assets tumbled. Today, it's more of the same.
And then the weakness finally spread to US equity futures, which after doing what they do best for most of the overnight session, i.e., ignoring everything around them, suddenly fell off a cliff, dropping as much as 16 point in just a few minutes.
As a reminder, it was China's devaluation that launched the global market turmoil in August that ultimately forced the Fed to delay its September rate hike. If China wants to repeat this performance it has 2 days in which to do it.
For now, this is how global markets look like
- S&P 500 futures down 0.6% to 2029
- Stoxx 600 down 1.42% to 358
- MSCI Asia Pacific down 0.4% to 129
- US 10-yr yield down 1bp to 2.22%
- Dollar Index up 0.01% to 97.95
- WTI Crude futures down 0.9% to $36.44
- Brent Futures down 1.1% to $39.29
- Gold spot down 0.3% to $1,069
- Silver spot down 0.3% to $14.07
A closer look at the markets reveals that in the final session of the week, Asian equities shrugged of the positive lead from Wall Street to trade broadly in the red, as weakness in China dampened sentiment. As such, Asian stocks headed for the biggest weekly drop since Sept. Chinese shares slid after a report billionaire Guo Guangchang was missing added to concerns that slowing economic growth. Yuan recorded its biggest weekly drop since an August devaluation.
"Asian markets had a mixed day to end the week,” said Angus Nicholson, Melbourne-based market analyst at IG Ltd. “Japanese markets have clearly reached levels where investors are happy with valuations again. Chinese markets were spooked by the ‘disappearance’ of Fosun’s chairman, quite likely by China’s anti-corruption department.”
The Shanghai Comp (-0.7%) was weighed on by financials amid growing concerns over increased capital outflows, as the PBoC continued to depreciate the CNY fix to bridge the gap with the CNH. While Chinese stocks had also been spooked following reports that the Chairman of the nation's biggest non-state-owned conglomerate (Fosun), had disappeared, igniting probe speculations. ASX 200 (-0.2%) was dragged lower by materials as iron ore sustained its downward spiral having fallen 1.4% in the prior session. Nikkei 225 (+1.0%) bucked the trend with Japanese exporters benefitting from the weaker JPY. JGBs fell amid spill-over selling in T-notes despite the BoJ entering the market.
China's State-owned Asset Supervision and Administration (SASAC) said that SOEs which are unprofitable for 3 years should leave the market and that they will shut, suspend or reorganise long-term unprofitable SOEs in overcapacity industries which fail to adhere to environment, safety and quality standards. Also in China overnight we got New Yuan Loans data, which rose by CNY708.9B, below the Expected CNY735.0B.
Top Asian News
- Fosun Bonds Fall, Stock Halted After Report Chairman Missing: Caixin magazine reports Group has “lost contact” with billionaire Guo Guangchang
- China to Consolidate Shipping Operations at Two Top State Firms: China Ocean Shipping Group and China Shipping Group will consolidate operations
- Hong Kong on the Brink as Builders Offer Stealth Price Cuts: Cheung Kong, Henderson Land among developers offering inducements incl. stamp-tax rebates
- China Ghost Town Developer May Default on Bonds Next Week: Ordos City Huayan says bondholders chose to sell back 1.14b yuan ($176.7m) of bonds early
- Citigroup Trader Fired Over Currency Probe Sues in Singapore: Tian Yuhui was fired the day she returned to work after four-month maternity leave
- China Losing Appeal to World Just as It Opens Bond Market Wider: The two best reasons to buy Chinese bonds are fast fading
- Nobel Laureate Says IMF Move Won’t Propel Yuan to Rival Dollar: Yuan becoming reserve currency “mostly of symbolic value,” Maskin says
European stocks fall for 4th day, led by declines in financial services and autos, on track for a second weekly decline. Italian stocks underperform, Swiss bourse outperforms. "Although everyone is expecting a rate hike from the Fed next week, a lot of questions remain about the future of monetary policy,” Francois Savary, chief investment officer at Geneva-based investment management firm Prime Partners told Bloomberg. "You currently have one central bank in a tightening cycle, and the other can’t actually deliver on expectations. The ECB’s disappointment last week showed that Draghi’s hands are tied. That’s why investors are so unsettled now.’’
In terms of specific movers, Softness has been seen in Co.'s with exposure to South Africa, with the likes of Investec (-8.0%) and Old Mutual (-9.0%) underperforming amid the recent ZAR weakness.
Fixed income markets have moved in tandem with the risk off sentiment, with Bunds extending on recent trade, moving higher throughout the morning and heading towards the 159.00 level.
Top European News
- Standard Chartered’s $5.1b Share Sale Gets 97% Demand: New shares are scheduled to trade in Hong Kong on Dec. 16
- Barclays CEO Staley Said to Extend Hiring Freeze Into Early 2016: A previous ban, implemented by Chairman John McFarlane in Sept. until year-end, was due to be reviewed in Jan.
- Denmark Set to Raise Bond Target as Demand Soars, Liquidity Lags: Will probably try to sell as much as DKK100b ($15b) in bonds next yr, or about one-third more than implied in a previous forecast, according to Nordea and Sydbank
- Cameron Delays Heathrow Decision Until Mid-2016, Sparking Anger: Announcement put back until after London Mayoral election
- Bellway Says Still Trading Well, Well Placed for Volume Growth: Reservation rate rose 12% to 165 homes per week in 18-wk period
- Publicis Loses Media Account as L’Oreal Switches to WPP: Publicis earlier this week lost business with Procter & Gamble
- Cancer Drug Quest Drives Bayer to Accelerate Pipeline Investment: Bayer may have 5 cancer drugs on the market by 2020
FX markets have seen a continuation of recent trend of softness in EM and commodity currencies , with the likes of ZAR seeing further weakness in the wake of the finance minister being replaced earlier in the week, while the RUB continued to be impacted by soft energy prices ahead of their rate decision, whereby the Bank of Russia kept rates on hold but announced intentions to cut rates in the future. AUD has weakened in tandem with softness seen in CNY and the by downbeat data out of China as European participants arrived at their desks.
A week ago today saw OPEC choose not to lower their production output and the implications are still firmly being felt across markets, with energy complex extending on weakness during the European morning as Brent and WTI both hit fresh multi year lows, with the former firmly below USD 39.50 and the latter firmly below USD 36.50. Separately Gold continues to decline amid recovery in the USD, with prices on track for a 7th weekly loss within the past 2 months, as we move a step closer to the key Fed rate decision next week.
Looking ahead at the key US releases, today's highlights include US retail sales, PPI final demand and the preliminary reading of University of Michigan sentiment.
Top Global News
- IEA Sees Oil Glut Lasting Until Late 2016 as OPEC Keeps Pumping: Global oil surplus will persist at least until late 2016 as demand growth slows and OPEC shows “renewed determination” to maximize output, according to the IEA
- Dow Chemical, DuPont Said to Plan Friday Announcement of Merger: Still no guarantee that the terms of the transaction will be agreed by then, said people familiar with the matter
- Buffett’s BNSF Open to Bid for Norfolk to Challenge CP Offer: BNSF is open to making a competing bid for Norfolk Southern, the target of a $27b takeover effort by Canadian Pacific Railway
- Ford to Invest $4.5b in Electrified Vehicles by 2020: Will add 13 electric cars and hybrids by 2020, rising to 40% of its lineup from 13% now
- United Technologies Plans $1.5b Restructuring Program: Restructuring, including reducing the manufacturing footprint in the U.S. and Europe, will result in $900m of annual savings when it’s done, CEO said Thursday
- Adobe Profit Tops Analysts’ Estimates on Cloud Sales Gains: 4Q adj. EPS 62c vs est. 60c, reaffirms FY2016 rev. view ~$5.7b (Oct. 6), adj. EPS ~$2.70
- Yahoo SVP Fuloria Leaving Company as Talent Drain Continues: Fuloria, whose duties included product and engineering for advertising products, is moving on to work with entrepreneurs and early-stage companies
- Senate Passes Short-Term Bill to Avoid Government Shutdown: Would finance the govt. through Dec. 16, requires approval by the House, which plans to vote on it on Friday
- Paris Climate Talks Enter ‘Crunch Time’ With Deal Divisions: Trying to narrow options in the agreement text that range from the amount of global warming that should be tolerated to how countries should review efforts to reduce greenhouse gases
- Macau Casinos Fall on Report China to Crack Down on UnionPay Use: Fell in Hong Kong trading after the South China Morning Post reported China will introduce new measures to crack down on the use of illegal China UnionPay point of service device
- Global Payments Said to Be in Talks to Buy Heartland Payment: A deal could be announced as soon as this month
- All Developed Bond Markets Gain in 2015 in Face of Fed Rate Move
- Chipotle Restaurant Shut Down in Seattle, Adding to Its Woes
Bulletin Headline Summary from RanSquawk and Bloomberg
- EM and commodity linked currencies are in focus amid softness in energy prices and global growth concerns as China remains in the spotlight
- European equities follow their Asian counterpart's lead to trade firmly in the red, with Bunds benefitting from the downbeat sentiment
- Looking ahead, today's highlights include US retail sales, PPI final demand and preliminary reading of University of Michigan sentiment as well as comments from BoE's Weale
- Treasuries rise amid losses in global equities led by EM and commodities before next week’s FOMC meeting; China’s yuan was on course for the steepest weekly drop since its August devaluation.
- The global oil surplus will persist at least until late 2016 as demand growth slows and OPEC shows “renewed determination” to maximize output, according to the IEA
- Fosun International Ltd. bonds plunged by a record and the company suspended its shares in Hong Kong after Caixin magazine reported that billionaire Chairman Guo Guangchang had gone missing
- The baffling disappearance of Chinese executives in recent weeks has drawn attention to the ruling Communist Party’s practice of holding people incommunicado either as targets of investigations themselves or to help with probes of others
- Ukraine may need to step up efforts to resolve a standoff with Russia over a $3b bond due this month to keep receiving aid from the IMF
- Less than 24 hours after South Africa President Jacob Zuma sent markets into chaos by abruptly firing his finance minister and replacing him with an untested unknown, fund managers and analysts warned that the ANC’s reputation for prudent financial management was practically in tatters
- The strong showing for Marine Le Pen’s National Front in the first round of France’s regional elections risks undermining her bid for a repeat in the second as a slew of polls suggest she may not be able to rally enough support to win major executive power for the first time in Sunday’s run-off
- Sovereign 10Y bond yields mixed. Asian stocks lower, European stocks fall, U.S. equity-index futures decline. Crude oil slides, copper rallies, gold drops
US Event Calendar
- 8:30am: Retail Sales Advance m/m, Nov., est. 0.3% (prior 0.1%)
- NOTE: U.S. Retail Sales Seen Having Edged Higher in Nov.
- Retail Sales Ex Auto m/m, Nov., est. 0.3% (prior 0.2%)
- Retail Sales Ex Auto and Gas, Nov., est. 0.4% (prior 0.3%)
- Retail Sales Control Group, Nov., est. 0.4% (prior 0.2%)
- 8:30am: PPI Final Demand m/m, Nov., est. 0% (prior -0.4%)
- NOTE: U.S. PPI Remains Depressed Ahead of Fed Liftoff
- PPI Ex Food and Energy m/m, Nov., est. 0.1% (prior -0.3%)
- PPI Ex Food, Energy, Trade m/m, Nov., est. 0.1% (prior -0.1%)
- PPI Final Demand y/y, Nov., est. -1.4% (prior -1.6%)
- PPI Ex Food and Energy y/y, Nov., est. 0.2% (prior 0.1%)
- PPI Ex Food, Energy, Trade y/y, Nov. (prior 0.4%)
- 10:00am: Business Inventories, Oct., est. 0.1% (prior 0.3%)
- 10:00am: U. of Mich. Sentiment, Dec. P, est. 92 (prior 91.3)
- U. of Mich. Current Conditions, Dec. P (prior 104.3)
- U. of Mich. Expectations, Dec. P (prior 82.9)
- U. of Mich. 1 Yr Inflation, Dec. P (prior 2.7%)
- U. of Mich. 5-10 Yr Inflation, Dec. P (prior 2.6%)
DB's Jim Reid concludes the overnight wrap
Presents for investors remain few and far between and there is still no sign of a anta laus rally although the S&P 500 did climb nearly 1% on the day 90 minutes before the close before slipping to end the day only +0.23% higher. Having shrugged off most of what was another down day for Oil, it appears that the index finally succumbed to one last dip lower for WTI into the close which dragged down energy stocks, the sector closing still with a +0.62% gain but at one stage was up over +1.5%. A fifth-consecutive day of near seven-year lows was made for WTI after it finished down -1.08% at $36.76, the latest fall not helped by OPEC reporting that November crude production was the highest in three years. Brent closed below $40 for the first time in this recent sell-off. That OPEC meeting last Friday feels like a long time ago, with prices now 13% down from the pre-meeting highs that day.
Some of the more interesting newsflow yesterday in the energy sector was at the micro level. Contributing to the early bounce for the sector were announcements from Chevron and ConocoPhillips with both energy heavyweights signaling that they intend to cut capex by a further 25% next year – the latter also expecting to sell down some non-core assets. It wasn’t just the US names in focus as Glencore was out with some cutback measures of its own, specifically targeting deeper debt reductions, more capex reductions and further divestments. Those measures sent Glencore’s share price up 7% yesterday, while its 10 year maturity bonds closed some 4pts higher. There was less good news for Anglo American however. Fresh off the back of its investor day earlier this week in which the company detailed out its own set of bumper measures, Moody’s downgraded the miner one notch to Baa3 late last night. The move puts it in-line with &P, however Moody’s also kept Anglo on review for further downgrade, raising the possibility of the company being downgraded to HY.
Credit markets were under pressure yesterday on both sides of the pond. In Europe Crossover (+5bps) closed wider for the fourth consecutive day, while in the US and despite the slightly better performance for US equities, CDX IG finished nearly 2bps wider on the day. Meanwhile, catching our eye, the WSJ was out with a story last night reporting that a large HY mutual fund in the US is blocking clients from withdrawing their money and is instead seeking an orderly liquidation. According to the article, the moves come after a number of redemption requests within the fund and also difficult liquidity conditions. Notably, the fund is sizeable with $789m in assets, although that is down from $2.4bn earlier in the year. In the first six days of this month, over $120m was said to have been withdrawn from the fund alone. A warning sign in an asset class under a fair bit of stress at the moment given these latest moves in energy prices. Speaking of which, US HY energy spreads were actually 1.5bps tighter yesterday, snapping a five-day run where spreads widened 126bps.
Moving on, it’s been a reasonably quiet week for data in the U this week, although today will see the November retail sales released where expectations are currently running for a +0.3% mom gain in the headline and +0.4% gains for the ex auto and ex auto & gas prints. Our US economists are a little less optimistic and are forecasting an unchanged reading at the headline and +0.2% and +0.3% gains for the two respective core readings. More important in their view however is the core retail control figure. This is the core print which excludes autos, gas and building materials and is the component used to estimate goods spending in the GDP accounting. Market expectations for this is a +0.4% mom gain.
Before we get there though, aside from a gain for the Nikkei (+1.00%) this morning, it looks like the bulk of bourses in Asia are to set to close out the week on a down note. Indeed the Shanghai Comp is down -0.72% while there are falls also for the Hang Seng (-0.76%), Kospi (-0.34%) and ASX (-0.16%) – the latter seeing resources names under pressure. Oil markets are down around half a percent while credit indices in Asia and Australia have both widened a couple of basis points.
Staying in Europe, equity markets continued their slide as yesterday the Stoxx 600 finished the session -0.27%, marking the 7th time in the last 8 sessions that the index has closed lower. Some of this may have reflected comments from the E B’s Praet who, commenting on the reaction post the E B meeting last week, said that ‘the markets exaggerated the situation’ and that ‘there was speculation about a package of measures that had never been up for Data in Europe yesterday was firstly centered in France where we saw the November inflation print come in softer than expected (-0.2% mom vs. 0.0% expected), which dragged down the YoY rate by one-tenth to 0.0%. French Industrial production (+0.5% mom vs. 0.0% expected) was significantly better than expected, although this was offset by a soft manufacturing production print (-0.5% mom vs. +0.1% expected). In the UK the BoE left rates on hold as expected by a vote of 8-1 with Ian McCafferty the lone dissenter after again arguing for a 25bps hike. The minutes revealed not much change in view relative to the November inflation report, while it was acknowledged that there ‘was no mechanical link’ between UK policy and policy of other central banks.
In the US yesterday we saw initial jobless claims tick up by 13k last week to 282k (vs. 270k expected) which was a five month high although this was blamed on seasonality more than anything else. Meanwhile the November import price index fell by less than expected last month at -0.4% mom (vs. -0.8% expected).
Turning over to the day ahead, this morning in Germany we’ll get the final reading for November CPI where no change is expected from the early +0.1% mom flash. In the UK the latest construction output numbers are due. Over in the US this afternoon the main focus will be on the retail sales data, although it’s also worth keeping a close eye on the November PPI print, particular the details on the healthcare industries series which is used to construct the healthcare services component of the core PCE deflator. Elsewhere, business inventories data for October and the preliminary University of Michigan consumer sentiment print for December are due out.
Finally, while preparations for the holiday season will likely be on a lot of our readers’ agendas for the weekend, it’s worth keeping an eye on the next slug of China data due out tomorrow morning with the November retail sales, industrial production and fixed asset investment readings all expected. This will likely dominate the opening on Monday morning as we start a week that's likely to see the first Fed hike for 9 years!