It Wasn’t Only China: Here Is What Else Is Crashing Overnight

It Wasn’t Only China: Here Is What Else Is Crashing Overnight (ZeroHedge, Dec 9, 2014):

It wasn’t just China’s long overdue crash last night. In addition to the Shanghai Composite suffering its biggest plunge since August 2009, there has been a sharp slide in the USDJPY which has broken its uptrend to +∞ (and hyperinflation), and around the time Chinese gamblers were panicking, the FX pair tumbled under 120, although since then the 120 tractor beam has been activated. Elsewhere, the Athens stock exchange is also crashing by over 10% this morning on the heels of news that the Greek government has accelerated the process to elect the next president and possibly, a rerun of the drama from the summer of 2012 when the Eurozone was hanging by a thread when Tsipras almost won the presidential vote and killed the world’s most artificial and insolvent monetary union. And finally, the crude plunge appears to have finally caught up with ground zero, with ADX General Index in Abu Dhabi plunging 3.5%, also poised for the biggest drop since 2009. In fact the only thing that isn’t crashing (at least not this moment), is Brent, which did drop to new 5 year lows earlier under $66, but has since staged a feeble rebound.

File picture shows a Saudi trader monitoring stocks at the Saudi Investment Bank in Riyadh

So… another record high in the fully decoupled from the rest of the world (as well as reality and reationality) S&P500 any minute now?

Some more details on the overnight action from RanSquawk

European equities trade in the red across the board following on from both their US and Asia-Pacific counterparts. Yesterday, saw a negative close on Wall Street, with the slide in WTI prices placing a further squeeze on energy names. This sentiment filtered through to the Asian session, however, the main focus overnight was on Chinese equities. The Shanghai Comp. (-5.4%) saw its biggest 1 day loss since August 2009, with the move lower led by a surge in money-market rates after the Chinese Securities Depository and Clearing Corp raised the threshold for collateral it would accept for repurchase operations. The PBOC tried to stabilise this by intervening in FX markets, setting a stronger CNY fix. However, USD/CNY actually saw its largest intra-day rise since 2008. It is worth bearing in mind that this slide in Chinese equities comes after the recent rally, which has seen the Shanghai Comp. surge circa 30% over the past month to a 4yr high, while US and European equities trade in close proximity to record highs.

This negative sentiment filtered through to the European session with all indices red across the board, with energy and basic material names the laggard sectors. On a stock specific basis, the notable underperformer in Europe is Tesco (-11%) after issuing yet another profit warning, which has subsequently weighed on other UK supermarket names. Furthermore, the FTSE has also been placed under pressure due to its heavy composition of commodity-related names. Fixed income products have benefitted from the softness seen in stocks, with Bunds continuing to extend on their recent gains, as the flight to quality has benefitted core European products. However, the Greek spread continues to widen to the German benchmark amid political uncertainty and potential snap elections, which has also weighed on the Greek stock index (-6.5%), with financials in the index down as much as 8%.

In terms of the day ahead, we kick this morning off with October trade reports out of both Germany and France and follow this up with both industrial and manufacturing production out of the UK. Later today we’ve got further employment data out of the US to look forward to with the JOLTS job opening print for October. Although we note that this data is somewhat lagging compared to other recent indicators, the print is still important given it forms part of the Fed Chair Yellen’s dashboard of economic indicators. Elsewhere in the US this afternoon we get the NFIB small business optimism reading along with the October wholesale inventories and the IBD/TIPP economic optimism print.

Bulletin Headline Summary from Bloomberg and RanSquawk

  • European equities trade in negative territory after a heavy sell-off in China overnight (-5.4%) resulting from a spike higher in money-market rates and collateral tightening for repurchase agreements.
  • The USD-index has erased Hilsenrath-inspired gains, with the softness in stocks prompting a safe-haven bid into JPY and CHF with JPY further underpinned by an unwind of carry trade positions.
  • Looking ahead, today sees the release of US wholesale inventories, API inventories, with ECB’s Makuch, Praet and Constancio all due on the speaker slate.
  • Treasuries steady before week’s $59b auctions begin with $25b 3Y notes. WI yield 1.095% after drawing 0.998% in Nov.; would be highest stop since April 2011.
  • Fed officials are discussing the future of their vow to hold rates low for a “considerable time,” ahead of a meeting next week where they will weigh that pledge against signs of economic strength
  • China’s clearing agency said yesterday it won’t allow bonds rated below AAA or sold by issuers graded lower than AA to be used as collateral for short-term loans obtained through repo
  • The new rules sparked a retreat in lower-rated bonds of local government financing vehicles and contributed to the biggest tumble in Shanghai shares since 2009 as noteholders reassessed the appeal of owning such debt
  • China’s leaders gathered for an annual meeting to map their economic plans for next year under the theme of “new normal,” a phrase adopted by President Xi Jinping to reflect a push to manage slower expansion
  • China’s residential building boom is petering out, with the effects seen from slumping steel and cement prices, to electricity use, rail-freight traffic and retail sales
  • Oil prices will stay at about $65 a barrel for at least half a year until OPEC changes its collective production or world economic growth revives, said the head of Kuwait Petroleum Corp
  • Because energy accounts for as much as half the cost to produce food and metals, all sorts of commodities will keep dropping, according to SocGen and Citi
  • ECB plans to limit duration of emergency liquidity aid (ELA) to banks to six months, Handelsblatt reports, citing unidentified central bank staff
  • U.K. manufacturing output unexpectedly fell for the first time in five months in October, declining 0.7% after 0.6% gain in October; median est. in Bloomberg survey was for 0.2% increase
  • Greek stocks and bonds slumped after Prime Minister Samaras opted to bring forward the process of choosing a new head of state, risking parliamentary elections in Europe’s most indebted state as early as January
  • Sovereign yields mostly higher. Asian stocks lower, Shanghai falls 5.4%. European stocks and U.S. equity-index futures decline. Brent crude and gold higher, copper falls

US Event Calendar

  • 7:30am: NFIB Small Business Optimism, Nov., est. 96 (prior 96.1)
  • 10:00am: JOLTs Job Openings, Oct. (prior 4.735m)
  • 10:00am: Wholesale Inventories, Oct., est. 0.1% (prior 0.3%); Wholesale Sales, Oct. (prior 0.2%)
  • 10:00am: IBD/TIPP Economic Optimism, Dec., est. 47 (prior 46.4)


The USD-index was initially seen higher overnight following the latest piece from WSJ’s Hilsenrath which suggested the Fed may drop the “considerable time” phrasing sooner rather than later”. However, the gains for the index were trimmed and subsequently reversed into losses, with the flight-to-quality alongside the slide in stocks benefitting JPY and CHF. Gains for JPY were further boosted by profit-taking in USD/JPY and an unwind of carry trade positions. Elsewhere, despite trading lower overnight, AUD has mounted a modest recovery vs. USD as energy prices pare some of yesterday’s heavy losses, while the latest production data from the UK provided a modest downtick for GBP.


Energy prices have posted a modest recovery of yesterday’s heavy losses which saw WTI settle down over 4% at the NYMEX pit close, which marked its lowest settlement price since July 2009, ahead of today’s API inventory report. Precious metals prices have also posted a modest recovery and trade in positive territory alongside the softness in the USD-index. However, iron ore prices were once again weighed on, this time as a result of JPMorgan cutting its 2015 iron ore price forecast by 24% to USD 67/ton, cut 2016 forecast by 23% to USD 65/ton. On a geopolitical front, Ukrainian Military has suspended combat in Eastern Ukraine and is ready to ‘observe a day of silence’, while Russia’s Lavrov says a `contact group` on the Ukraine to meet in coming days to discuss implementation of ceasefire plan in Eastern Ukraine.

* * *

DB concludes the overnight event recap

There’s still plenty to play for in 2014 and yesterday we got another date for the diary as Greece’s Presidential election process was accelerated to start next Wednesday December 17th with the results likely known on December 29th. Our expert George Saravelos thinks that if the vote is successful the Troika and government should be able to find common ground once this political risk is over but its all coming to a head slightly sooner than anticipated. The failure to elect a President by the existing parliament would lead to a national general election within 3-4 weeks, with the current SYRIZA opposition party leading in the polls (according to various opinion polls). So very large electoral uncertainty and the lack of an official financing backstop ensures a meaningful period of uncertainty ahead for Greece. In rounds 1 and 2 (Dec 17th and 22nd) the Government requires 200 out of 300 MPs which is extremely unlikely. In the final round (Dec 29th) they require 180 votes. George believes that the probability of an early election is 60/40. This risk has fallen a little of late as some swing voters have leaned towards the Government but this is becoming quite a binary event into year-end with the process starting on the same day as the Fed have their all important meeting. In itself this may not be a huge global macro story but it could indirectly lead to the first non mainstream party being elected after a few near misses in recent years. How they behave if they get elected may give us some clues about the end game in Europe. Would SYRIZA be successful in pushing for further debt restructuring and a different policy approach or will the negotiations with the EU force them to toe the existing line due to the consequences of not doing so? An interesting period ahead.

So the voting kicks off on FOMC day and talking of the Fed, they will surely be scratching their head at the fact the 10 year Treasuries is back to 2.26% only one trading day after the positive shock from payrolls. We traded at 2.25% just before Friday’s blockbuster report only to then hit intraday highs of around 2.34% yesterday before rallying hard into the close. It was a particularly data-light day in the US so some dovish notes from Atlanta Fed’s Lockhart (who will be a FOMC voting member next year) appeared to provide some direction. Specifically, Lockhart commented that ‘inflation is the one key element that does not seem to be consistent with what we are seeing in terms of growth and what we are seeing in the labour market’ and also that ‘if inflation goes completely sideways or begins to indicate a decline, disinflation, then I think it will raise some concerns’. The largely centrist figure went on to say that the Fed should be in no rush to drop the ‘considerable time’ language if it conveyed an imminent lift-off decision, although re-iterated his projection of a ‘midyear lift-off’. On that note, WSJ’s Hilsenrath reminded us that Fed officials are seriously debating dropping the ‚considerable time? language at the upcoming meeting but no decision has yet been made apparently.

The demand for Treasuries was probably also fuelled by what was a notably weaker day for risk assets yesterday. The S&P 500 came off its record highs to close -0.73% at the end of play whilst credit markets also softened with CDX IG +2bps and HY energy bonds generally off a couple of points. The day saw another big leg lower in Oil markets with both WTI (-4.24%) and Brent (-4.17%) closing at $63.05/bbl and $66.19/bbl, respectively. Both oil grades closed at their five year lows and are extending those declines in trading this morning. There were a few negative reports which may have added pressure on oil. Saudi Arabia last week reportedly (Bloomberg) sold crude into Asia at the deepest discount in at least 14 years whilst the head of Kuwait Petroleum Corp was on the wires saying that Oil prices will stay at about US$65/bbl for at least half a year until OPEC changes its collective production or world growth revives. Interestingly Kuwait yesterday also announced that it plans to spend about $7bn to develop heavy oil fields despite where oil prices are now which serves as a contrast to what its US peers are doing. Indeed ConocoPhillips is planning to cut its 2015 capex spending plans by 20% relative to what it did this year. Specifically the company plans to slow its activity in US shale exploration. Back to market moves, Energy stocks (-3.9%) led the sector declines in the S&P 500 yesterday by closing lower for its third consecutive day. Large cap names such as Exxon Mobil, Chevron and ConocoPhillips closed -2.26%, -3.67%, and -4.16%, respectively.

Turning our attention to this side of the Atlantic, there was something of a rally in both core and peripheral government bonds yesterday following comments by the ECB’s Nowotny. Looking at the price action, 10y benchmark yields in Germany (-7bps) and France (-6bps) tightened to 0.713% and 0.970% respectively whilst looking across the peripheral space, there were notable gains for Spain (-4.8bps), Portugal (-2.9bps) and Italy (-3.4bps) to 1.785%, 2.719% and 1.943% respectively – all fresh record lows. Indeed the latter has hit a record low despite a move on Friday after the market close by S&P to cut its sovereign rating to BBB- (stable) from BBB. Coming back to the comments from Nowotny yesterday, sentiment was somewhat lowered after the ECB member was quoted as saying that ‘we see a massive weakening in the eurozone economy’ as well as expressing concerns that inflation would fall further in 2015. On the subject of QE however, and in stark contrast the Bundesbank Chief’s Weidmann recently, Nowotny appeared to be more on board with the idea of public QE, specifically saying that it was ‘widely formulated’ that the central bank was considering all assets and instead saying that ‘of course we’re thinking specifically about government bonds’. Wrapping up the market moves, the Stoxx 600 closed -0.67% – not aided by a decline in the energy component although in reality all sectors finished the day in the red. Finally German industrial production came in at a modest miss, the +0.2% mom figure below market consensus of +0.4%.

Away from the declines in energy stocks, EM currencies are one other such asset class feeling the force of a plummeting oil price as well as a stronger Dollar. An article in the FT pointed out that an index measuring a variety of emerging market currencies has dropped to its lowest level since 2000. The falls appear to be wide-ranging, with the likes of oil-sensitive producers like Russia and Nigeria in particular suffering from the slump in prices and hitting all time lows whilst oil consuming countries including Turkey and South Africa are also suffering from a depreciating currency. Just staying on this topic of FX markets, there was news yesterday that Mexico’s central bank is planning a currency intervention following a drop in the Peso to a two year low at 14.39/$ – slumping around 10% over the last six months (Reuters). The central bank have stated that policy makers will auction $200m on days when the Peso weakens at least 1.5% from the previous close – mirroring similar support put in place in November 2011.

Refreshing our screens this morning Asian equity markets are mostly trading lower with the exception of China. China interest rate swaps rose to a 3 month high on news that the regulator has stopped accepting new applications for repo for lower graded credits spurring expectation of lower demand for these issues. The volatility has forced one of the top-tier issuers (State Grid Corp of China) to delay its planned bond sale. This weakness has also prompted demand for China 5y CDS which widened by about 2bps overnight. Malaysia is also bit of an underperformer as its CDS moved 6bp wider with the oil exporter suffering from the further declines in crude. Back to equities, the Hang Seng, Nikkei and KOSPI are all down -1.12%, -0.87% and -0.30% as we type. Staying within the region we also have the AUD moving sharply lower overnight. The Aussie is now trading at around 82.3 cents against the USD down from around 83.2 at the end of last week as RBA rate cut expectations continue to build.

In terms of the day ahead, we kick this morning off with October trade reports out of both Germany and France and follow this up with both industrial and manufacturing production out of the UK. Later this afternoon we’ve got further employment data out of the US to look forward to with the JOLTS job opening print for October. Although we note that this data is somewhat lagging compared to other recent indicators, the print is still important given it forms part of the Fed Chair Yellen’s dashboard of economic indicators. Elsewhere in the US this afternoon we get the NFIB small business optimism reading along with the October wholesale inventories and the IBD/TIPP economic optimism print.

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