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Dazed And Confused: Futures Tumble Below 200 DMA, Oil Near $40, Soaring Treasurys Signal Deflationary Deluge

It is unclear what precipitated it (some blamed China concerns, fears of rate hikes, commodity weakness, technical picture deterioration although  it's all just goalseeking guesswork) but overnight S&P futures followed yesterday's unexpected slide following what were explicitly dovish Fed minutes, and took another sharp leg lower down by almost 20 points, set to open below the 200 DMA again, as the dazed and confused investing world reacts to what both the Treasury and Oil market signal is a deflationary deluge. Indeed, oil is about to trade under $40 while the 10Y Treasury was last seen trading at 2.07%. Incidentally, the last time oil was here in March of 2009, the Fed was about to unleash QE 1. This time, so called experts are debating if the Fed will hike rates in one month or three.

Not helping matters was China's national plunge protection team, after Chinese shares fell over 3% and the Shanghai Composite closed a mere eight points above its 200-day moving average. This happens the same day China’s central bank injected the most funds in open-market operations since February as intervention to prop up the yuan strained the supply of cash and drove a key money-market rate to a four-month high. Ironically the "targeted" liquidity injections actually dampened expectations of further monetary easing.

According to Bloomberg, the People’s Bank of China pumped a net 150 billion yuan ($23 billion) into the financial system this week, data compiled by Bloomberg show. That’s the most since before the Chinese New Year holiday, when seasonal demand for cash spikes. The authorities are providing another 170 billion yuan through loans and an auction of deposits. Yuan purchases risk driving borrowing costs higher at a time of slowing economic growth unless the monetary authority releases additional cash.

“Front-end rates have been edging up, likely resulting from tighter liquidity conditions amid intervention,” said Frances Cheung, head of Asia ex-Japan rates strategy at Societe Generale SA in Hong Kong. "The PBOC needs to step up its open-market operations to offset the liquidity withdrawal on the foreign-exchange side.”

And there again is another unintended consequence of central planning as the PBOC now scrambles to fight the consequences of its own actions.

Perhaps sensing that the micromanagement of markets is failing and central banks everywhere are rapidly losing control, Asian equity markets were a sea of red and traded in negative territory following the weak lead from Wall Street as the slump in the energy complex and concerns over China continues to weigh on global sentiment. Subsequently, energy names dragged the Nikkei 225 (-0.9%) and ASX 200 (-1.7%) lower amid the tumble in crude prices. Japan's Topix fell 1.5% and is now down 4.6% from the multi year high it achieved just eight trading days ago. The MSCI Emerging Market Index fell to its lowest close since October 2011.

There was also speculation in Chinese press that China may set an average GDP target of 6.5% for the 2016-2020 period. Hang Seng (-1.7%) had seen technical selling as the index entered bear market territory having fallen 20% from its April peak and approaches a 'death cross' for the 1st time in a year with the 50 DMA in close proximity to breaching below the 200DMA. JGBs rose amid spill-over buying in USTs and weakness in Japanese equities.

Dovish interpretation of the FOMC minutes failed to lift investor sentiment , which instead remained depressed as market participants focused on the ever growing risks stemming from China. As a result, stocks in Europe (Euro Stoxx: -0.9%) traded lower since the get-go, with energy names underperforming on the sector breakdown amid the ongoing slump on energy and base metals. The downside price action in futures markets also saw the e-mini S&P break below the 200 DMA at 2064. High profile US earnings today include, Gap and HP.

Also of note, a Greek Finance Ministry official has stated that Greece have repaid EUR 3.4bIn owed to the ECB after receiving EUR 13bIn in the first tranche of their ESM funding following the bailout approval, while Greek press suggests PM Tsipras is to meet with key advisers at 1400 local time (1200BST) and will then decide when to go for early elections after rumours in Greece that Tsipras could hold a snap election on September 13th or 20th.

In fixed income, weakness in equities has filtered through to strengthen core fixed income products with Bund Sep'15 futures higher by around 40 ticks heading into the North American crossover. As such the lower yields led to unfavourable rate flows, which together with less than impressive UK retail sales (Inc Auto Fuel (Jul) M/M 0.10% vs. Exp. 0.40%) weighed on GBP, which in turn has underperformed its major peer. This, together with the consequent re-pricing of Fed rate lift-off expectations following the FOMC minutes, saw EUR/USD trade firmer.

Moving to FX, the focus remained on commodity linked (AUD,CAD, etc) and EM currencies (TRY, KTZ, etc) which continued to come under pressure on the back of the ongoing rout in energy and base metals markets, with the price volatility rising following the recent CNY devaluation by the PBOC. On that note, the FT noted that the capital outflow from EM states stands at around USD 1trl over the past 13 months.

On that note, the ongoing reluctance by the Turkish central bank to counter the weakness in TRY, together with the ongoing political and geo-political concerns saw Turkish Lira (TRY) fall to its weakest level on record vs. USD to 2.9853. Also, the Kazakhstan Tenge (KZT) was the notable underperformer (lower by 28% vs. the USD) after the Kazakh central bank free floated its currency overnight.

Elsewhere, the South Korean Security Council is convened at the moment with military at the highest alert level following an exchange of Artillery fire at the border with North Korea, which comes after 2 South Korean soldiers were injured on North Korean Land mines at the border earlier in August and in retaliation to this, South Korea began announcing propaganda over the border using loud-speakers.

The energy complex has seen continued weakness throughout the Asian and European sessions with WTI Sep'15 futures firmly below the USD 41/bbl handle ahead of the expiry at 1930BST/1330CDT. Also of note, today sees the EIA NatGas storage change, which is expected at 59. Elsewhere, metals have seen strength on the back of the FOMC minutes and USD weakness, with gold printing its highest level in 5 weeks.

Going forward, market participants will get to digest the release of the
latest US weekly jobs report, Philadelphia Fed and existing home sales.

In summary: European shares remain close to intraday lows with the financial services and personal & household sectors underperforming and basic resources, retail outperforming.  Kazakhstan’s Tenge falls 23% to all-time low against the dollar as country scraps FX rate band. PBOC injects most funds since Feb. amid yuan intervention. Turkish lira weakens past 3 per dollar for first time, rand weakens past 13 per dollar for first time since Dec. 2001. Oil extends decline from lowest close in more than 6 years. Fed minutes yesterday showed officials still concerned by low inflation, probability of a rate hike next month has fallen, futures show. U.K. retail sales in line with estimates. The Italian and Dutch markets are the worst-performing larger bourses, the U.K. the best. The euro is stronger against the dollar. German 10yr bond yields fall; French yields decline. Commodities decline, with Brent crude, WTI crude underperforming and zinc outperforming. U.S. jobless claims, continuing claims, Bloomberg consumer comfort, Bloomberg economic expectations, Philadelphia Fed index, existing home sales, leading index due later.

Market Wrap

  • S&P 500 futures down 0.7% to 2059.2
  • Stoxx 600 down 1.2% to 376.9
  • US 10Yr yield down 3bps to 2.1%
  • German 10Yr yield down 4bps to 0.58%
  • MSCI Asia Pacific down 1.6% to 133.9
  • Gold spot up 0.5% to $1139.7/oz
  • Eurostoxx 50 -1%, FTSE 100 -0.4%, CAC 40 -0.9%, DAX -0.9%, IBEX -0.8%, FTSEMIB -1.4%, SMI -0.7%
  • Asian stocks fall with the Nikkei outperforming and the Shanghai Composite underperforming; MSCI Asia Pacific down 1.6% to 133.9
  • Nikkei 225 down 0.9%, Hang Seng down 1.8%, Kospi down 1.3%, Shanghai Composite down 3.4%, ASX down 1.7%, Sensex down 1.2%
  • 1 out of 10 sectors rise with telcos, health care outperforming and energy, materials underperforming
  • Euro up 0.4% to $1.1165
  • Dollar Index down 0.08% to 96.28
  • Italian 10Yr yield down 4bps to 1.77%
  • Spanish 10Yr yield down 5bps to 1.94%
  • French 10Yr yield down 4bps to 0.93%
  • S&P GSCI Index down 0.7% to 352.4
  • Brent Futures down 1.5% to $46.4/bbl, WTI Futures down 1.2% to $40.3/bbl
  • LME 3m Copper up 1.6% to $5072.5/MT
  • LME 3m Nickel up 0.2% to $10445/MT
  • Wheat futures up 0.3% to 501.5 USd/bu

Bulletin Headline Summary from RanSquawk and Bloomberg

  • Dovish interpretation of the FOMC minutes failed to lift investor sentiment, which instead remained depressed as market participants focused on the ever growing risks stemming from China to weigh on equities
  • Unfavourable rate flows and less than impressive UK retail saw GBP underperform its major counterparts
  • Going forward, highlights include US weekly jobs report, Philadelphia Fed, existing home sales and EIA natural gas storage change data as well as earnings from, Gap and HP
  • Treasuries gain amid global equity rout, further losses in oi;
  • Kazakhstan became the latest country to abandon control of its currency, tenge plunges 23% after country shifted to a free float.
  • PBOC injected the most funds in open-market operations since February as intervention to prop up the yuan strained the supply of cash and drove a key money-market rate to a four- month high
  • The Shanghai Composite dropped 3.4% to 3,664.29, lowest level since Aug. 6; about 17% of mainland-listed shares remain halted
  • North Korea fired a rocket at a South Korean border position, prompting Seoul’s forces to unleash an artillery barrage across the demilitarized zone dividing the two countries
  • When it comes to using a private server for her e-mails when she was secretary of state, Hillary Clinton "didn’t really think it through," according to her communications director
  • Sovereign 10Y bond yields lower. Asian and European stocks fall, U.S. equity-index futures drop.Crude oil lower, gold and copper rise

US Event Calendar

  • 8:30am: Initial Jobless Claims, Aug. 15, est. 271k (prior 274k)
    • Continuing Claims, Aug. 8, est. 2.265m (prior 2.273m)
  • 9:45am: Bloomberg Consumer Comfort, Aug. 16 (prior 40.7)
    • Bloomberg Economic Expectations, Aug. (prior 45.5)
  • 10:00am: Existing Home Sales, July, est. 5.43m (prior 5.49m)
    • Existing Home Sales m/m, July, est. -1.1% (prior 3.2%)
  • 10:00am: Philadelphia Fed Business Outlook, Aug., est. 6.5 (prior 5.7)
  • 10:00am: Leading Index, July, est. 0.2% (prior 0.6%)

DB's Jim Reid completes the overnight recap

Markets are also slightly lost, upset and confused at the moment with a slightly lower US CPI and a dovish set of Fed minutes setting up a sharp re-pricing of the front end of the US curve last night with 2yr notes falling 6.1bps to 0.659% and the probability of a September hike falling to 38% from 48% 24 hours earlier and 54% at its recent peak on August 7th. 10yr yields also saw a decent move lower yesterday, falling 6.7bps to 2.126% and back to down to the lowest closing yield since May 29th. The minutes briefly helped reverse a 1% loss in US equities after another weak European session (Stoxx 600 -1.76%) but it ended back down nearer to its session lows at the close (-0.83%).

EM woes and continued falls in Oil continue to hit sentiment. Interestingly the Fed's minutes refer to the July 28-29th meeting before the Chinese devaluation and associated more recent EM troubles. Oil is also down over 15% since they last met. Even with what they knew then it would be hard pressed to say that the committee had high conviction that September was the right month to start the hiking cycle. The minutes said that “Almost all members” indicated that “they would need to see more evidence that economic growth was sufficiently strong and labor markets conditions had firmed enough for them to feel reasonably confident that inflation would return to the Committee’s longer-run objective over the medium term,”. Added to that was the comment that ‘it was noted that considerable uncertainty remained about when wages might begin to accelerate and whether that development might translate into increased price inflation’. This certainly feels more dovish to how the market interpreted the statement when it originally came out. Despite that, without committing to timing the Fed are still clearly keeping options open and the hawks will point towards the statement that most participants ‘judged that the conditions for policy firming had not yet been achieved, but they noted that conditions were approaching that point’.

Despite the recent Yuan devaluation coming after the latest Fed meeting, there was still some mention of the risks to the US economy from a slowdown in China growth, while the slump in the stock market was played down with regards to any impact on growth. Staying with China, this morning the Shanghai Comp is heading into the midday break down 0.40% while the Shenzhen is up 0.37%, both having recovered from earlier deeper declines. Although as we repeatedly have to say, please watch the last couple of hours of trading. Yesterday saw the Shanghai Comp completely reverse the 3% losses as we went to print to close up 1.23%.

Markets are broadly weaker elsewhere in Asia this morning. The Nikkei (-1.06%), Hang Seng (-1.25%), Kospi (-0.63%) and ASX (-1.26%) are all down as we type. Meanwhile, in the FX space the reaction to the PBoC Yuan moves continues and shortly after we saw the State Bank of Vietnam move yesterday to devalue the Dong, Kazakhstan followed suit by allowing the Kazakh Tenge to devalue nearly 4.5% yesterday before going one step further this morning by announcing that they are to scrap the ER band for the currency and instead move to a free-float, with the currency tumbling a further 20% as a result. Aside from a slight decline for the Malaysian Ringgit (-0.14%), moves have been fairly muted in Asian FX markets this morning with the onshore Yuan (+0.1%) a tad firmer despite the news that the IMF has said that it will keep its current benchmark currency basket frozen until the end of September 2016, making October 2016 the earliest possible date for the Yuan to be considered in its SDR basket.

Back to yesterday’s US inflation data. Headline CPI rose +0.1% mom during July, a tad behind market expectations for a +0.2% rise, but enough to nudge up the annualized rate as expected to +0.2% yoy. The monthly core print also disappointed slightly (0.1% mom vs. +0.2% expected) but was enough to keep the annualized rate unchanged as expected at +1.8% yoy. The 3-month annualized rate did however drop to 1.8% from 2.3% in June. Combined with the FOMC minutes the Dollar index dipped 0.70% yesterday and brought to a halt four previous days of gains.

Equity markets struggled to latch onto any momentum yesterday and that was largely as a result of another hugely weak day in the Oil space. WTI closed the session down 4.27% to finish at $40.80/bbl, the lowest settlement since 2nd March 2009. Meanwhile Brent finished down 3.38% at $47.16/bbl after previous day hopes that we may see a decline in US stockpiles was given a dent after the EIA reported that crude supplies rose 2.62m barrels last week. Both have declined another half a percent this morning. Elsewhere Copper (-0.79%) closed down below $5000/tn for the first time since July 2009 at $4995/tn although it was a better session for Aluminum (+0.16%), Zinc (+1.25%) and Gold (+1.45%) – the latter bouncing on the back of the US dataflow and FOMC minutes.

The pressure on EM continues and that’s certainly been evident in the huge selloffs in their currencies as well as the outflows which we touched on 24 hours ago. Yesterday we also saw the MSCI EM index tumble a further 0.90%, a fall of nearly 7% MTD now after declines of 7.3%, 3.2%, and 4.2% in July, June and May respectively with the index now creeping in on the 2011 lows.

Closer to home yesterday we finally got the news that the Euro area finance ministers have signed off on the Greek bailout following yesterday’s parliamentary approvals from Germany and Netherlands. As a result, it’s expected that Greece will receive its first tranche from the ESM today, in turn allowing the nation to pay off its ECB debt repayment. Headlines around Greece have certainly abated of late after dominating for much of the year, but there’s still plenty of political risk on the horizon and while we are unsure of the potential timing of any snap election, an autumn time-frame is looking realistic, so one to keep an eye on.

Taking a look at today’s calendar now, its set to be another morning dominated by data out of the UK where we get July retail sales along with August CBI business trends data. Over in the US this afternoon, the early release is initial jobless claims before we then follow up with existing home sales, the Philly Fed business outlook (which will be important in light of the weak NY Fed manufacturing survey earlier this week) and finally the Conference Board’s leading index. Fedspeak wise we’ve got the San Francisco Fed President Williams due to speak.