The overnight market has been a repeat of yesterday's action, when following China's repeat 1.6% devaluation of the CNY (which was to be expected since the PBOC made it quite clear the fixing would be based off the market value, a value which continues plunging), the second biggest in history following Monday's 1.9% plunge, traders appeared stunned having believed the PBOC's lies that the devaluation was a one-off and as a result the E-Mini tumbled overnight, and is now 30 points lower from last night's PBOC fixing announcement, trading at around 2058, and far below the “magical” 200-DMA support line, which has now been solidly breached.
Perhaps the only saving grace right now is that the PBOC stepped in the last minutes of trading to prop up the yuan, or else today's bloodbath, not just across Asian FX as shown earlier, but in US and European equity markets would have been far, far worse. For Asia, however, it was too late: all major indices were firmly in the red, with the Nikkei 225 (-1.6%), ASX 200 (-1.7%) and Hang Seng (-2.4%) and Shanghai Comp. (-1.1%) pressured, which followed in tandem with US equity futures as the actions by the PBoC further added uncertainty and concerns of weak underlying Chinese growth. At the same time, JGBs gained 29 ticks amid a risk off tone.
But what was bad for stocks was delightful news for Treasurys, whose yields tumbled overnight, and at last check were trading just modestly off the overnight lows of 2.07%. We fully expect a 1-handle in the 10 Year within days. As RanSquawk notes, the latest move by the PBOC caused an uproar across various asset classes, with USTs now up over 1.5 points since Monday and stocks in Europe trading lower over 2% this morning amid fears of negative spill over effects. As a result, US inflation swap forward 5Y5Y rate now trades at the lowest since March while Euro 5-year/5-year inflation swap rate trades at its lowest since April 28. It's called “currency war” for a reason: the same reason it is also called “exporting deflation.”
Looking at sectors, the exporters led the move lower in Europe and on the sector breakdown , the weakness was particularly evident across auto and luxury names. The move lower saw the DAX index break below the key 11,000 level, while the S&P e-mini future looks set to break the 200DMA line to the downside.
Focusing on FX, the USD index failed to benefit from the risk averse sentiment as lower yields, with USTs 10y yield breaking below its 200DMA yesterday, and the consequent flattening of the curve prompted realignment of market expectations with regards to potential rate hike. At the same time, FX managers recycling into EURs, together with the ongoing unwind of short carry trades (EUR/USD and EUR/CNY) see the major pair rallying to 1-month high, while EUR/CHF continued to consolidate above the key 200DMA line.
The commodity complex did see initial weakness on the back of the latest news from China, with the exception of gold which benefitted from a safe haven bid to trade higher on the day by around USD 10.00 and is now on track for its 5th straight day of gains . Away from gold, WTI crude futures initially extended losses having settled at its lowest level in 6-years despite the latest API crude report showing a 3rd consecutive drawdown. (-847K vs. Prey. -2400K), however the energy complex has retraced some of these losses this morning, with Brent and WTI trading above USD 49.00 and USD 43.00 respectively.
In Summary: European shares remain lower though are off intraday lows after the biggest two-day selloff in Asian currencies since 1998. The onshore yuan fell ~1.9%, Shanghai Composite down 1.1%. The personal & household and autos sectors underperform and oil & gas, real estate outperform. Most European government bond yields fall, German bund yield drops to two-month low. The euro rises to a one-month high against the dollar. IEA sees oil glut enduring in 2016 after reaching 17-year high. Crude oil rises. U.K. unemployment in line with estimates, wage growth below. European industrial production below estimates. The French and Dutch markets are the worst-performing larger bourses, the U.K. the best. The euro is stronger against the dollar. Japanese 10yr bond yields fall; German yields decline. Commodities gain, with nickel, soybeans underperforming and WTI crude outperforming.
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