Oil prices are tumbling with Brent approaching $51 and WTI near $48.5. This follows yesterday's announcement by Saudi Arabia of deeper discounts next month for the US and Europe. This was seen as a further confirmation that it adheres to its market share strategy.
The continued drop in oil prices is spurring a significant decline in bond yields. The US 10-year yield is below 2% for the first time since mid-October and new record low yields are being seen throughout European core bonds. The German 10-year yield is below 50 bp.
Equity markets are continuing the decline began at the end of last year. The MSCI Asia-Pacific Index is off 1.75%, though Shanghai was eked out a minor gain and the Shenzhen Composite rallied 1.7% (ostensibly on the idea of a link with Hong Kong). European shares are trading heavily, led by the energy sector. The Dow Jones Stoxx 600 is off about 0.4% near midday in London.
US shares are trading lower in Europe. We have identified the gap created by the sharply higher opening on December 18 (2016.75-2018.98) as an important area. It also corresponded with a retracement objective of that advance. The gap was entered yesterday but not filled. A break of 2000 could see a return to the December low near 1972.
The drop in US yields and the 3% drop in the Nikkei, bringing the four-day decline to 5.8%, is lifting the yen. It is the strongest currency today, gaining about 0.75% against the dollar. The US dollar is approached JPY118.65, its lowest level since December 18. It is not so much that investors are flocking to the yen, as the safe haven thesis implies. Rather the yen's strength appears largely a function of short-covering.
The euro can't get out of its own way. Although it drifted higher in Asia, reaching almost $1.1970, it has come off in Europe and returned to the $1.1900 area. The market did not seem to pay much notice to the service PMIs, and instead appear focused on the possibility that tomorrow's flash CPI reading shows outright deflation (that is a negative print).
