It has been more of the same in the latest quiet overnight session where many await tomorrow's NFP data for much needed guidance, and where Chinese markets opened weaker, rose during the day, then went through a mini rollercoaster, then sold off in the afternoon. The Shanghai Composite and HS China Enterprises indices finished down .9% and .3%, respectively. Trading volume continued to be very subdued, running at half the thirty day average as some 20 million “investors” have pulled out of the market to be replaced with HFTs such as Virtu.
Despite what some have estimate is as much as a trillion in Chinese “plunge protection” allocation, the Shanghai Composite is now near the lows hit on July 8 when China openly threatened sellers and shorters with arrest. If that low is taken out, China will have a big headache on its hands.
Other Asian equities traded mixed following the positive close on Wall Street where sentiment was supported by strong US data and comments by Fed's Powell which contradicted recent hawkish remarks from Fed's Lockhart. Nikkei 225 (+0.2%) was bolstered by a slew of strong earnings, while gains where further underpinned by JPY weakening to a 2-month low against the greenback. The ASX 200 (-1.1%) was led lower by broad losses in large banks. Finally, JGBs fell following the EU and US counterpart, with losses exacerbated by a weak enhanced liquidity auction drawing the lowest b/c on record.
European shares are lower, for the moment halting a rally that has been on-going since July 28. The Stoxx 600 index is up about 18% YTD. There has been no discernable difference between core and peripheral performance. Despite the looming risk events, including the release of the latest NFP report on Friday and the eagerly awaited “Super Thursday” in the UK today, stocks traded mixed (Euro Stoxx: -0.1 %), with Greece's stock market rebounding after three days of heavy losses. The FTSE-100 index underperformed (-0.3%), weighed on by BP (-3%) and Anglo American (-3%), with both trading ex-dividend. Overall, energy names underperformed, as WTI prices remained under-pressure, while the upside support was provided by industrials and financials sectors.
The release of the much better than expected German Factory Orders data, together with somewhat mixed retail PMIs did little to drive the price action across asset classes , with Bunds and Gilts trading little changed. At the same time, the expected volatility in GBP/USD later on in the session failed to weigh on the pair, which traded with little changed after giving back some of it overnight gains following mixed UK data (Industrial Production M/M -0.4% vs. Exp. 0.10%, Manufacturing Production M/M 0.20% vs. Exp. 0.10%). While the USD (USD-index: +0.1%) heading into the North American crossover flat on the day.
Elsewhere, AUD was in focus overnight following a mixed Australian jobs reports, where AUD initially surged higher amid a significant beat in employment change (M/M 38.5K vs. Exp. 10.0K Prey. 7.3K, Rev. 7.0K ). However, AUD/USD fell below preannouncement levels as the unemployment rate rose to a 7-month high (M/M 6.3% vs. Exp. 6.1% Prey. 6.0%, Rev. 6.1%).
But while stock action has been muted, the story of the night so far is oil and the energy complex broke out of a tight overnight range early in the European session to continue yesterday's downward trend, seeing WTI Sep'15 futures fall below the USD 45.00 handle after yesterday's DoE crude oil inventories saw US crude output rise by 0.552%.
As of this moment oil was trading at $44.72, just pennies above the low print of 2015.
Perhaps the catalyst for the latest weakness was another report out of Goldman's Jeff Currie in which he says the “lost decade reinforces lower for longer.” Some more details:
Although spot oil prices have only retraced to the lows of this winter, forward oil prices, commodity currencies and energy equities/credit (relative to the broad indices) have now all retraced to levels not seen since 2005, erasing a decade of gains. This creates a very different economic environment as the search for a new equilibrium resumes: financial stress is higher, operational stress as defined below is more extreme and costs have declined further due to more productivity gains, a substantially stronger dollar and sharp declines in other commodity prices. These differences reflect not only a further deterioration in fundamentals, but also the financial markets' decreasing confidence in a quick rebound in prices and a recognition that the rebalancing of supply and demand will likely prove to be far more difficult than what was previously priced into the market. This is all in line with our lower-for-longer view. While we maintain our near-term WTI target of $45/bbl, we want to emphasize that the risks remain substantially skewed to the downside, particularly as we enter the shoulder months this autumn.
