Renewed Oil Weakness Weighs on Sentiments
Renewed weakness in crude oil is pressuring investors’ sentiment again. WTI crude oil dips to as low as 30.39 today on talk that OPEC is unlikely to agree on a plan with Russia for production cut.
Major European indices are all trading lower with FTSE down -1.6%, DAX down -0.9%, CAC down -1.65%. US futures also point to a lower open with DJIA futures having triple digit loss.
The currency markets are relatively steady though. Commodity currencies are trading soft today but are held in tight range against dollar so far. European majors are also stuck in recently established range against the greenback.
Among the drivers for today’s oil weakness was news that Russia pushed their oil output to fresh post-soviet highs amid the recent price slump, as crude output reaches 10.9mln bpd in Jan’16. At the same time JBC said that far from dropping, OPEC output actually rose to 32.42m b/d in Jan vs 32.38m in December. Iran is aiming at 1.5 m b/l to make up for lost ground.
The oil story was so dominant overnight that not even the surge in Chinese equities did anything to boost sentiment, with the Composite higher by 2.3%. Perhaps a reason for this was that China’s animal spirits are clearing fading, and as reported overnight, margin debt in China’s stock market shrank to the lowest level since December 2014, a sign that the stock market bubble has not only burst but is not coming back: the outstanding balance of margin debt on the Shanghai and Shenzhen stock exchanges dropped for 22 straight days to 897.6 billion yuan ($136.4 billion) on Monday. According to Bloomberg, it fell below the lows reached during a summer rout when the Shanghai gauge tumbled more than 40 percent from mid-June through its August low.
Margin trading was blamed for exacerbating the selloff last summer that led the securities regulator to crack down on the business by raising margin requirements and punishing brokerages for allowing unqualified clients to borrow funds. While smaller leverage reduces risks to the financial system, it could potentially also curb investors’ ability to make big bets, making rallies harder to come by.
Compounding the bad commodity news was BP’s results, which posted a loss of $6.5 billion: the biggest in its history: 2015 was even worse for the London-based company than its 2010 Deepwater Horizon catastrophe:
“People are very spooked about what they can’t see, and at the moment they can’t see where global growth will come from,” Justin Urquhart Stewart, co-founder of Seven Investment Management in London, told Bloomberg. “In a market like this, less certainty around the U.S. election cycle will add further nerves. The last thing investors need is more background noise.”
A quick summary of where risk stands now:
- S&P 500 futures down 0.7% to 1918
- Stoxx 600 down 1.4% to 336.7
- FTSE 100 down 1.8% to 5953
- DAX down 1% to 9664
- German 10Yr yield down 4bps to 0.32%
- Italian 10Yr yield down 1bp to 1.46%
- MSCI Asia Pacific down 0.9% to 122
- Nikkei 225 down 0.6% to 17751
- Hang Seng down 0.8% to 19447
- Shanghai Composite up 2.3% to 2750
- US 10-yr yield down 2bps to 1.92%
- Dollar Index down 0.04% to 98.97
- WTI Crude futures down 3.4% to $30.54
- Brent Futures down 3.4% to $33.09
- Gold spot down 0.3% to $1,125
- Silver spot down 0.6% to $14.27
RBS predicts ‘hard landing’ for China
In Europe, oil once again dictates price action as this week’s continued softness in WTI and Brent translates into weakness in the major indices , led lower by the energy sector. BP is a notable laggard and despite the market being prepared for bad numbers, trades in negative territory by 8.1% after posting Q4 earnings, consequently the FTSE 100 (-1.7%) is a marked underperformer. UBS (-7.9%) also reported earnings today, missing on expectations and warning of further FX headwinds.
European Top News
- Euro-Area Unemployment Falls as ECB Weighs Stimulus Measures: Region’s jobless rate decreased to 10.4% from 10.5% in Nov., est. unchanged at 10.5%; rate at lowest since Sept. 2011
- German Unemployment Rate Falls to Record Low as Job Market Booms: Jobless rate fell to 6.2%, the lowest level since German reunification, from 6.3%; joblessness slid to seasonally-adjusted 2.73m
- Sainsbury Agrees to Buy Home Retail for About $1.9b: Sainsbury will pay about 161.3p in cash and stock per Home Retail share, a 63% premium above the closing price prior to the emergence of discussions, to lead to profit synergies of GBP120m or more
- Danske Bank Unveils $1.3b Share Buyback Program: Said will buy back another DKK9b ($1.3b) in shares; forecast 2016 net profit in line with 2015’s results, before goodwill impairments, 4Q adj. net DKK4.64b vs est. DKK3.74b
- Sanofi, Merck Said to Consider Exiting Vaccine Joint Venture: Sanofi CEO Brandicourt is reviewing the alliance because of a lack of promising assets in the business’s pipeline; venture had sales of about $330m in first half of 2015
- Kuoni Agrees to $1.4 Billion Takeover Bid From EQT Partners: EQT offering CHF370 per B share, 32% above Dec. 30 closing price
- Raiffeisen Shares Jump After Lower Provisions Lift 2015 Profit: Full yr Net income was EU383m compared with loss of EU617m yr ago; profit was better than anticipated because of lower provisions for impairments
- EU Nears Agreement on U.K. Demands After Talks Make Progress: Still ‘outstanding issues’ to resolve, EU President Tusk says
- Fiat Offers New Settings for Diesel Motors to Make Them Cleaner: Carmaker says vehicles have no defeat device to cheat tests, says all its cars comply with emission regulations