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Markets Update pm

 

Wall Street falls more than 1 per cent as crude extends losses , China Devalues Yuan

US investors cashed-in on profits after a more than one per cent jump in the last session as crude oil prices dipped and Treasury yields rose.

European Stocks closed sharply lower on bad macro data and oil price retreat.

Oil prices fell 4 percent on Tuesday after Saudi Oil Minister Ali Al-Naimi ruled out any production cuts, restating the kingdom’s rationale for maintaining output was that demand would pick up excess crude that has crushed prices over the past 20 months.

Big oil exporters Saudi Arabia and Russia have proposed to freeze output at January levels, which were near record highs, only if other producers also do the same.

Analysts remain skeptical that the cuts will be effective in rebalancing the market.

“If they freeze production at January levels when you’re already over supplied by around a million barrels per day it just prolongs that situation of oversupply,” said Energy Aspects’ analyst Dominic Haywood.

As Bloomberg notes Investors got a reminder on Tuesday of the potential for China’s currency moves and renewed selling in crude to jar financial markets.

U.S. stocks slumped from six-week highs, with the Dow Jones Industrial Average falling more than 150 points, as crude plunged on speculation OPEC members won’t curb output. Equities from Europe to emerging markets slid earlier as China’s central bank unexpectedly weakened the yuan, rekindling concern about the state of the world’s second-largest economy. The yen rose with gold on haven demand and Treasuries advanced.

The boost in demand for haven assets is a sign that China still has the capacity to disrupt the relative calm in markets that led to a rebound in commodities and stocks in the past week. The cut in the fixing on Tuesday was more than some analysts predicted and the biggest since a run of reductions in January roiled markets and escalated fears of a global currency war. Oil’s renewed slump took it below $32 a barrel in New York.

 

Stocks

The Standard & Poor’s 500 Index fell 1.1 percent at 12:24 a.m. in New York, after rallying on Monday to a six-week high. The index is down more than 9 percent from a May record and 5 percent lower this year on concern that weakness in China will damp global growth, and that lenders will suffer as some energy producers struggle to stay solvent amid low oil prices.

Energy shares led declines on Tuesday with materials producers. Freeport-McMoRan Inc. declined 6.5 percent and Chevron Corp. sank 2 percent. Lenders, which have buttressed the latest rebound in equities, fell with JPMorgan Chase & Co and Citigroup Inc. losing at least 2.8 percent.

The Stoxx Europe 600 Index lost 1.2 percent, paring losses of as much as 1.1 percent. BHP Billiton Plc’s first lowering in its payout in 15 years and a surprise loss posted by Standard Chartered Plc show how the global slowdown and tumbling prices for metals and oil are weighing on earnings.

Emerging Markets

Emerging-market stocks fell from a six-week high as economic data signaled China’s slowdown is deepening and the People’s Bank of China cut the yuan’s reference rate by the most in six weeks.

Turkish stocks and the lira extended gains after policy makers kept interest rates unchanged. The Shanghai Composite Index decreased from a one-month high and the yuan depreciated for a third day. Indian government bonds retreated along with Eastern European currencies.

Commodities

Zinc retreated 2.1 percent on the London Metal Exchange, falling from its highest close in four months. Copper, lead and nickel also fell.

Gold led precious metals higher, gaining 1.1 percent to $1,221.45 an ounce as investor holdings in exchange-traded funds jump to the highest in almost a year.

Currencies

The yen gained 0.8 percent to 111.96 per dollar, rallying from a decline Monday.

The yuan fell 0.08 percent to 6.5279 a dollar, according to China Foreign Exchange Trade System prices. The PBOC lowered the daily reference rate 0.17 percent.

The pound dropped 0.3 percent to $1.4105, while the euro slid 0.3 percent to $1.0996. The U.K.’s potential exit may damage trade and encourage other members to renegotiate their relationship with the EU, signaling scope for further losses in the euro in the run-up to Britain’s June 23 referendum.

The Swiss franc added 0.9 percent to 1.09217 per euro. Brazil’s real dropped 0.5 percent against the dollar.

Bonds

Treasuries erased losses, pushing 10-year yields to 1.74 percent, as stocks and oil declined.

Bonds fell, with the yield on 10-year German bunds rising two basis points to 0.20 percent.

Euro sub-zero yields club engulfs 39% of bonds

Remember when European government bonds trading with negative yields made headlines? Now, some 39 per cent of them are sub zero.

That’s according to the number crunchers over at Citi. They say:

Out of a total of €6.6tn European government bonds outstanding (at market value), around €1.5tn is currently trading below the deposit rate [of minus 0.30 per cent] (23% of all bonds), €1tn is trading between -0.30% and 0% and €4bn is trading with a positive yield. This means around 39% of all EMU-11 debt is trading at a negative yield.

 

Chart from CITI

In Germany, yields on bonds are negative up to 8.5 years, and in France, up to 6.5 years.

It’s not just the government bonds going negative in Europe though.

Out of the €530bn outstanding debt for euro supranationals like the European Union and the European Investment Bank, Citi reckons 31 per cent is trading below the ECB deposit rate (beyond which, the central bank can no longer buy). The picture is similar for covered bonds too:

Currently, 28% of the Euro iBoxx covered bond index is trading at negative yields. Digging deeper and splitting for maturity buckets, no covered bond with a remaining maturity of more than six years is trading in negative territory while 76% of sub-3yr euro benchmark covered bonds trade negatively.

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