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$5 trillion was wiped out from global stocks this week

Asia Crashes, Europe Slides, US Rebounds But Yields Resume Ominous Rise



Zero hedge


Fri, 02/09/2018




"$5 trillion was wiped out from global stocks this week."

After yesterday's violent last hour plunge in US stocks, which also sent the VIX surging back to the mid-30s, the overnight session was somewhat muted, with European stocks falling further on Friday morning, but at a slower pace than the sharp sell offs in Asia and New York.

Europe's 600 Index, down -1% as of this moment and back to session lows after a modest rebound earlier, was set for its worst week since 2016 as banks and financial-services stocks led most industry sectors lower. The drop, however, was relatively modest and followed a sheer plunge in Asia, where stocks tumbled across the region, wiping out most of their gains from the previous two sessions. The Shanghai Composite recouped some gains to close down "only" 4.1% - in what has now been a two-week selloff without the Chinese National Team making an appearance and buying stocks - the Hang Seng was down 3.1% with losses across all sectors. Tokyo’s Topix closed down 1.9 per cent.

The renewed slide followed Thursday's drop in the S&P 500, which pushed the index to a 10 per cent decline from its January high - officially, a correction - stirred renewed concerns over the future of the long bull market that followed the 2008 financial crisis, and whether the selloff that was catalyzed by systematic quant funds would spill over to retail investors. And, as we highlighted overnight, that's precisely what happened following the single biggest weekly outflow from equity funds on record.

And while we look forward to today's session to see if the retail liquidation continues, S&P 500 futures little changed, after earlier rising as much as 0.9%, while Dow contracts reverse advance to slide 0.3%, even as Congress passed a delayed budget deal, after the government was briefly shut down.

The premarket calm may not last: in what has become a vicious Catch 22, as futures rise, so do 10Y yields, and as the last few days have demonstrated, once the 10Y rises above 2.85%, it leads to an almost immediate selloff.

Some perspective: what was until recently the best start since 1987, has turned into a global selloff that has wiped $5 trillion from global stocks since January while the MSCI World Index is set for its biggest weekly drop since 2011.

Meanwhile over in macro, FX traders have one eye on the stock markets and another on positioning and central bank developments. While in earlier trading the dollar stayed under pressure as U.S. futures pointed to a higher open and Treasuries slipped, the entire move has quickly reversed as futures started to sink as yields rebounded, sending the BBG Dollar index (BBDXY) to session highs.

“A reassessment of the inflation outlook at this point in the cycle is natural and markets are adjusting for this,” Kerry Craig, a Melbourne-based global market strategist at JPMorgan Asset management, said in a note. “But given that U.S. markets are now in correction territory it’s likely that the most severe gyrations will hopefully have passed. Volatility may remain for a while longer, but the strong economic backdrop and sustained earnings outlook means we continue to prefer equities.”

Meanwhile, days after Goldman came out with a glowing endorsement of the commodity sector in general, and crude in particular, oil headed toward its worst week in almost a year as the global risk-asset rout further rankled investors already concerned over growing U.S. supply. Gold declined along with most industrial metals. South Africa’s rand strengthened as speculation intensifies that President Jacob Zuma will soon resign. Russia’s ruble was among the best-performing emerging-market currencies after the country’s central bank cut its policy rate.

Bulletin headline summary from RanSquawk

  • Partial government shutdown stopped after US Senate and House passes spending bill.
  • European bourses showing some resilience to the sell-off seen in the US and Asia.
  • Looking ahead, highlights include Canadian Jobs report and a slew of central bank speakers.


Top Headline News from BBG


  • Congress passed a two-year budget agreement early Friday that will boost federal spending by almost $300 billion and suspend the debt ceiling for a year, ending a brief partial government shutdown that began at midnight when lawmakers missed a funding deadline
  • Fed’s Esther George says three rate hikes this year and about the same number next year is a “reasonable baseline unless the outlook changes materially”; she also said that last week’s report of higher wages is a “welcome development” and that she expects inflation to begin to rise as labor markets tighten further and global demand pushes up import prices
  • Investors pulled $30.6b out of global equity funds, the most on record, analysts at BofAML says in research note citing EPFR Global data for week ending Feb. 7
  • Hedge funds investing only in Europe received about $6 billion in 2017, reversing a funding exodus in the previous 12 months, according to eVestment data; money pools targeting the U.S. and Asia suffered combined outflows last year of about $24 billion
  • RBA said in its quarterly policy statement that it will be some time before the economy reaches current estimates of full employment and inflation returns to the midpoint of the target. It left inflation and economic growth forecasts unchanged from three months earlier
  • U.K. PM Theresa May is adamant that Britain must aim high in its demands for an ambitious free-trade deal, just as she’s determined to make the most of her time in office, however long that lasts, officials said

Market Snapshot

  • S&P 500 futures up 0.6% to 2,608.50
  • STOXX Europe 600 down 0.4% to 372.4
  • MSCI Asia Pacific down 1.9% to 170.20
  • MSCI Asia Pacific ex Japan down 1.9% to 554.21
  • Nikkei down 2.3% to 21,382.62
  • Topix down 1.9% to 1,731.97
  • Hang Seng Index down 3.1% to 29,507.42
  • Shanghai Composite down 4.1% to 3,129.85
  • Sensex down 1.4% to 33,937.75
  • Australia S&P/ASX 200 down 0.9% to 5,837.97
  • Kospi down 1.8% to 2,363.77
  • Brent Futures down 0.5% to $64.48/bbl
  • Gold spot down 0.3% to $1,315.09
  • U.S. Dollar Index up 0.02% to 90.25
  • German 10Y yield unchanged at 0.763%
  • Euro up 0.2% to $1.2266
  • Brent Futures down 0.5% to $64.48/bbl
  • Italian 10Y yield rose 4.3 bps to 1.725%
  • Spanish 10Y yield fell 1.6 bps to 1.434%

Asia stocks traded negative across the board with global sentiment lambasted after the return of the market turmoil on Wall St, where the major indices closed in correction territory and the DJIA (-4.2%) tumbled over 1000 points on the day with the move accelerating heading into the close. Furthermore, political uncertainty in the US also added to the downbeat tone with the government officially in a shutdown after Senator Rand Paul blocked to fast track the Senate vote on the 2-year budget deal, other commentators have also paid credence to the continued upside in US yields adding pressure to equities. As such, ASX 200 (-0.9%) was weaker with energy names dampened after Brent crude prices fell to a near 2-month low, while losses in the Nikkei 225 (- 2.7%) were magnified by recent JPY strength. Elsewhere, underperformance in China resumed in which Hang Seng (-3.7%) and Shanghai Comp (-5.3%) slumped as the large cap energy and financials dragged, while the PBoC remained steadfast in its efforts to keep interbank liquidity stable and refrained from open market operations for a 12th day. However, the central bank instead announced it released nearly CNY 2tln in temporary liquidity through the Contingent Reserve Allowance which will allow banks to temporarily utilize deposit reserves to satisfy cash demand ahead of the Lunar New Year. Finally, 10yr JGBs were higher on safe-haven bids and with the BoJ also present in the market for JPY 850bln in JGBs across the curve. PBoC skips open market operations, for the 12th consecutive day, while it said it released temporary liquidity valued nearly CNY 2tln as it seeks to satisfy cash demand before the Lunar New Year.

Top Asian News

  • China Ends 25-Year Wait as Yuan Oil Futures Set to Start Trading
  • Citic Bank to Offer HNA Group 20B Yuan Credit Line
  • Bank Indonesia Intervenes to Stabilize Rupiah at 20-Month Low
  • Shenzhen Stocks Enter Bear Market as New Economy Dreams Fade

European traders were closely watching events in the US on Thursday: The fresh sell-off late yesterday saw US equities (DJIA and S&P 500) move into correction territory amid the surge higher in yields in which the US 10yr yield made a high of 2.88%, matching the post NFP high. This also transpired into a sell-off in the Asia-Pac region with Chinese bourses seeing its largest weekly decline in 2yrs, prompting Chinese authorities to announce a  CNY2tln temporary liquidity package. However, despite this, losses in Europe have been somewhat contained, European bourses showing a relatively mixed picture (EuroStoxx 50 -0.4%). On a stock specific basis, M&A talk has been doing the rounds with the L’Oreal CEO hinting that they may acquire a EUR 23bln stake in Nestle. Umicore shares the best performer following their strong trading update.

Top European News

  • BOE’s Broadbent Says Rate Path Now Slightly Higher Than in Nov.
  • U.K. PM Is Mulling Trip to Northern Ireland Next Week, BBC Says
  • Maersk Drops as Company Misses Estimates After an ‘Unusual’ Year
  • Flow Traders Shares Soar as Volatility Drives 1Q

In FX, Usd/Jpy is now bouncing further from overnight lows (around 108.50 where decent domestic bids were reported) through 109.00 and offers at 109.20 to a 109.30 peak so far. Similarly, Usd/Chf is firmer up towards 0.9400 vs 0.9350 at one stage and the DXY is deriving some underlying support ahead of the 90.000 level despite Greenback losses against other G10 counterparts. Cable has lost grip of the 1.4000 handle and a degree of its bullish/hawkish BoE impetus, but remains firm ahead of 1.3900, as Eur/Gbp continues to trade below 0.8800 and Eur/Usd is capped by 1.2289 resistance (55 DMA) in front of supply at 1.2300. Usd/Cad is still pivoting around 1.2600 and now awaiting Canadian jobs data amidst the ongoing NAFTA impasse, while Aud/Usd stays on the backfoot after the RBA’s dovish SOMP and weaker than forecast mortgage data within a 0.7795-60 range – 200 DMA at 0.7755 providing support and big 0.7800 option expiry (2.75 bn) also exerting some influence. Nzd/Usd is holding just above 0.7200 in wake of this week’s RBNZ meeting, which opened the door to further easing alongside central guidance for tightening in mid-2019, but Usd/Cnh has retreated from its post-capital control related spike highs.

In commodities, across the commodities complex, WTI and Brent crude futures continue to hover near recent lows, however prices have seen a slight pull back amid source reports that the Forties pipeline system is still running at a restricted rate. China plans to launch crude oil futures on March 26th.

Looking at the day ahead, the only data of note is December wholesale trade sales. The Fed's George is also due to speak early morning.

US event calendar

  • 10am: Wholesale Inventories MoM, est. 0.2%, prior 0.2%; Wholesale Trade Sales MoM, est. 0.4%, prior 1.5%

DB's Jim Reid concludes the overnight wrap

The Winter Olympics in Pyeongchang starts today and if markets this week were an event I think they’d probably be the Ski Cross. If you haven’t seen this crazy race it consists of wild jumps, fast bends, spectacular crashes, terrifying falls, and jutting elbows. Just like the VIX this week.

The ups and downs continued yesterday with the eventual emphasis on the down with another very poor US close seeing the S&P 500 down -3.75% and 104 points lower than the day’s early highs. Given how sensitive markets were to a slightly hawkish BoE yesterday, one can only imagine the turmoil on Wednesday next week if US CPI comes in ahead of expectations. Obviously a softer/in-line number would be greatly received at the moment. To put the BoE in perspective their forecasts only imply three quarter point hikes over the next three years. So hardly a traditional rate cycle let alone an aggressive one. Initially the sell-off was focused on Government bonds but it spread with a lag of a couple of hours to equities with equity vol spiking again.

Now delving into equities a bit more, US bourses were down c4% yesterday with all sectors in the red and losses led by the financials, tech and discretionary consumer stocks (S&P: -3.75%; Dow -4.15%; Nasdaq -3.90%). Relative to their recent highs two weeks ago, the S&P and Dow are now officially in correction territory with the index down -10.2% and -10.4% respectively, while the Nasdaq is not far behind at -9.7%. European bourses were also lower yesterday, with the Stoxx (-1.60%), DAX (-2.62%) and FTSE (-1.49%) all down.

Over in government bonds, the UST 10 bond yield traded up to 2.882% following a weaker 30y treasury auction but closed -1.2bp lower to 2.825%, in part boosted by the flight to safety that has been absent most of this week. Elsewhere, 10y Bunds yields rose 1.7bp while Gilts rose 6.6bp following the hawkish BOE statements (more below). In credit markets, spreads on IG credit indices widened 4-5bp and the US CDX HY widened 20bp back to December 16 levels. Another focus yesterday was the volatility measures. The VSTOXX jumped c50% to 32.04, now back near the Brexit vote high in 2016 while the VIX traded within a c12pt range before closing c21% higher to 33.46 (+5.7 pt).

This morning in Asia, markets are extending the US sell off. The Nikkei (-2.93%), Hang Seng (-3.56%), Kospi (-1.62%) and China’s CSI 300 (-5.0%) are all down as we type. If these levels hold into close, all indices excluding the Kospi will be down >11% since their recent highs. Datawise, China’s January CPI and PPI both slowed mom but were in line with expectations at 1.5% yoy and 4.3% yoy respectively. In the US, the government may be partially shut down for a few hours. Earlier, Senator Rand argued against the proposed two year spending bill, leaving the Senate to wait till 1am Friday morning (as we go to print) to pass a procedural vote, then the House is expected to pass it sometime between 3am-6am, if not earlier. Elsewhere, the Senate banking committee has narrowly approved (13-12) Trump’s Fed nominee Marvin Goodfriend. His confirmation will now be voted in the full senate where approval may not be certain.

Now recapping other markets performance from yesterday. In currencies, the US dollar index was marginally higher (+0.03%) and rose for the fifth consecutive day, while the Euro dipped 0.14% and Sterling gained 0.23% following the BOE commentaries. In commodities, WTI oil retreated for the fifth straight day to be down 1.04% to $61.15/bbl (-6.6% cumulative). Elsewhere, precious metals strengthened slightly (Gold +0.03%; Silver +0.30%) and other base metals were mixed but little changed (Copper -0.35%; Zinc +0.55%; Aluminium +0.07%).

Turning back to the BOE, as expected the MPC members voted unanimously to keep rates on hold at 0.5%. However the outlook comments seemed more hawkish. The BOE Governor Carney said “it will be likely to be necessary to raise rates to a limited degree in a gradual process but somewhat earlier and…greater extent than what we had thought in November”. A stronger than expected global economy, improving wages and the continuing weak outlook for the UK’s potential supply underpinned the Bank’s more hawkish position. The bank has also upgraded its GDP growth forecasts for 2018 to 1.8% (+0.2ppt) while 2019 was steady at 1.7%. Overall, the meeting was broadly in line with our UK team’s expectations that the MPC would endorse tighter market pricing, without wanting to pre-commit to a May hike. They maintain their view that the BOE will keep rates on hold in May, as they expect demand to slow. For more details, refer to our UK economists’ note. Bloomberg’s implied odds for a May cash rate hike has increased 20ppt to 67%.

Now onto the three Fed speakers overnight. On the recent US equity sell off, similar to their peers, they all seemed to be taking it in their stride. The Fed’s Dudley said “…so far, I’d say this is small potatoes”. The Fed’s Kaplan said “… having a little more volatility, may be a healthy thing”, in part as the recent low  volatility was “historically unusual”. Then the Fed’s Harker said “stock market volatility hasn’t changed his economic outlook” and that if you believe the long end of the curve is going up, then “it makes sense that equities would have an adjustment”. That said, he does not think the changes will materially impact business investment and consumer spending.

Moving onto rates and inflation. Mr Dudley noted three rate hikes “still seems like a very reasonable projection” and that “monetary policy around the world is going to become less accommodative”. However, he didn’t put too much weight on the 2.9% yoy wage growth beat last week as it was a single data point and the “question is what’s the trend looking through many months”. Following on, Mr Kaplan noted “my base case right now is the same (3 hikes in 2018)….but it’s a dynamic process”, that is subject to the incoming data and prevailing conditions. He added he “will continue to be vigilant for looking at financial conditions and any spillovers to the economy”, but he is not seeing that at this point. Elsewhere, Mr Harker noted “I’m glad we’re seeing some firming (in inflation)”, but “it’s not obvious that inflation…will absolutely reach our 2% target”, with one of the swing factors being the dollar.

Turning back to the Euro, the ECB’s Weidmann noted “we will monitor closely any impact FX rate movements might have on our primary target of stability”, but should not “allow ourselves to become unsettled by the decline in (the recent) fall in equity prices”. On QE, he reiterated his views that “if the expansion progresses as expected, substantial net purchases beyond the announced amount do not seem to be required”. The ECB’s Praet also noted policy normalisation will be a “long complex” process.

Onto some of the Brexit headlines. Senior EU figures have told Reuters that Britain will not be ready to make a full break from the EU by the end of 2020 and the EU side is bracing for a longer goodbye. Conversely, senior UK officials told Bloomberg that the UK is planning for an instant break from existing EU regulations, such as some rules on financial services to benefit more from Brexit.

Elsewhere, after more talks between the EU and UK counterparts over the past two days, the UK Brexit Secretary Davis said the meeting was “very constructive”, but “…there are still things incomplete”.

Finally, this morning, Michal Jezek in our team published a report “Credit Spread & Vol. Repricing as Equities Go from Melt-Up to Melt-Down”. He reviews the price action in CDS index spreads and their implied volatility during the current market turmoil and shows how their future direction is linked to equity volatility products. The report concludes that the recent vol. shock as a learning event for most market participants is likely to lead to a new, higher regime for both spread levels and their volatility. You can download the report here.

Before we take a look at today’s calendar, we wrap up with other data releases from yesterday. In the US, the weekly initial jobless claims (221k vs. 232k expected) and continuing claims (1,923k vs. 1,940k expected) were both moderately lower than expectations - the former is near mid-January’s c44 year low. The January Bank of France industrial sentiment index eased back to a still solid level of 105 (vs. 110 expected). In Germany, the December trade surplus was smaller than expected at €18.2bln (vs. €21bln), with stronger than expected growth in imports (1.4% mom vs. -0.7%) outpacing exports (0.3%). For 2017, Germany’s annual trade surplus fell for the time since 2009, albeit modest (€244.9bln vs. €248.9bln).

Looking at the day ahead, in Europe we get the December industrial production data out of the UK and France, with trade numbers also due in the former, while across the pond in the US the only data of note is December wholesale trade sales. The Fed's George is also due to speak early morning


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