Equity And Crypto Pain Persists: 06.02.18

Tuesday February 6: five things the markets are talking about

The global equity rout extended overnight as Asian and European markets followed Wall Street and tumbled, sending equity indexes toward the biggest three-day slide in nearly three-years.

Volatility in stocks has pushed a number of investors to unwind equity bets and head to the ‘mighty’ dollar and the Japanese yen, another haven.

The dollar has also been benefiting from last Friday’s robust US employment data. However, despite the greenback's recent gains, the prospect of faster-than-expected monetary policy tightening abroad has left the buck atop of its lowest level outright in more than three-years.

Note: Yesterday, the VIX saw its biggest daily climb ever, both in percentage and absolute terms.

1. Stocks markets tumble again

Yesterday, US stocks plunged the most in more than six years and volatility roared back into the market as the S&P 500 sank -4.1%.

In Japan, stocks suffered their biggest point drop in 18-months overnight on fears about rising US bond yields and a potential pick-up in inflation. The Nikkei share average ended down -4.73%, while the broader Topix fell -4.4%.

Down-under, Australia’s S&P/ASX 200 traded at levels last seen in October as it slide -3%, while S. Korea’s KOSPI was the outperformer in dropping just -1.8%.

In Hong Kong, stocks joined the market rout intensified. The benchmark Hang Seng Index plummeted -5.1%, its biggest daily percentage drop since August 2015, while the Hang Seng China Enterprise (CEI) fell -5.9%.

Note: Hong Kong is particularly exposed to US rate moves because the HKD is pegged to the US dollar.

In China, Shanghai stocks post their worst day in two-years. The Shanghai Composite Index slumped -3.4%, its biggest single-day drop since February 2016, while the blue-chip CSI 300 index ended down -2.9%.

In Europe, regional equities move well off their opening levels, but remain in negative territory as US futures stage a sharp turn around. Earnings continue to dominate corporate news.

US stocks are set to open in the black (+0.6%).

Indices: STOXX 600 -1.9% at 374.8, FTSE -2.0% at 7191, DAX -2.2% at 12409, CAC 40 -1.9% at 5192, IBEX 35 -1.9% at 9884, FTSE MIB -1.5% at 22494, SMI -1.9% at 8927, S&P 500 Futures +0.6%

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2. Oil prices ease, gold higher

Oil prices have fallen for a third consecutive session overnight, although the crude price remains in positive territory so far this year.

Oil is caught up in the market's general risk-off move and not helped by the strength of the US dollar in the past two trading sessions.

Brent crude futures are down -35c at +$67.27 a barrel, but still up +1% so far in 2018. US West Texas Intermediate (WTI) crude futures have eased by -25c to +$63.90.

Note: Since the S&P 500 hit a record high on Jan. 26, the index has lost -8%. Oil, in contrast, has lost -4.5%, while cryptocurrency (Bitcoin) (BTC) has lost -50% of its value.

Adding to the pressure on oil, which hit its highest price in nearly three-years in January, has been evidence of rising US crude production, which could threaten OPEC’s efforts to support prices.

Data from the US government last week showed that output climbed above +10m bpd in November for the first time in nearly fifty-years, as shale drillers expanded operations.

Gold prices have rallied overnight as the global equity rout encouraged investors to seek shelter in safe havens, although expectations of more US rate hikes this year will weigh on the market. Spot gold is up +0.3% to +$1,342.95 per ounce, following yesterday’s +0.5% gain.

3. Reserve Bank of Australia (RBA) on hold

The RBA overnight chose to stay out of the global shift among central banks toward higher interest rates, amid deep fears that domestic household debt burden would not stand up well to the pain of rising mortgage costs.

The RBA left its cash rate unchanged at a record low +1.5%, signalling no desire to follow the likes of the Fed, the BoE and the ECB in removing the policy accommodation.

Governor Philip Lowe said he remains hopeful that growth and inflation will trend higher this year, but stressed the big uncertainty is the outlook for consumers.

Elsewhere, investors have been dumping government debt, but for different reasons. In the US, investors see more inflation coming; while in the eurozone, they see stronger economic growth.

The yield on US 10-Year Treasuries has increased +6 bps to +2.76%. In Germany, the 10-Year Bund yield decreased -3 bps to +0.71%, while in the UK, the 10-year Gilt yield has declined -3 bps to +1.53%, and the biggest drop in almost five weeks.

4. Dollar finds little traction

The USD remains on soft footing, unable to gather any safe-haven demand despite the pickup in global volatility.

EUR/USD (€1.2400) continues to maintain within its recent consolidated range, €1.2350-1.25, supported by the market sentiment that the eurozone is expanding robustly with stronger growth rates than previously anticipated.

GBP/USD (£1.3935) remains on the defense, as UK ministers seem to have a difference of opinion on the Brexit strategy.

USD/JPY's strong correlation with US interest yields seems to have broken down as the pair tested ¥109 in the session overnight despite the BoJ’s rhetoric that it would continue advocating an easy monetary policy.

Bitcoin (BTC) briefly traded below $6,000 overnight as weakness in digital tokens continued with Ripple, Ethereum and Litecoin also tumbling at least -11%.

Note: The BIS said that central banks must be prepared to intervene to stem risks from digital currencies, as Bitcoin has become a “combination of a bubble, a Ponzi scheme and an environmental disaster.”

5. German factory orders surge

Data this morning showed that German factory orders surged in December.

Orders, adjusted for seasonal swings and inflation, increased +3.8% after dropping a revised -0.1% in November. Demand was up +7.2% from the previous year.

The Bundesbank says the German economy will maintain its momentum. After growing +2.2% last year, GDP is forecast to increase +2.5% in 2018.

Note: Strong domestic spending and prosperous global trade is supporting Germany’s economy. This has helped the country’s largest union win a +4.3% pay increase over 27-months.

Original post

Written By: MarketPulse