December 14, 2015

Markets Today: Liquidity Trap

Friday night session saw a surge in risk aversion with sharp losses in equity indices, the USD underperformed against other majors while safe haven demand pushed core global yields lower.

Friday night session saw a surge in risk aversion with sharp losses in equity indices, the USD underperformed against other majors while safe haven demand pushed core global yields lower. The fall in oil prices to a new seven year low was already weighing on investor’s sentiment; however news of the closure of a well-known high yield US mutual fund exacerbated the negative mood, increasing the selloff in risk assets. Third Avenue announced the liquidation of its $789m Focused Credit Fund saying that poor bond market trading conditions made it almost impossible to raise sufficient cash to meet redemptions without having to fire sale assets. The liquidation of the fund underscores the current plight in the US high yield market and the risk it poses to other markets. Ahead of the FOMC later this week, the question now is whether this is just one bad apple or the prelude to a crash in the junk market.

The S&P500 dropped 1.94% to 2012.37, the Dow fell by 1.76% and the NASDAQ lost 2.21%. In Europe the Eurostoxx index fell by 2.04% while the DAX dropped 2.44%. The VIX (CBOE volatility index) jumped 26.1% to 24.39 closing at its highest level since the end of September.

In G10 currencies, against a background of risk aversion the usual major currencies with current account surpluses outperformed the USD. CHF was the outperformer up 0.5% followed by USD/JPY +0.45% while the EUR/USD gained 0.4% to 1.0986. Commodity currencies were the underperformers, AUD fair worst falling by 1.3% to 0.7189, the CAD was -0.95% followed by the NZD down by 0.55%.

Safe haven demand pushed core global yields lower. 10y UK gilts closed 5.3bps lower at 1.81% while 10y German Bunds fell by -2.8bps to 0.54%.The US Treasury curve bull flattened and relative to Sydney’s closing levels 2y UST lost 5bps, closing at 0.877%. 5y and 10y UST lost just over 9bps ending at 1.554% and 2.218% respectively while the 30y bond dropped 10.4bps closing the week at 2.871%.

In commodities, WTI oil traded to an intraday low of $35.18, however in the later part of the session it recovered some ground to close at $35.36, 3.34% down for the day. USD weakness helped the performance in hard commodities; the LMEX index closed 1.46% higher with copper the notable performer up 2.46%. Iron ore prices fell for the 9th time in 10 days, losing 0.57% and ending the week at $38.3.

Last week’s data for the w/e Dec 8 shows overall speculative long dollar positioning vs. G10 currencies were trimmed by 9.4% to 354.6k from 391.6k, so still quite long, but off record highs seen two weeks ago. Like last week, this was mostly on a paring of the AUD net short (-33.6k from -46.6k) and EUR (-172.3k from -182.8k). In rates, net speculative shorts in 2ys blew out to -114.6k from -70.6k, 5y went from -265.6 to –293.4k while in 10y, the small net long position in the previous week of +15.5k flipped to a net short of -24.5k.

As for data releases, US retail sales in November rose by 0.2% vs 0.3% expected, however the control group (ex: gas, autos and building materials) grew by a solid 0.6%. Final-demand PPI was +0.3% mom in November, above the 0.0% consensus while the Michigan consumer sentiment index rose to 91.8 (Dec) vs 92 exp. China data releases over the weekend exceeded expectations. Industrial production grew at 6.2% yoy in November, up from 5.6% in October (vs 5.6% exp). Fixed asset investments rose 10.2% ytd/yoy (10.2% prev,10.1% exp) and retail sales grew at 11.2%yoy (Nov) above 11.1% exp. Overall, the numbers suggest the Chinese economy is showing signs of stabilisation.

CoreLogic RP Data weekend data revealed an auction clearance rate of 59.3%, up from last week’s clearance rate of 57.3%. In Melbourne the clearance rate strengthened slightly to 65.7% from 63.3% while in Sydney the clearance rate climbed to 55.2% from 52.9% previously.

In other news the PBoC announced the introduction of a new trade weighted currency index signalling its intentions to broaden the active management of the RMB. The introduction of a trade weighted index provides the Chinese authorities with more flexibility to manage its exchange rate, particularly against those countries where export competitiveness has eroded. This new currency management approach will also allow the CNY/USD to depreciate when the USD appreciated without the connotation of a PBoC led devaluation

Coming Up

No doubt the FOMC meeting and its announcement which comes at 6am AEDT on Thursday Australia time will take most of the market’s focus this week. While the majority of market participants expect a Fed hike (74% priced), most of the attention is likely to be focused on the Fed’s new forecasts and Fed Chair Yellen’s press conference. In Australia we have a light week in terms of data releases, however the RBA Board minutes and Budget update on Tuesday should attract some of the market’s attention.
As for today, there are no data releases in Australia. In Japan the BoJ releases its Tankan survey for Q4 where consensus expectations are for a slightly softer survey relative to Q3. IN Europe we Eurozone industrial production for October and there are no data releases in the US.

Friday’s Markets

On global stock markets, the S&P 500 was -1.90%. Bond markets saw US 10-years -10.35bp to 2.13%. On commodity markets, Brent crude oil -4.53% to $37.93, gold+0.4% to $1,077, iron ore -0.6% to $38.30. AUD is at 0.7202 and the range was 0.7184 to 0.7283.

For full analysis, download report:

Markets Today: 14 December 2015 (PDF, 327KB)

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