S&P 500 and the Dow slumped over 2%, taking the underperformance to over -7% (year-to-date) before the end of the second week.
It’s true that Chinese markets reversed direction on Wednesday, with the Shanghai Composite closing below psychological 3000 points. This could put downside pressure on US shares.
Furthermore, oil prices took another step lower yesterday, where it was Brent’s turn to dip below $30, as it looked like oil prices won’t see much recovery this year amid a supply glut.
While the EIA report showed a lower than expected increase in crude inventories at 234,000 barrels versus 2 million consensus, the administration expects supply to continue outpacing demand this year, with more crude oil being stored. EIA forecasts inventories to keep expanding before becoming balanced in 2017. As a result, oil prices should continue to remain low, where a sustained pick up is expected only in the third quarter of 2017.
These two developments may have affected sentiments in US, but we think it is purely a domestic driven play. Strong USD was mentioned a total of 16 times in the US beige book. The US yield curve was the flattest since 2008, where the 2-10s spread is at 116 basis points. The VIX jumped 12% to over 25, and up 30% since the start of the year. This highlighted the amount of fear in the markets after the first week of stupor.
Asia is poised for another day of selling. Sentiments are spooked by RBS’ ‘sell everything’ mongering, followed by another salvo from SocGen strategist Albert Edwards. Australia and Japan already began under huge pressure.
- S&P 500 and Dow Jones Industrial ended -2.5% and -2.2% lower respectively, while European indices were subdued. FTSE however managed to eke out +0.5%, helped by gains in health care and energy (surprisingly!).
- The energy sector in FTSE 100, was held up by a 4% jump in BP prices, as the oil company plans to shed 4000 jobs and to reduce upstream workforce to less than 20,000. Furthermore, BP confirmed they received initial approval to market jet fuel in India, where the country is the ninth largest aviation market in the world.
- In the currency markets, AUD fell to a four-month low, on concerns related to China and commodity prices. The currency slipped below key 0.70 to as low as 0.6920. NZD and CAD also weakened. EUR/USD rebounded towards 1.09.
- Bank of Korea maintained key rate at 1.5%. Japan’s machine orders during November grew less than expected at +1.2% YoY, and fell -14.4% from the previous month. Australia cut 1000 jobs in December, although the unemployment rate remained unchanged at 5.8%. Full-time unemployment rose 17,600.
- The PBOC fixed yuan midpoint little changed at 6.5616 per USD. The central bank injects CNY 160 billion into the banking system via 7-day reverse repos.
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