It certainly does feel like groundhog day today because while last week’s near record oil surge is long forgotten, and one can debate the impact the result of last night’s Iowa primary which saw Trump disappoint to an ascendant Ted Cruz while Hillary and Bernie were practically tied, one thing is certain: today’s continued decline in crude, which has seen Brent and WTI both tumble by over 3% has once again pushed global stocks and US equity futures lower, offsetting the euphoria from last night’s earnings beat by Google which made Alphabet the largest company in the world by market cap.
Among the drivers for today’s oil weakness was news that Russia pushed their oil output to fresh post-soviet highs amid the recent price slump, as crude output reaches 10.9mln bpd in Jan’16. At the same time JBC said that far from dropping, OPEC output actually rose to 32.42m b/d in Jan vs 32.38m in December.
The oil story was so dominant overnight that not even the surge in Chinese equities did anything to boost sentiment, with the Composite higher by 2.3%. Perhaps a reason for this was that China’s animal spirits are clearing fading, and as reported overnight, margin debt in China’s stock market shrank to the lowest level since December 2014, a sign that the stock market bubble has not only burst but is not coming back: the outstanding balance of margin debt on the Shanghai and Shenzhen stock exchanges dropped for 22 straight days to 897.6 billion yuan ($136.4 billion) on Monday. According to Bloomberg, it fell below the lows reached during a summer rout when the Shanghai gauge tumbled more than 40 percent from mid-June through its August low.
Compounding the bad commodity news was BP’s results, which posted a loss of $6.5 billion: the biggest in its history: 2015 was even worse for the London-based company than its 2010 Deepwater Horizon catastrophe which resulted in a $3.72 billion loss, as the company took charges of more than $40 billion to cover the legal, operational and environmental costs of the Gulf of Mexico oil spill.
Also not helping sentiment was a drop by UBS Group which slid after pretax profit at its investment bank trailed predictions.
“People are very spooked about what they can’t see, and at the moment they can’t see where global growth will come from,” Justin Urquhart Stewart, co-founder of Seven Investment Management in London, told Bloomberg. “In a market like this, less certainty around the U.S. election cycle will add further nerves. The last thing investors need is more background noise.”
A quick summary of where risk stands now:
Looking at regional markets, we start in Asia where equities traded in mostly in negative territory with yet again oil prices the familiar culprit as hopes over cooperation between OPEC and Non OPEC members in regards to a production cut fades , alongside the tepid lead from Wall Street. As such, the ASX 200 (-1.00%) and Nikkei 225 (-0.6%) were dragged lower by energy names, with the latter also pressured by a stronger JPY. However, the Shanghai Comp (+2.2%) outperformed as the PBoC injected more liquidity into the market via open-market-operations, subsequently providing ample liquidity ahead of the Lunar New Year, while the central bank continued to set a firmer CNY fix. JGBs fell albeit marginally so following a lacklustre auction which drew a lower than prior b/c as well as the widest tail in 10-months.
“It’s still a volatile market,” said Rafael Palma Gil, a Manila-based trader at Rizal Commercial Banking Corp., which oversees about $1.8 billion in assets. “While central banks have become relatively more accommodating, this stance doesn’t remove the concern of a global economic slowdown, with the weakness in China.”
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