Gold: $1107.70 up $15.80 (comex closing time)
Silver $15.34 up 38 cents
In the access market 5:15 pm
At the gold comex today, we had a poor delivery day, registering 0 notices for nil ounces.Silver saw 0 notices for nil oz.
Several months ago the comex had 303 tonnes of total gold. Today, the total inventory rests at 200.82 tonnes for a loss of 103 tonnes over that period.
In silver, the open interest rose by 725 contracts even though silver was only up only 1 cent with respect to yesterday’s trading and again without a doubt we had more short covering. We have an extremely low price of silver and a very high OI. The total silver OI now rests at 168,245 contracts. In ounces, the OI is still represented by .841 billion oz or 120% of annual global silver production (ex Russia ex China).
In silver we had 0 notices served upon for nil oz.
In gold, the total comex gold OI rose by a whopping 8318 contracts to 422,006 contracts as gold was up $13.50 in yesterday’s trading.
We had a huge 4.16 tonnes of gold deposit into gold inventory at the GLD, / thus the inventory rests tonight at 645.13 tonnes. The appetite for gold coming from China is depleting not only gold from the LBMA and GLD but also the comex is bleeding gold. Our 670 tonnes of rock bottom inventory in GLD gold has been broken. It looks to me that China has taken the last amounts of physical gold from the GLD. I guess the only place left for China to receive physical gold, after they deplete the GLD will be the FRBNY and the comex. In silver, we had huge changes in inventory at the SLV/we had massive withdrawals of 4.28 million oz /Inventory rests at 317.797 million oz.
First, here is an outline of what will be discussed tonight:
1. Today, we had the open interest in silver rose slightly by 725 contracts up to 168,245 despite the fact that silver was up only with 1 cent with respect to yesterday’s trading. The total OI for gold rose by 8318 contracts to 422,006 contracts as gold was up $13.50 in price yesterday
2 a) Gold trading overnight, Goldcore
3. ASIAN AFFAIRS
i) EARLY LAST NIGHT: (zero hedge)
Last night, WEDNESDAY night, THURSDAY morning: Shanghai closes DOWN 7% then circuit breakers close the exchange for the rest of the day, Hang Sang falls badly, then rest of Asia falters badly throughout the night. Chinese yuan sharply down with another big devaluation. At the close all stocks in Asia in the red, . Oil falls again in the morning,. Stocks in Europe deeply in the red. Offshore yuan continues to collapse as it trades at 6.74 yuan to the dollar vs 6.5915 for onshore yuan:
ii) Bloomberg comments on the Chinese stock market halt after a 7% drubbing:
iii) Chinese foreign exchange reserves fall by 108 billion dollars in December to 3.3 trillion as China desperately tries to contain its devaluation.
( zero hedge)
iv) the circuit breakers for the Chinese markets have now been suspended. The real problem in China is not those circuit breakers but the high P/E of all those securities:
i) We now move to Europe where markets are crashing:
ii) The low price of oil is certainly having a devastating effect on Saudi Arabia. The fact that they have also decided to meddle in other countries affairs did not help either. Today, the market is betting on a huge devaluation of the Saudi Riyal. Strangely their credit default swaps cost higher than basket case Portugal:
i) The Baltic Dry Index again falters to an all time record low of 468. This index is an excellent
ii) Canada’s PMI crashes into contraction mode
iv) Another terrific article from Raul Meijer on the upcoming global economic collapse!!
The blended basket of all crude crashes below 30 dollars per barrel, lowest since 2004:
( zero hedge)
1)Dr Copper and thus the global economy, is now on life support as the price of this metal crashes below 2 dollars:
( zero hedge)
ii) Finally silver has a good day, rallying 2.5% and that just broke its 50 day moving average..a great sign
i) Initial jobless and continuing claims continue to rise indicating the uSA economy is suffering from the high dollar:
ii) USA planned job cuts in December: 23,622 lower than last yr.(courtesy Challenger, Christmas, Gray)
Let us head over to the comex:
The total gold comex open interest rose to 422,006 for a gain of 8,318 contracts as gold was up by $13.50 in price with respect to yesterday’s trading. For the past two years, we have strangely witnessed two interesting developments with respect to the gold open interest: 1) total gold comex collapse in OI as we enter an active delivery month, and 2) a continual drop in the amount of gold standing in an active month. Today, only the first scenario held. We are now in the non active January contract which saw it’s OI rise by 4 contracts to 264. We had 0 notices filed upon yesterday, so we gained 4 contracts or an additional 400 oz will stand for delivery in this non active delivery month of January. The next big active delivery month is February and here the OI rose by 2030 contracts up to 275,025. The estimated volume today (which is just comex sales during regular business hours of 8:20 until 1:30 pm est) was 253,467 which is very good. The confirmed volume yesterday (which includes the volume during regular business hours + access market sales the previous day was also good at 207,411 contracts. The comex is in backwardation in gold up to March.
December contract month:
INITIAL standings for January
|Withdrawals from Dealers Inventory in oz||nil|
|Withdrawals from Customer Inventory in oz nil||
|Deposits to the Dealer Inventory in oz||nil|
|Deposits to the Customer Inventory, in oz||
|No of oz served (contracts) today||0 contracts
|No of oz to be served (notices)||264 contracts
|Total monthly oz gold served (contracts) so far this month||0 contracts(nil oz)|
|Total accumulative withdrawals of gold from the Dealers inventory this month||nil|
|Total accumulative withdrawal of gold from the Customer inventory this month||11,952.3 oz|
Total customer deposits nil oz
January INITIAL standings/
|Withdrawals from Dealers Inventory||nil|
|Withdrawals from Customer Inventory||549,904.202 oz
|Deposits to the Dealer Inventory||nil|
|Deposits to the Customer Inventory||
|No of oz served today (contracts)||0 contracts
|No of oz to be served (notices)||289 contracts
|Total monthly oz silver served (contracts)||12 contracts (60,000 oz)|
|Total accumulative withdrawal of silver from the Dealers inventory this month||nil oz|
|Total accumulative withdrawal of silver from the Customer inventory this month||626,868.0 oz|
Today, we had 0 deposits into the dealer account:
total dealer deposit;nil oz
we had 0 dealer withdrawals:
total dealer withdrawals: nil
we had 0 customer deposits:
total customer deposits: nil oz
total withdrawals from customer account: 549,904.202 oz
we had 0 adjustments:
And now the Gold inventory at the GLD:
Jan 7/a huge addition of 4.16 tonnes of gold into GLD/Inventory rests at 645.13 tonnes
Jan 6/2016/we had a withdrawal of 1.6 tonnes of gold from the GLD/Inventory rests at 640.97 tonnes/
Jan 5/2016: since my last report we had a total of 3.57 tonnes of gold withdrawal from the GLD/Inventory rests at 642.37 tonnes
Dec 23. will update GLD inventory tomorrow
Dec 22.no change in inventory tonight/inventory rests at 645.94 tonnes/
Dec 21/tonight a huge deposit of 15.77 tonnes of gold was added to the GLD/Inventory rests tonight at 645.94 tonnes
(With gold in backwardation it is highly unlikely that physical gold was added/probably a paper gold addition.)
Dec 18.2015: late last night: a huge withdrawal of 4.46 tonnes of gold/Inventory tonight rests at 630.17 tonnes
DEC 17.no changes in gold inventory at the GLD/Inventory rests at 634.63 tonnes/
dec 16/no changes in gold inventory at the GLD/inventory rests at 634.63 tonnes.
Dec 15.2105/no changes in gold inventory at the GLD/Inventory rests at 634.63 tonnes
Dec 14.no change in gold inventory at the GLD/Inventory rests at 634.63 tonnes
DEC 11/no change in gold inventory at the GLD/inventory rests at 634.63 tonnes
Dec 10.2015/no change in gold inventory at the GLD/inventory rests at 634.63 tonnes
And now your overnight trading in gold and also physical stories that may interest you:
1 Chinese yuan vs USA dollar/yuan falls badly in value , this time to 6.5913/ Shanghai bourse: in the red then halted , hang sang: red
2 Nikkei closed down 423.98 or .2.33%
3. Europe stocks down badly (approximately 3% down) /USA dollar index down to 98.72/Euro up to 1.0871
3b Japan 10 year bond yield: falls to .247 !!!!(Japan buying 100% of bond issuance)/Japanese yen vs usa cross now at 117.50
3c Nikkei now just above 18,000
3d USA/Yen rate now well below the important 120 barrier this morning
3e WTI: 33.10 and Brent: 33.55
3f Gold up /Yen up
3g Japan is to buy the equivalent of 108 billion uSA dollars worth of bond per month or $1.3 trillion. Japan’s GDP equals 5 trillion usa.
Japan to buy 100% of all new Japanese debt and by 2018 they will have 25% of all Japanese debt. Fifty percent of Japanese budget financed with debt.
3h Oil down for WTI and down for Brent this morning
3i European bond buying continues to push yields lower on all fronts in the EMU. German 10 yr bund falls to .494% German bunds in negative yields from 6 years out
Greece sees its 2 year rate rise to 9.15%/: still expect continual bank runs on Greek banks
3j Greek 10 year bond yield rises to : 8.47% (yield curve inverted)
3k Gold at $1085.30/silver $14.00 (7:45 am est)
3l USA vs Russian rouble; (Russian rouble down 56/100 in roubles/dollar) 75.23
3m oil into the 33 dollar handle for WTI and 33 handle for Brent/
3n Higher foreign deposits out of China sees huge risk of outflows and a currency depreciation (already upon us). This can spell financial disaster for the rest of the world/China forced to do QE!! as it lowers its yuan value to the dollar.
30 SNB (Swiss National Bank) still intervening again in the markets driving down the SF. It is not working: USA/SF this morning 1.0004 as the Swiss Franc is still rising against most currencies. Euro vs SF is 1.0872 well above the floor set by the Swiss Finance Minister. Thomas Jordan, chief of the Swiss National Bank continues to purchase euros trying to lower value of the Swiss Franc.
3p Britain’s serious fraud squad investigating the Bank of England on criminal charges/arrests 10 traders for Euribor manipulation
3r the 6 year German bund now in negative territory with the 10 year falls to + .494%/German 6 year rate negative%!!!
3s The ELA at 75.8 billion euros,
The bank withdrawals were causing massive hardship to the Greek bank. the Greek referendum voted overwhelming “NO”. Next step for Greece will be the recapitalization of the banks and that will be difficult.
4. USA 10 year treasury bond at 2.14% early this morning. Thirty year rate at 3% at 2.91% /POLICY ERROR
Overnight rate: 0.36%
5. Details Ransquawk, Bloomberg, Deutsche bank/Jim Reid.
(courtesy Jim Reid/Bloomberg/Deutsche bank/zero hedge)
Global Stocks Crash After Spiraling Chinese Devaluation Unleashes Worldwide Chaos And Selling
In yesterday’s overnight market wrap, we commented that while Chinese stocks had succeeded in levitating following another massive government intervention, “the global market was far more focused with what was going on in China’s currency, which as previously reported, plunged to new 5 year lows, while the spread between the onshore and offshore Yuan rose to a record wide, suggesting the depreciation in the currency is only going to accelerate from here, and a big payday for Kyle Bass is coming.”
A few hours later this was confirmed when China set the Yuan fixing some 0.5% lower, the biggest drop since the official August devaluation…
… and unleashed a global selling panic after China’s stock market was promptly shut down less than 30 minutes into trading, when it hit the -5% “15 minute” circuit breaker, and immediately thereafter the -7% “all day” circuit breaker. This was the second market halt this week, and means that Chinese stocks have been fully halted on half of all trading days so far in 2016, just as we said was the endgame for this massively rigged market back when we described the Hanergy fiasco.
The following chart courtesy of Holger Zschaepitz summarizes the utterly farcical nature of Chinese markets quite effectively:
At that point the PBOC yuantervened…
… but it already too late: the damage had been done, and all in just 14 minutes of actual trading (net of the 15 minute trading halt).
“It’s a brutal start of the year, there’s just nowhere to hide on the market. This looks like a ripple effect from what happened back in August. It might continue for a few weeks, but given China’s central bank fire power, it shouldn’t last for more than that,” Alexandre Baradez, chief market analyst at IG France, says by phone.
As we also warned yesterday that none of what is going on in China should be a surprise, this is precisely how global markets took it, because what is taking place now is a carbon-copy of the global market response to the August devaluation, one which unleashed a 10% correction in the market, and led to the August 24 ETFlash crash, one which may also recur today judging by where global sotcks and US equity futures are trading right now:
Global stocks and crude oil tumbled on widening concerns about the Chinese economy, as markets’ turbulent start to the year intensified. The Stoxx Europe 600 was down 3.4% in midmorning trading, while Brent crude oil was down 1.9% at $33.42 a barrel.
S&P futures are holding near their worst levels of the day (had dropped as much as 55pts or 2.77%) amid global rout in stocks, commodities. In pre-mkt trading, Apple -3.2%, FreeportMcMoRan -5%, Netflix – 3.1%, Twitter -3%, Facebok -3%, Bank of America -2.8%, Wells Fargo -2.7%, Amazon -2.7%, Alphabet -2.6%. WTI down 2.7%, paring earlier loss of as much as 5.5% to $32.10/bbl.
- S&P Futures 48pts or -2.4% to 1,938
- DJIA futures -389pts or 2.31% to 16,449
- Nasdaq 100 futures -139pts or 3.1% to 4,308
- WTI Crude -2.6% to $33.07/bbl
- Brent Crude -2.1% to $33.50/bbl
- Gold +0.3% to $1,096/oz
- Copper -2.9% to $2.03/lb
- 30-yr -2.26bps to 2.9149%
- 10-yr -2.64bps to 2.1438%
- 2-yr -2.40bps to 0.952%
- Dollar Index Spot -0.3% to 98.89
- Euro/Dollar +0.5% to $1.0837
- GBP/Dollar -0.5% to $1.4563
- Dollar/Yen +0.7% to 117.63
- MSCI Asia Pacific down 2% to 124
- US 10-yr yield down 3bps to 2.14%
- Dollar Index down 0.36% to 98.82
- WTI Crude futures down 2.6% to $33.09
- Brent Futures down 2% to $33.54
- Gold spot up 0.2% to $1,096
- Silver spot down 0.2% to $13.99
Some other highlights: European shares fell the most since August, crude oil tumbled to a 12-year low, and South Africa’s rand sank to a record; haven assets extended gains, with Treasuries rising for a sixth day and the yen reaching a four-month high. Gold is trading near $1100, while Bitcoin is surging and was last seen at $450 as increasingly more Chinese use the digital currency to transfer their rapidly devaluing money offshore into more stable currencies.
As Bloomberg summarizes, China’s tolerance for a weaker yuan is being seen as evidence policy makers are struggling to revive an economy that’s the world’s biggest user of energy, metals and grains. Those concerns helped wipe $2.5 trillion off the value of global equities in the first six days of this year.
It wasn’t just China: as we observed overnight, George Soros warned that markets are facing a crisis, while the World Bank cut its global growth forecasts for this year and next as China’s slowdown prolongs a commodity slump and contractions endure in Brazil and Russia. “China has a major adjustment problem,” Soros said Thursday at an economic forum in Colombo, Sri Lanka. “I would say it amounts to a crisis. When I look at the financial markets there is a serious challenge which reminds me of the crisis we had in 2008.”
He could very well be right.
* * *
Looking at regional markets, Asian stocks continued the 2016 stock market rout, which has already seen the S&P 500 record its worse 3-day start since 2008. Nikkei 225 (-2.3%) and the ASX 200 (-1.7%) was led lower by losses in energy after oil prices declined to test the USD 33/bbl level to the downside with Brent at its lowest level since 2004. US equity futures declined with E-mini S&P down over 1% and Dow futures shedding around 150 points, as Chinese markets were halted for trade after the Shanghai Comp and CSI 300 fell by over 7%, with continued aggressive CNY devaluation again acting as a catalyst for the downturn. 10yr JGBs gained as losses in riskier assets supported a flight to quality, while today also saw a relatively well-received 30yr auction where b/c printed much higher than the 12-month average and the tail in price CSRC capped large shareholders’ stake reduction to 1% of total outstanding share for 3 months, effective from January 9th and said that major shareholders should disclose share sale plan 15 days before the sale.
The MSCI Asia Pacific Index slipped 2 percent. A gauge of Chinese shares listed in Hong Kong slumped 4.2 percent and the Hang Seng Index dropped 3.1 percent. Benchmark stock indexes in Australia, Japan, Singapore and Thailand all lost more than 2 percent.
“The Chinese yuan is smack bang at the heart of concerns,” Chris Weston, chief market strategist in Melbourne at IG Ltd. “For risk assets to stabilize and sentiment to turn around, we are going to need a stable or even positive move in the Chinese currency. It’s clear that the market is becoming increasingly concerned by the global inflation outlook.”
Top Asian News:
- China Regulator Said to Discuss Markets Without Taking Action: Authorities met to discuss market conditions, circuit breakers
- China Renews Curb on Major Investors’ Stock Sales to Ease Panic: New rules ensure “orderly and legal” sales by key shareholders
- DBS, Standard Chartered Said to Face China Currency Suspensions: Standard Chartered said to have appealed to shorten hiatus
- Lack of Options on North Korea Presses China to Shift Policy: Diplomats question China threshold for ending Pyongyang cover
In Europe, equities have undergone another bashing today as global markets react to the continued bearish sentiment in China. With equity trading in China lasting just half an hour today, in a similar fashion to the rest of the week Euro Stoxx is lower by 2.8% on the day, now lower by almost 6.6% on the week The Euro Stoxx 600 has fallen today by the most since the August 24th collapse , after the CNY fix was moved by the most since the same date, and as such safe havens Bunds, JPY and gold have all benefitted today, while in terms of fixed income, short sterling has seen bull flattening extended, with the June contract breaking above Q4 highs. In line with the China concerns, energy and material names are once again under performing, with Brent and WTI both reaching fresh multi year lows in early European trade.
Top European News:
- Euro-Area Economic Confidence Increases to Highest Since 2011: Reflects better sentiment in industry, services
- Marks & Spencer Chief Bolland Quits as Sales Slump Persists: Retailer’s holiday sales decline more than analysts’ estimates
- German Factory Orders Rise in Sign of Solid Domestic Demand: Orders up 1.5% in November vs. estimate for 0.1% increase
- Osborne Warns U.K. Economy Faces ‘Dangerous Cocktail’ of Risks: China, commodity prices, Middle East cited as hazards
- Euro-zone Dec. Economic Confidence 106.8; est. 106
- Euro-zone Dec. Business Climate Indicator 0.41; est. 0.39
- Euro-zone Dec. Industrial Confidence -2; est. -2.9
- Euro-zone Dec. Consumer Confidence -5.7; est. -5.7
- Euro-zone Nov. Unemployment Rate 10.5%; est. 10.7%
- Euro-zone Nov. Retail Sales -0.3% m/m; est. 0.2%
- Netherlands Dec. EU Harmonized CPI 0.5% y/y; est. 0.5%
- Germany Nov. Factory Orders 1.5% m/m; est. 0.1%
In FX, the offshore yuan swung from a 0.3 percent gain to a 0.7 percent loss and back in the space of about 30 minutes in early trading in Hong Kong’s freely traded market. It was subsequently 0.4 percent higher versus the greenback, while the onshore rate weakened 0.5 percent. The People’s Bank of China cut the yuan’s reference rate by 0.5 percent, the most since the week of an Aug. 11 devaluation that roiled global markets.
“We saw aggressive intervention in the offshore yuan market,” said Zhou Hao, an economist at Commerzbank AG in Singapore. “We don’t really understand the rationale behind the market movements in the past few days. Obviously, these movements have reminded us of the market rout last year.”
The central bank is considering new measures to prevent high exchange-rate volatility in the short term, according to people familiar with the matter. China updates its foreign-currency reserve levels Thursday, giving traders an insight into how much its management of the yuan cost in December. The holdings fell by more than $400 billion in the first 11 months of 2015 as the PBOC bought yuan to support the exchange rate.
The yen, which has been the best-performing major currency so far this year amid the demand for safe-haven assets, rose as much as 1 percent to its strongest level since August versus the dollar.
In commodities, the Bloomberg Commodity Index fell 0.8 percent, headed for its lowest close since 1999. Copper dropped 2.7 percent in London and nickel sank 2.9 percent.
West Texas Intermediate crude slid 3.3 percent to $32.86 a barrel, poised for the lowest settlement since February 2004. U.S. gasoline inventories surged the most in 22 years and crude supplies at Cushing, Oklahoma — the American hub — climbed to an all-time high, government data showed Wednesday. Concern about a global oversupply saw crude cap its biggest ever two-year tumble in 2015, with OPEC abandoning limits on production and U.S. oil stockpiles remaining about 100 million barrels above their five-year average.
Gold rose as much as 0.8 percent to a two-month high of $1,102.85 an ounce.
“Gold is probably the only one beneficiary among all the commodity markets from all the turmoil in the geopolitical scene,” Bob Takai, chief executive officer and president of Sumitomo Corp. Global Research, said by phone from Tokyo.
The only data of note in the US this afternoon is the latest weekly initial jobless claims reading, while we’re also due to hear from the Fed’s Lacker (at 1.45pm GMT), delivering his economic outlook, as well as Evans (at 7.15pm GMT) who is scheduled to talk on the economy and monetary policy.
Top Global News:
- Chinese Stocks Halted as Yuan’s Slump Sends Markets Into Turmoil: Equity rout triggers trading halt in less than 30 minutes, PBOC cuts yuan fixing most since August; Shanghai Fund Manager Dumps All Holdings in ‘Insane’ Market: Shanghai Heqi Tongyi forced to liquidate holdings amid plunge
- George Soros Sees Crisis in Global Markets That Echoes 2008: China’s devaluation hurting rest of the world, Soros says
- Barclays Said to Plan Closing Most of Asia Cash Equities Unit: About 50% of positions in Asia equities may be eliminated
- United CEO Munoz Has Heart Transplant With Return Still Seen: Expected back at work by start of 2Q, company says
- Microchip Said to Be Reconsidering Offer to Acquire Atmel: Atmel’s disappointing quarterly sales said to raise concerns
- Yahoo Said to Propose Job Cuts as Part of Mayer’s Revival Plan: Announcement expected by earnings report in coming weeks
- $30 Oil Just Got Closer as WTI Slides to 12-Year Low on China: WTI trades at lowest since December 2003
- Morgan Stanley’s Gorman Extends Tenure, Spurring Fleming’s Exit: In senior-level shakeup, Gorman names Colm Kelleher president
- Red Kite Bucks Metals’ Worst Year Since Crisis With Mining Bets: Firm is committed to physical metals fund after ‘tough year’
- U.S. to Deepen Probe Into BofA’s Client Protection Rules: WSJ: Scrutiny on certain dividend-tax trades, whether bank broke rules designed to safeguard client accounts
- ‘Star Wars’ Shoots Past ‘Avatar’ to Break U.S. Box Office Record
Bulletin Headline Summary from Bloomberg and RanSquawk:
- Another day of turmoil in China as more circuit breakers are triggered in the domestic markets and more intervention is required in the CNY
- European equities have undergone another bashing today with the Euro Stoxx 600 posting the largest intraday decline since the August 24th collapse
- Looking ahead, today’s highlights include, US Initial and continuing Jobless Claims and comments from Fed’s Lacker and Evans
Treasuries advanced for a sixth day after a plunge in Chinese stocks halted trading for a second time this week and as oil fell to a 12-year low, WTI nearing $30/bbl.
- The worst start for Chinese markets in two decades showed no signs of letting up after PBOC cut its yuan reference rate by the most since August, sparking a selloff in stocks that forced the $6.6t market to shut early
- “This is insane. We were forced to liquidate all our holdings this morning,” says Chen Gang, CIO at Shanghai Heqi Tongyi Asset Management Co., which manages about 300m yuan
- China’s FX reserves tumbled by a record $108b in December as the PBOC sold USD to stem a slide in yuan. That was about four times greater than analysts predicted in a Bloomberg survey, and reduced the stockpile to the lowest level in three years
- The manager of a Chinese hedge fund that returned a surprising 86 percent during last year’s stock rout will sell all its stock holdings as renewed fears tanked China’s markets again
- French police confirm report of gunshots fired outside a police station in the 18th arrondissement, or district, of Paris; I-Tele reports police shot an attacker who entered the station with a knife
- DBS Group Holdings Ltd. and Standard Chartered Plc are among banks suspended from some forex business in China, according to people with knowledge of the matter
- Anglo American Plc led a slump in mining stocks to the lowest in more than a decade as market turmoil in China, the biggest consumer of metals, ignites a vicious spiral of tumbling equities and collapsing commodity prices around the world
- Iran accused Saudi Arabia on Thursday of an aerial attack on its embassy in Sana, the capital of Yemen, in a potential escalation of a sectarian and geopolitical conflict that has put the region on edge, NYT reports
- South Korea will resume the propaganda broadcasts that previously led the Kim Jong Un regime to threaten war, in order to punish North Korea for conducting a fourth nuclear test
- The latest outbreak of bubonic plague on the Indian Ocean island of Madagascar has killed 63 people since August, the Health Ministry said
- $8.25b IG priced yesterday, no HY. BofAML Corporate Master Index OAS +1bp to +174, 2015 range 180/129. High Yield Master II OAS widens 8bp to +711; 2015 range 733/438
- Sovereign bond yields mixed. Asian and European stocks plunge, U.S. equity-index futures slide, with S&P -2.4%. Crude oil and copper lower, gold gains
We concludes as is customary with Jim Reid’s overnight event wrap
The holiday period is starting to feel like a bit of a distant memory. There’s a huge sense of unease in markets at the moment and a big part of that are the concerns with China which dominated much of yesterday’s risk-off tone and, given the Asia session overnight, look set to dictate markets today. From the opening bell this morning the CSI 300 took 12 minutes to tumble to -5% and trigger a 15-minute trading halt. After resuming, the index then took 2 minutes to hit -7% for the day, breaching the second threshold of the circuit breaker and resulting in Chinese equity markets shutting early for the second time this week. So markets were open for just 29 minutes with a total trading time of 14 minutes. The Shanghai Comp closed -7.32% and Shenzhen -8.34% with the latter down over -15% YTD already. Those huge moves have dragged the rest of Asia lower. The Nikkei (-1.96%), Hang Seng (-2.39%), Kospi (-0.77%) and ASX (-1.93%) are all in the red. US equity futures have tumbled over 1% and Oil is testing the $33 mark (down -2%) after falling nearly 6% yesterday. Asia and Australia iTraxx indices are 3 to 4bps wider.
A lot of the blame is being put again on the currency after the PBoC set the Yuan fix 0.51% weaker today, the eighth consecutive weakening but this time the largest since August. That’s caused plenty of volatility in the currency this morning. The onshore Yuan is currently 0.6% weaker as we type while the offshore Yuan is actually +0.2% firmer although at one stage traded nearly as much as 1% weaker. The moves have however caused a broad sell-off across most EM currencies with China’s December FX reserves data due out at any time now and set be very closely watched. As we type headlines are also out suggesting that China’s securities regulator is to cap the size of stakes that major investors can sell at 1% of a company’s shares, effective this weekend, in a bid to surely help ease some of the panic ahead of the open tomorrow.
Today’s moves so far come after another tough session for risk assets yesterday, while there was a reasonable amount of newsflow to get through too. The moves for Oil yesterday saw WTI close at the lowest since December 2008 and Brent at the lowest price since June 2004, while Gasoline closed -7.55% and Natural Gas -2.49% following the latest batch of bearish gasoline inventory data. Meanwhile, the FOMC minutes were probably a touch more dovish than expected (more shortly), although the US dataflow was actually relatively supportive with a much better than expected ADP print (257k vs. 198k expected) raising hopes for Friday’s payrolls, while the ISM non-manufacturing printed at 55.3 which was below expectations (56.0) and down versus November (55.9) but all things considered still relatively resilient in light of the manufacturing data earlier in the week. If this wasn’t enough, we then saw the World Bank weigh in after the closing bell, downgrading their global growth forecasts for 2016.
All told the S&P 500 closed yesterday down -1.31%, meaning the index is down -2.63% to start the year which is only just shy of the -2.73% return for the first three trading days of 2015 which was the worst start to a year since 2008. It was a similar performance for European stocks yesterday where the Stoxx 600 closed down -1.26%, taking its YTD loss pass the 3% mark already. Yields continue to dip lower in most core government bond markets. 10y Bund yields were down nearly 4bps yesterday to settle at 0.502% and nearing the early December levels. 10y Treasury yields finished down nearly 7bps meanwhile at 2.168% and a two-week low.
Onto the Fed. The main point of note in yesterday’s FOMC minutes were the comments from officials suggesting that last month’s decision to commence liftoff was a ‘close call’, reflecting concerns around the outlook for inflation in particular. The text revealed that ‘for some members, the risks attending their inflation forecasts remained considerable’ and that ‘among those risks was the possibility that additional downward shocks to prices of oil and other commodities or a sustained rise in the exchange value of the dollar could delay or diminish the expected upturn in inflation’. Aside from those comments, in truth there was little else of note from the minutes and instead the text was pretty consistent with the post-meeting statement. On timing of future moves, there was more emphasis on the need for ‘gradual’ adjustments in the fed funds rate, while also emphasizing the need to adjust policy as economic conditions evolve. There was also reference to the stress in US HY around the timing of last month’s meeting. While participants didn’t downplay the moves, there appeared to be little concern from officials about the wider implications for now however.
Back to the rest of the US data yesterday. As well as the ADP and ISM numbers, the final services PMI for December was revised up 0.6pts at the final count to 54.3. That helped to take the composite up to 54.0 at the final read from 53.5 in the earlier flash. Meanwhile, the November trade balance reading revealed a shrinking of the deficit to $42.4bn (vs. $44bn expected) from $44.6bn reflecting a drop in imports. Factory orders data offered few surprises after coming in at -0.2% mom in November as expected, while there was no change to the final revision for durable goods in the same month at 0.0% mom. Core capex orders was revised up one-tenth to -0.3% mom. Having highlighted the recent downward revision, yesterday’s narrowing of the trade deficit and resultant contribution from net exports has seen the Atlanta Fed now upgrade their Q4 GDP forecast to 1.0% from 0.7% a few days ago.
Meanwhile, the Fed Vice-Chair Fischer was vocal again yesterday. Following on from San Francisco Fed President Williams’ comments that he see’s 3 to 5 rate hikes this year, Fischer said that in his view four rate hikes ‘are in the ballpark’, although at the same time highlighted the concerns emanating out of China saying that there ‘are levels of uncertainty and they’ve risen a bit now’.
Over in Europe yesterday the final revisions to the December PMI numbers were generally encouraging. The final Euro area composite PMI was revised up 0.3pts to 54.3, with the services component up the same amount to 54.2. That took the composite back to its cyclical high seen in August. By country, Germany saw an upward revision to its already strong flash reading, by +0.6pts to 55.5. The print for Italy was also encouraging having risen +1.7pts to 56.0. This offset a bit of weakness in the final revision for France (-0.2pts to 50.1) while the reading out of Spain also fell last month (-1.6pts to 55.1). Our European economics team confirmed that yesterday’s PMI’s point to GDP growth of +0.5% qoq in Q4, which is slightly above their +0.4% expectation and suggestive that the economy should continue to expand at a solid rate in the near term, with external headwinds (China and the US) the main risks.
Before we take a look at today’s calendar, just quickly highlighting those World Bank growth forecast changes. 2016 global growth has now been downgraded to 2.9% from the earlier 3.3% forecast back in June. This reflected concerns of a slowdown for emerging markets, with the Bank citing concerns around China and also the recessions in Brazil and Russia. It was noted that the Bank cut its outlook for China growth this year to 6.7% from the earlier 7% previously, while a 6.5% forecast was made for 2017. That forecast for this year is in-line with the views of our Chief China Economist.
It’s set to be a slightly quieter day ahead for data with markets probably more focused on events in China. In Europe this morning we’ve got factory orders and retail sales numbers out of Germany, along with the latest Euro area confidence indicators as well as the November unemployment print and retail sales data for the region. The only data of note in the US this afternoon is the latest weekly initial jobless claims reading, while we’re also due to hear from the Fed’s Lacker (at 1.45pm GMT), delivering his economic outlook, as well as Evans (at 7.15pm GMT) who is scheduled to talk on the economy and monetary policy
let us begin:
Last night, WEDNESDAY night, THURSDAY morning: Shanghai closes DOWN 7% then circuit breakers close the exchange for the rest of the day, Hang Sang falls badly, then rest of Asia falters badly throughout the night. Chinese yuan sharply down with another big devaluation. At the close all stocks in Asia in the red, . Oil falls again in the morning,. Stocks in Europe deeply in the red. Offshore yuan continues to collapse as it trades at 6.74 yuan to the dollar vs 6.5915 for onshore yuan:
Here We Go Again: China Halts Trading For The Entire Day After Another 7% Crash
The punishment will continue until The Fed unleashes QE4!!
* * *
*CHINA STOCK SLUMP TRIGGERS TRADING HALT AS CSI 300 FALLS 5%
US Equity markets are tumbling…
And USDJPY is in free-fall…
Someone just stepped into support the Offshore Yuan…
As we detailed earlier:
Following the collapse of offshore Yuan to 5 year lows and decompression to record spreads to onshore Yuan, The PBOC has stepped in and dramatically devalued the Yuan fix by 0.5% to 6.5646. This is the biggest devaluation since the August collapse. Offshore Yuan has erased what modest bounce gains it achieved intraday and is heading significantly lower once again. Dow futures are down 100 points on the news.
PBOC fixes Yuan at its weakest since March 2011… with the biggest devaluation since August
And Offshore Yuan collapses…
This all has a worrisome sense of deja vu all over again… We have seen this pattern of money flow chaos before… Outflows surge from China, send liquidity needs spiking, which bleeds over into Saudi stress (petrodollar?), causing unwinds in major equity markets (thanks to deleveraging of carry trades) in China and then US stocks…
Chinese stocks are opening down hard:
- *SHANGHAI COMPOSITE INDEX FALLS 4.01%
- *SHANGHAI COMPOSITE EXTENDS DROP TO 10% BELOW DECEMBER HIGH
- *HANG SENG CHINA ENTERPRISES INDEX FALLS 3.03%
- *CHINA CSI 300 INDEX FALLS 4.05%
Hold your breath. Dow futures plunged 100 points on the news…
China Halts Stock Trading After 7% Rout Triggers Circuit Breaker
Chinese stock exchanges closed early for the second time this week after the CSI 300 Index plunged more than 7 percent.
Trading of shares and index futures was halted by automatic circuit breakers from about 9:59 a.m. local time. Stocks fell after China’s central bank weakened the currency’s daily reference rate by the most since August.
“The yuan’s depreciation has exceeded investors’ expectations,” said Wang Zheng, Shanghai-based chief investment officer at Jingxi Investment Management Co. “Investors are getting spooked by the declines, which will spur capital outflows.”
Under the mechanism which became effective Monday, a move of 5 percent in the CSI 300 triggers a 15-minute halt for stocks, options and index futures, while a move of 7 percent close the market for the rest of the day. The CSI 300 of companies listed in Shanghai and Shenzhen fell as much as 7.2 percent before trading was suspended.
Chinese stocks in Hong Kong, which doesn’t have circuit breakers, slumped 4.4 percent. The offshore yuan fell to a five-year low before erasing losses.
Chinese foreign exchange reserves fall by 108 billion dollars in December to 3.3 trillion as China desperately tries to contain its devaluation.
(courtesy zero hedge)
Gold, Bitcoin Soar After China Liquidates Most Reserves On Record To Defend Currency
A little over two months ago, when official PBOC data revealed that not only had Chinese reserve outflow slowed down, but actually posted an uptick in October, we warned that “Capital Is Still Flowing Out Of China, Here’s How Beijing Is Hiding It“, in which we explained that in taking a page from the western bankers’ playbook, the Chinese central bank had shifted to less “traceable” forms of currency manipulation, namely via “forwards”. To wit:
Standard central-bank intervention to support a currency generally involves selling dollars and buying the home tender. In this case, China’s large state banks borrowed dollars in the swap market, sold the U.S. currency in the cash spot market and used forward contracts with the central bank to hedge those positions.
“If you can intervene without actually diminishing your reserves, it’s somehow viewed as better,” said Steven Englander, global head of Group-of-10 foreign exchange-strategy in New York at Citigroup Inc. Such central-bank activity “may not look quite as dramatic as the sale of reserves, and they may prefer that optically,” he said.
Since this form of FX intervention does not impact cash reserves and is not reflected in a change of underlying spot securities, China could intervene for an extended period and not show it, which is precisely what happened in October and November.
The problem is that this only works for a limited period of time, and only if the manipulation with synthetic instruments works. In this case it failed miserably as the latest collapse in the Chinese currency has demonstrated. It also means that sooner rather than later, the PBOC would be forced to revert to traditional, cash-based intervention.
And then came December.
As the PBOC revealed overnight, China’s foreign-exchange reserves plunged much more than forecast in December, capping the first-ever annual decline (of $513 billion) as authorities sought to prop up a weakening yuan. More importantly, the $108 billion decline from $3.438 trillion to $3.330 trillion – far greater than the $20 billion estimated – was the largest on record, and shows that while on the surface the Yuan was stable, behind the scenes the PBOC was furiously dumping securities to prevent an all out currency rout as outflows hit a record.
As a reminder, “liquidating reserves” is a financial euphemism for selling government bonds, mostly US Treasurys.
To be sure, the massive intervention explains the relative stability of the Yuan in November and December. However, it appears that the Chinese central banks has decided to stop intervening aggressively, if at all, in 2016. By now, everyone has seen the result: “the weakening of the fixing contributed to a selloff in stocks that led exchanges to close early on Monday and Thursday after the retreat triggered new circuit-breaker mechanisms. China’s CSI 300 Index plunged 7.2 percent Thursday.”
More from Bloomberg:
“It’s inevitable: The PBOC is intervening, there are a lot of capital outflows, and the yuan is facing larger depreciation pressure,” said Chen Xingdong, chief China economist at BNP Paribas SA in Beijing. “The PBOC now wants to maintain stability in the yuan index and not versus the U.S. dollar.”
The government will “allow for more depreciation, use reserves and tighter controls on cross-border capital flows,” said Wang Tao, chief China economist at UBS Group AG in Hong Kong. The yuan will continue to decline against the dollar this year and foreign reserves will drop to $3 trillion, she said.
The paradox that China finds itself in is that as it devalues the currency in what it hopes is a controlled fashion, the FX outflows soar, forcing the PBOC to intervene and slow down the devaluation, leading to a self-defeating process in which China not only devalues far slower than it hopes, but results in an accelerated depletion of reserves. And once China’s reserves decline by a few hundred more billion, that will be the time to panic.
Which brings us to this week: as Bloomberg adds, “the fact that the central bank cut the fixing so much this week signaled that the authorities are worried that the economy is challenged by increasing downward pressures,” said Nathan Chow, a Hong Kong-based economist at DBS Group Holdings Ltd. “Considering the weak fundamentals, the long-term trend for the yuan to weaken and for the capital to leave the nation hasn’t changed.”
Which means even more devaluation is in stock for China, which means even more reserve liquidation, which means even less dry powder to contain future outflows and out of control devaluation, all of which culminates into a great unknown, one which however does not have a happy ending.
So how are traders reacting?
Moments ago gold finally broke out above the $1,100 resistance level which so many sellside experts warned it would never be able to cross again…
… while that “other” currency, bitcoin, has soared by 5% overnight, not on some idiotic narrative about a Russian pyramid schemer’s website, but because of what we first warned in September (when bitcoin was at $225): the more the Yuan devalues, the faster Chinese depositors will seek to circumvent China’s capital controls and convert their increasingly less valuable money into either other currencies (via bitcoin), or into gold.
China Suspends Circuit-Breaker Rule – “This Is Insane; We Were Forced To Liquidate All Our Holdings This Morning”
Update: China folds – CHINA SUSPENDS STOCK CIRCUIT BREAKER RULE
China Securities Regulatory Commission Suspends Stock Circuit Breaker Rule, CSRC Says on Weibo
According to the Shenzhen Stock Exchange messages, to safeguard the smooth operation of the market, approved by the China Securities Regulatory Commission and Shenzhen Stock Exchange decided to suspend the implementation of the “Shenzhen Stock Exchange rules” provisions of Chapter VI of the “index since January 8, 2016 fuse “mechanism.
In addition, according to gold in the news, to maintain the smooth operation of the market, approved by the China Securities Regulatory Commission, China Financial Futures Exchange decided since January 8, 2016, to suspend the implementation of the CSI 300, SSE 50, the CSI 500 stock index futures fuse system.
In Q&A, CSRC insists circuit breakers didn’t cause the China meltdown but admits they may have aggravated sell-off.
This is a result of the unprecedented local outcry detailed earlier.
“It couldn’t be worse,” exclaims one manger who started his fund mid-year in 2015, blaming China’s equity market carnage on its newly-created circuit-breakers (as opposed to the fact that the Chinese market trades at 64x P/E and there are sellers everywhere). “Panic will eventually turn into a buying opportunity,” hopes one strategist while another proclaims “poorly-designed” circuit breakers need to be adjusted to 10% (seriously).
Blame is everywhere, but it is Chen Gang who summed up the panic best, “this is insane… we were forced to liquidate all our holdings this morning.”
Crushed by the Double-Halt…
Circuit breakers may be “creating a herding effect” and “intensifying panic” blames Galaxy Securities Sun Juianbo, as investors accelerate selling after the 1st trading halt as they seek liquidty. But for one asset manager at least, as Bloomberg reports, Chinese equity markets have become too much…
A Shanghai fund dumped all its holdings as Chinese shares tumbled and triggered a circuit-breaker that halted trading in the world’s second-biggest stock market.
“This is insane,” Chen Gang, chief investment officer at Shanghai Heqi Tongyi Asset Management Co., said in an interview on Thursday. “We were forced to liquidate all our holdings this morning,” said Chen, whose firm manages about 300 million yuan ($45.5 million).
Many private funds and hedge funds in China have agreements with investors spelling out mandatory liquidation levels if their holdings drop below a certain value.
As anxiety rises ahead of China’s lifting of short-selling restrictions, Chinese regulators have imposed a limit on the amount of stock major corporate shareholders can sell as authorities move to curb the nation’s market rout.
The CSRC capped the size of stakes that major investors are allowed to sell at 1 percent of a company’s shares for three months effective Jan. 9, the regulator said in a statement on Thursday.
The restriction replaces an existing six-month ban on any secondary market stock sales that is due to expire Friday, it said.
Chen, who commented before the CSRC announced its new caps, said he “won’t consider getting back into the market until that overhang is gone and CSRC improves its circuit-breaker system, for instance by extending the 15-minute break to half an hour.”
“A trading break of 15 minutes or even longer wouldn’t ease their nerves or get them a clear picture of the fundamentals,” said Polar Zhang, a Beijing-based analyst at BOC International Holdings Ltd. “On the contrary, it’s draining liquidity as everybody tries to get out of the door before the door is closed. ”
If CSRC doesn’t improve the mechanism, Zhang said he expects to cut trading volume by 20 percent.
“It is clearly adding some unintended consequences, such as people trying to sell before the break, which is actually accelerating the decline,” said Gerry Alfonso, a trader at Shenwan Hongyuan Group Co. in Shanghai. “Investors need time to adapt to the new rules. This type of development in a retail-driven market is bound to be challenging.”
However, Citi’s Cheung adds some rational perspective, noting “the circuit-breaker should not affect market direction fundamentally.”
Correct – so what is?
Maybe this? Do you really think this downside vol is all about “circuit-breakers” or is it “panic” at this…
Still think that selling China’s stock market is unreasonable?
If China lifts the circuit breaker rule… who will they blame if stocks crash again tonight?
“Markets In Turmoil” As Europe Opens
With Chinese trading halted mere minutes into its day-session on the back “insane” moves as one Asian manager exclaimed, the rest of the world’s markets have borne the brunt of hedging, unwind, selling pressure.
Happy “Chinese” New Year…
Dow Futures are down 300 points from After-Hours highs…
Crude has crashed back to a $32 handle…
The dollar is weaker as JPY and EUR surge…
And Gold has jumped back above $1100…
Time for some jawboning Mr. Draghi.. and what about you Kuroda-san? Get back to work!! Unless the rest of the world is ‘ganging up’ on The Fed, pressuring the US stock market until Yellen folds and unleashes QE4?
Denmark Hikes Rates As Draghi’s “Hawkish” Ease Relieves Peg Pressure
When Mario Draghi “disappointed” markets in December by “only” cutting the depo rate by 10 bps and “merely” extending PSPP by six months while electing not to expand monthly asset purchases, the Riksbank, the Nationalbank, the Norges Bank, and the SNB all breathed heavy sighs of relief.
Essentially, Denmark, Sweden, Switzerland, and Norway are beholden to Mario Draghi. When the ECB eases, those countries’ central banks must ease as well or risk falling behind in the global currency wars.
This beggar thy neighbor race to the Keynesian bottom has resulted in negative rates for all of the central banks mentioned above with the exception of the Norges Bank and you can bet that when slumping crude proves incapable of bringing about sufficient NOK weakness, Norway will take the NIRP plunge as well.
While we doubt the ECB is done when it comes to going “full-Krugman” (as it were), Mario Draghi’s “hawkish” ease did buy his counterparts some breathing room. Case in point: Denmark just hiked.
Earlier this week, Handelsbanken predicted the move, noting that strengthening pressure on DKK vs EUR has eased, while Danish FX reserves may have fallen to DKK415b by the end of December, “which would be below level before attack on DKK peg began almost one year ago.”
As Dow Jones reminds us, Denmark has “sold huge amounts of its own currency and suspended bond auctions to limit the inflow of foreign currency into the country.” On Tuesday, the central bank published figures showing currency reserves are now back at levels last seen at the end of 2014,” Bloomberg said, earlier this week, adding that FX reserves are now roughly where they were “just before hedge funds and other short-term investors started betting the krone’s peg to the euro wouldn’t last.”
Of course no one should think this marks some kind of epochal shift in European monetary policy. “While the ECB didn’t deliver as much QE in December as expected, there’s no guarantee it won’t come up with more later and the Danish central bank needs to take that into consideration,” Nordea’s Jan Stoerup Nielsen says. Here’s a bit more color from Realkredit Danmark’s Christian Heinig:
- Increase largely expected given falling foreign currency reserves, especially after central bank last month sold FX for about DKK50b to support krone
- Market expected bank to raise rate when reserves reached level maintained before last year’s attack on the krone, and reserves, at DKK434.9b, now largely there
- Rate increase unlikely to have a big impact on mortgage rates especially since it was expected
- Rate increase shrinks negative spread to ECB to minus 0.35%; no reason, however, to expect it to normalize above zero any time soon
And here’s more from Nielsen:
- Whether today’s rate hike will be followed by further tightening will fully depend on the krone exchange rate versus the euro
- Nordea’s baseline scenario doesn’t assume any further rises until into the autumn; see CD rate at -0.5% by yr-end while ECB is expected to keep its deposit rate unchanged at -0.3%
- Danish central bank tightening is a fine-tuning of its key policy rate vs euro area; comes after a long period of pressure for a weaker krone, which has reduced currency reserves by more than DKK300b
- The bank has for quite a while been normalizing monetary policy after the extraordinary measures introduced early 2015; last step in this process is a gradual narrowing of the interest-rate differential vs euro area
In other words, at the slightest sign that Mario Draghi is set to either cut the depo rate or expand PSPP to include other “assets” (because the supply of purchase-eligible EGBs is running dangerously low), you can expect Denmark to do a quick about-face as the market will once again put to DKK peg to the test. Or, as WSJ puts it, “the slightest sign of a weaker euro against the krone will have the Danes stamping on the brake and even shifting into reverse if necessary.”
And on cue:
* * *
Saudi Arabia Launches Missile Attack Against Iranian Embassy In Yemen
Last weekend, an already chaotic geopolitical landscape was complicated immeasurably when Saudi Arabia moved to execute prominent Shiite cleric Nimr al-Nimr.
The Sheikh was a leading voice among Saudi Arabia’s dissident Shiite minority and it was his role in a series of anti-government protests that ultimately sealed his fate. “In any place he rules—Bahrain, here, in Yemen, in Egypt, or in any place—the unjust ruler is hated,” Nimr once said of the Sunni monarchies. “Whoever defends the oppressor is his partner with him in oppression, and whoever is with the oppressed shares with him his reward from God. We don’t accept al-Saud as rulers. We don’t accept them and want to remove them.”
The Saudis branded Nimr a “terrorist” and insist that he was no different from the 43 Sunnis who were executed last Saturday.
The Shiite world isn’t buying it – not for a second.
In fact, it seems likely that Riyadh knew good and well that killing the Sheikh would precipitate a firestorm. Even John Kerry warned the Saudis against executing the popular Shiite figure. In light of that, it seems just as likely as not that Riyadh wanted to create an excuse to sever ties with the Iranians and escalate the regional proxy wars playing out in Yemen, Syria, and Iraq.
In short: Saudi Arabia is losing. The Russian intervention in Syria has turned the tide against the Sunni extremist elements battling the SAA, what was supposed to be a quick victory in Yemen has devolved into a protracted stalemate, and Iraq has become an Iranian colony. The so-called “Shiite crescent” is waxing and the Saudis appeared powerless to stop it.
So they created a crisis. They engineered sectarian strife and then blamed Tehran for good measure.
From the time protesters took to the streets in Bahrain last Saturday we’ve been asking how long it would be before the “diplomatic” spat became part and parcel of the multiple regional proxy wars unfolding across the Mid-East.
On Thursday, we got the answer. Tehran now says Saudi Arabia has bombed the Iranian embassy in Sana’a.
- IRAN SAYS YEMEN EMBASSY HIT IN SAUDI AIRSTRIKE
“Tehran holds Saudi Arabia responsible for the damage caused to its embassy in Yemen,”Bloomberg reports, adding that “an unspecified number of embassy guards were wounded.”
Tehran says the missile attack represents a violation of international law.
Iran insists the bombing was “deliberate,” and claims several staff members were wounded. As BBC notes, the Saudi-led coalition contends that “the air strikes had targeted rebel missile launchers, and that the rebels had used abandoned embassies for operations.” Here’s Reuters:
Dozens of air strikes hit the Yemeni capital Sanaa on Thursday, in what residents described as the heaviest aerial attacks there in nine months of war, days after a Saudi-led coalition trying to restore a Saudi-backed government ended a fragile ceasefire.
The strikes pounded the presidential palace and a mountain military base to the south of the city, causing children and teachers in several schools to flee for their lives.
“My classmate and I were at recess when a huge explosion hit the neighborhood. We ran to the side and she fell to the ground in fear,” said Maha, a tenth grader in a Sanaa school. “Everybody was screaming and the administration got us together and called our parents to take us out – all the students were in a panic.” There were no immediate reports of casualties.
Will this be just the excuse Iran needs to take the “proxy” out of Yemen’s proxy war? After all, there have long been reports of IRGC generals fighting alongside the Houthis and it wouldn’t exactly be out of character for the Quds to intervene in an effort to tip the scales. Perhaps more importantly, how long will it be before Iranian assets are damaged by Saudi strikes elsewhere? Like say, near Aleppo. Or in Iraq.
As The Saudi Economy Implodes, A Fascinating Solution Emerges
Earlier today we reported that when it comes to Saudi Arabia, things are going from bad to abysmal, with the market is clearly aware of it. Saudi riyal forwards hit their highest level in almost two decades as oil plummeted: twelve-month forward contracts for the riyal climbed 260 points, and set for the steepest close since December 1996 on growing speculation the world’s biggest oil exporter may allow its currency to slide against the dollar for the first time since 1986 (incidentally, Bank of America’s “Number One Black Swan Event For The Global Oil Market In 2016“).
Alongside this, Saudi default risk has also been rising, and as of this morning Saudi CDS traded wider than Portugal:
The reason for this suddenly quite dire outlook on Saudi Arabia is that as the kingdom has made very clear over the past year, it will continue with a strategy of oversupplying crude even if it means sending its fiscal deficit soaring, forcing the country to draw down on its reserves, and load up on debt.
In other words, as long as Saudi Arabia refuses to relent and allow oil supply to catch up with demand, thereby pushing the price of il higher, it is slowly crushing not only its competitors such as the high-cost OPEC producing nations and marginal US shale companies, but itself as well. The biggest question is how much longer Saudi Arabia can continue this self-punishment, one which recently spilled over with Saudi Arabia forced to boost gas, water and electricity prices and in effect, dismantle its welfare state, risking widespread social unrest.
And then earlier today everything changed when Saudi Arabia’s unveiled what may be a stunning Hail Mary: one which is great news for the suddenly liquidity challenged Saudi government, and is very bad news for the future price of oil.
According to the Economist, Saudi Arabia is contemplating taking Saudi Aramco – arguably the world’s most valuable company – public. To wit:
SAUDI ARABIA is thinking about listing shares in Saudi Aramco, the state-owned company that is the world’s biggest oil producer and almost certainly the world’s most valuable company. Muhammad bin Salman, the kingdom’s deputy crown prince and power behind the throne of his father, King Salman, has told The Economist that a decision will be taken in the next few months. “Personally I’m enthusiastic about this step,” he said. “I believe it is in the interest of the Saudi market, and it is in the interest of Aramco.”
The potential listing comes as Saudi Arabia grapples with the damage wreaked on its economy by an oil-price collapse to below $35 a barrel, as well as mounting tensions with its arch-rival Iran, following the execution of Saudi cleric Nimr Baqr al-Nimr in early January. It is just one possible step in an ambitious plan to balance the budget and throw open the country’s closed economy.
* * *
The upstream part of the business would be most attractive to investors. At 261 billion barrels, Saudi Aramco’s stated hydrocarbon reserves are more than ten times those of ExxonMobil, the largest private oil company. Saudi Aramco is also one of the world’s lowest-cost oil producers, thanks to the ease of pumping oil in Saudi Arabia.
The financial community immediately sprang up to analyze what a deal like this would mean.
According to Bloomberg oil strategist Julian Lee (who worked for the former Saudi oil minister Sheikh Yamani) the possibility that Saudi Aramco might sell shares to investors is unlikely to bring degree of transparency that oil, equity markets might want.
If there were to be an IPO, investors’ wishlist for information about Saudi Arabia would include: detailed published, externally verified reserves; similar estimates of spare output capacity; published, audited report and accounts, and so on. Lee notes that it would be challenging for Saudi Arabia to share detailed information on reserves, production capacity as those are often regarded as state secrets in oil-producing nations; any possibility of reserves, output capacity being downgraded by external assessors would be unacceptable to Saudi Arabia.
Furthermore, the IPO would be unlikely to happen on world’s biggest exchanges, which would require greatest transparency.
Others were comparably skeptical: according to SocGen’s Mike Wittner, the IPO of Saudi Aramco wouldn’t immediately impact oil prices, adding that a potential IPO doesn’t indicate any change in Saudi strategy of letting the oil price do the job of managing global supply.
He is correct: it wouldn’t immediately impact prices; it would however have a huge impact on oil prices over the longer run.
Because reading between the lines, what this announcement really means is that Saudi Arabia is scrambling: for it to resort to partial privatization of its crown jewel, which is what selling stake in an IPO would mean, it suggests two things: the government is desperate to obtain liquidity at any price, and it means that if successful, the Saudi regime will be able to continue its strategy of crushing its high production cost competition for a long time thanks to the new funds.
Indicatively, selling 5% in a company valued at $2 trillion would mean a $100 billion liquidity check to the Saudi government, or enough to fund the country’s reserve outflows for at least year, and perhaps as much as two – a period of time that would be sufficient to put virtually all marginal shale producers, as well as a Venezuela or two, out of business.
In conclusion, keep a close eye on the Saudi capital raising plans, especially if they involve privatizing even more state assets: if that is the route the crown princes have decided to take, then Saudi just found a brilliant loophole to its near-term liquidity troubles, one which will surely lead to its victory in the global race to the crude bottom.
There is really just one key question: who would buy this IPO?
After all, not a single oil-exporter would sign up for this (they would be handing over money to their own executioner) while US firms would indirectly be crushing their own parallel investments in shale and its numerous derivatives, with who knows what unintended consequences as the shale bankruptcy wave finally strikes.
Then again, for the “really rich people“, a $50 or even $100 billion check is nothing at the end of the day. It is, however, a huge political statement, one which may serve as the foundation of a new post-petrodollar axis. We, for one, are extremely curious to find out just who ends up paying it.
Baltic Dry Index Falls to Another All Time Low
Scrapping in the sector during 2015 was reported to be the second highest on record.
After starting the year soft, the Baltic Dry Index Tuesday fell 5 points to a fresh all time low of468.
Analysts and market watchers alike were quick to point the finger at the now all too familiar story of concerns over the Chinese economy, not helped by a 7 percent slide on theShanghai stock market Monday that resulted in a trading halt.
Media reports also surfaced indicating that scrapping in the sector during 2015 was second highest on record.
Average spot TC rates for capesize’s Tuesday fell $135 to $4,676 per day, supramaxes were down $43 to $4,656 per day.
The Panamax index, meanwhile, firmed $16 to $3,722 per day.
Last month Ship & Bunker reported that Symeon Pariaros, chief administrative officer atGreece-based Euroseas, warned that “only companies with very strong balance sheets” will likely survive the sector’s current downturn.
“Nowhere To Hide” As Baltic ‘Fried’ Index Careens To Fresh Record Low
Another day, another fresh all-time record low in The Baltic Dry Index as Deutsche Bank’s “perfect storm” appears ever closer on the horizon. Plunging 4.7% overnight to 445 points, this is 20% lower than the previous record low in 1986 and as one strategist warns,“It’s a brutal start of the year, there’s just nowhere to hide on the market.”
“This looks like a ripple effect from what happened back in August,” adds Alexandre Baradez, chief market analyst at IG France, hopefully looking forward, “it might continue for a few weeks, but given China’s central bank fire power, it shouldn’t last for more than that.”
But Deutsche’s “perfect storm” looms…
The improvement in dry bulk rates we expected into year-end has not materialized. And based on conversations we’ve had with several industry contacts, we believe a number of dry bulk companies are contemplating asset sales to raise liquidity, lower daily cash burn, and reduce capital commitments.The glut of “for sale” tonnage has negative implications for asset and equity values. More critically, it can easily lead to breaches in loan-to-value covenants at many dry bulk companies, shortening the cash runway and likely necessitating additional dilutive actions.
Dry bulk companies generally have enough cash for the next 1yr or so, but most are not well positioned for another leg down in asset values
The majority of publically listed dry bulk companies have already taken painful measures to adapt to the market- some have filed Chapter 11, others have issued equity at deep discounts, and most have tried to delay/defer/cancel newbuilding deliveries.
The additional cushion, however, is likely not enough if asset values take another leg down; especially given the majority of publically listed dry bulk companies are already near max allowable LTV levels.
The move to sell assets in unison can lead to a downward spiral, where the decline in values leads to an immediate need for additional equity to cure LTV breaches.
Source: Deustche Bank
Canada PMI Crashes Into Contraction
Canada’s Ivey Purchasing Managers Index collapsed from an exuberant and simply unbelievable 63.6 in November to a contractionary 49.9 in December – one of the biggest MoM drops on record and biggest misses on record. On a seasonally-unadjusted basis, this is the weakest print in at least 2 years. From the best data since February 2012 to the worst since February 2015 seems to expose these soft-surveys as practically useless. The huge drop in Inventories suggests a major drag on GDP and an extension of Canada’s recession.
From First to Worst!!
Unadjusted, this is the weakest data in at least 2 years…
Moar recession? But for America, low oil prices are “unequivocally good” still right?
Revisiting The Greatest Crash In History
A Historically Unique Event
We keep watching what is happening in Cyprus with morbid fascination. As a reminder, the unhappy island was the first major “haircut” victim in Europe. Its bankers, who had flagrantly over-traded their capital and won prizes for running “the best banks in Europe” along the way, erroneously believed the repeated promises of assorted EU commissars that Greece would never – never! – be allowed to go bankrupt. Consequently they stuffed their balance sheets to the gills with supposedly risk-free Greek government bonds, only to eventually see them get “haircut” twice in a row.
Desperate depositors queuing in front of Laiki Bank, the second largest Cypriot bank, which was eventually wound up
With their capital thus depleted, the banks became dependent on “ELA” funding from the ECB in order to pay depositors who wished to withdraw their money. So as to avoid a panic, the Cypriot government and the EU lied for months to the customers of these banks, assuring them that their deposits were perfectly safe. This inter alia gave the friends and families of well-connected politicians and oligarchs (including close family members of the then president of Cyprus) the opportunity to get all their money out before the curtain came down.
Citizens of Cyprus would have done well to inform themselves about the fraudulent nature of fractional reserve banking. Many might perhaps have been able to avoid what happened next: they were expropriated overnight in an act of confiscatory deflation.
Note here that we are not saying bank depositors should not bear risks, nor are we saying that they should be bailed out by taxpayers. In fact, we cannot offer an alternative to what happened, except perhaps to state that if any bank-related bailouts are implemented (such as the ongoing ECB QE program), depositors should ideally be first in line to partake of the central bank’s largesse. We mainly want to point to the fact that depositors were lied to about these risks all along, which vastly reduced their chances to save their hard-earned money while it was still possible to do so.
We have kept a close eye on the stock market of Cyprus, and lo and behold, it made a new all time low in late 2015:
The Cyprus stock market has declined by 99.986% – of every 100 euro invested at the peak, a mere 0.014 euro are left. In other words, 100 euro have been transformed into just 1.4 cents– click to enlarge.
In order to fully grasp the extent of this devastation, consider the following: had you bought the market after it had declined by 90%, you would quickly have lost another 90%. Had you bought after it had declined by 90% twice, you would just as quickly have lost almost another90%. So since 2007, this market has seen three consecutive declines of 90%. As far as we know this is unparalleled. If there had been a stock market in the Roman Empire, it might have done something similar around AD 400 – AD 500.
Boom, Bust and the Money Supply
As we have frequently pointed out, euro-area wide money supply is growing at an astonishing pace thanks to the ECB printing money 24/7 of late. The most recent annual change rate of the narrow money supply M1, which is the aggregate that most closely resembles money TMS (true money supply) stands at around 14% (a few items are missing from this measure to make it fully comparable to TMS, such as deposits owned by non-residents. However, adding them would probably have little effect on the rate of change).