Stock Market Indigestion Gets Worse

Submitted by Pater Tenebrarum  –  The Acting Man Blog

Another Bad Hair Day

At the beginning of the week, it looked like a rebound in stocks might get underway – and why not? After all, the market is a bit oversold by now. In fact, a number of indexes are oversold quite a bit. But then came Wednesday, and turned into another bad hair day – a really bad one.

20-animals-having-a-bad-hair-day-3A surprised market participant joins the stock market in having a bad hair day.

Photo via pinterest.com 

Needless to say, this remains highly unusual market behavior for early January. And this week is an options expiration week to boot, which reminds us that the warning shot in August also happened during an expiration week (plus the Monday following the expiration).

Probably because it is early January and this market behavior is so unusual, there is no real sense of fear yet. There are certainly many scary headlines and bears are becoming increasingly more vocal. For instance, famous bear Albert Edwards of Soc-Gen has just decided he needs to lower his target…quite a bit. In a noteworthy similarity to us, his timing is occasionally off by a few years, but he also has a disconcerting habit of being vindicated at some point down the road.

Said “some point” may be in the process of arriving. On the other hand, there are also still many true believers going on about imminent v-shaped recoveries. In fact, it feels like there are still way too many of those. We note in the meantime that the downside leaders continue to lead to the downside – here are three of them:

1-Downside Leaders (TRAN, RUT, NYA) Continue reading

(Re-)Covering Oil and War

Submitted by Raúl Ilargi Meijer  –  The Automatic Earth


Russell Lee Tracy, California. Tank truck delivering gasoline to a filling station 1942 

The first thing that popped into our minds on Tuesday when WTI oil briefly broached $30 for its first $20 handle in many years, was that this should be triggering a Gawdawful amount of bets, $30 being such an obvious number. Which in turn would of necessity lead to a -brief- rise in prices.

Apparently even that is not so easy to see, since when prices did indeed go up after, some 3% at the ‘top’, ‘analysts’ fell over each other talking up ‘bottom’, ‘rebound’ and even ‘recovery’. We’re really addicted to that recovery idea, aren’t we? Well, sorry, but this is not about recovering, it’s about covering (wagers).

Same thing happened on Thursday after Brent hit that $20 handle, with prices up 2.5% at noon. That too, predictably, shall pass. Covering. On this early Friday morning, both WTI and Brent have resumed their fall, threatening $30 again. And those are just ‘official’ numbers, spot prices.

If as a producer you’re really squeezed by your overproduction and your credit lines and your overflowing storage, you’ll have to settle for less. And you will. Which is going to put downward pressure on oil prices for a while to come. Inventories are more than full all over the world. With oil that was largely purchased, somewhat ironically, because prices were perceived as being low.

Interestingly, people are finally waking up to the reality that this is a development that first started with falling demand. China. Told ya. And only afterwards did it turn into a supply issue as well, when every producer began pumping for their lives because demand was shrinking.

All the talk about Saudi Arabia’s ‘tactics’ being aimed at strangling US frackers never sounded very bright. By November 2014, the notorious OPEC meeting, the Saudi’s, well before most others including ‘analysts’, knew to what extent demand was plunging. They had first-hand knowledge. And they had ideas, too, about where that could lead prices. Alarm bells in the desert. Continue reading

Cracks at the Core of the Core

Submitted by Doug Noland – Credit Bubble Bulletin 

January 15 – Bloomberg (Matthew Boesler): “The U.S. economy should continue to grow faster than its potential this year, supporting further interest-rate increases by the Federal Reserve, New York Fed President William C. Dudley said. ‘In terms of the economic outlook, the situation does not appear to have changed much” since the Fed’s Dec. 15-16 meeting, Dudley said, in remarks prepared for a speech Friday… He added that he continues ‘to expect that the economy will expand at a pace slightly above its long-term trend in 2016,’ and said future rate increases would depend on incoming economic data.”

January 15 – Reuters (Ann Saphir): “The stock market’s swoon does not change the economic outlook and is merely market participants trying to make sense of global developments, San Francisco Federal Reserve Bank President John Williams told reporters… ‘As the Fed is moving gradually through a process of normalization it’s not surprising that we are not going to be at the peak stock prices’ of last year, Williams said. So far swings in stock market prices have not fundamentally changed his expectation for moderate economic growth, he said.”

The world has changed significantly – perhaps profoundly – over recent weeks. The Shanghai Composite has dropped 17.4% over the past month (Shenzhen down 21%). Hong Kong’s Hang Seng Index was down 8.2% over the past month, with Hang Seng Financials sinking 11.9%. WTI crude is down 26% since December 15th. Over this period, the GSCI Commodities Index sank 12.2%. The Mexican peso has declined almost 7% in a month, the Russian ruble 10% and the South African rand 12%. A Friday headline from the Financial Times: “Emerging market stocks retreat to lowest since 09.”

Trouble at the “Periphery” has definitely taken a troubling turn for the worse. Hope that things were on an uptrend has confronted the reality that things are rapidly getting much worse. This week saw the Shanghai Composite sink 9.0%. Major equities indexes were hit 8.0% in Russia and 5.0% in Brazil (Petrobras down 9%). Financial stocks and levered corporations have been under pressure round the globe. The Russian ruble sank 4.0% this week, increasing y-t-d losses versus the dollar to 7.1%. The Mexican peso declined another 1.8% this week. The Polish zloty slid 2.8% on an S&P downgrade (“Tumbles Most Since 2011”). The South African rand declined 3.0% (down 7.9% y-t-d). The yen added 0.2% this week, increasing 2016 gains to 3.0%. With the yen up almost 4% versus the dollar over the past month, so-called yen “carry trades” are turning increasingly problematic.

Importantly, the past month has seen contagion effects from the collapsing Bubble at the Periphery penetrate the Fragile Core. Japan’s Nikkei 225 index was down 7.6% over the past month. While bubbling securities markets have worked to underpin European economic recovery, now prepare for the downside. The German DAX is off 11% in the first two weeks of 2016, with stocks in Spain and Italy also sporting double-digit declines. France’s CAC 40 has fallen 9.2% y-t-d. And highlighting a key Issue 2016, European bonds have provided little offsetting protection against major equities market losses. So far in 2016, German bund yields are down only eight bps. Yields are little changed in Spain and Italy. Sovereign yields are up 20 bps in Portugal and 130 bps in Greece. European corporate debt has posted small negative returns so far in 2016. Continue reading

HOW CHINA IS DELEVERAGING FROM THE USD

Submitted by J.C. Collins  –  philosophyofmetrics

PandaOn December 29, 2015, in the post The Myth of China Dumping US Dollars, I wrote the following in regards to the past accumulation of USD by the People’s Bank of China:

“The PBoC continues to keep the renminbi weak against the dollar for the purpose of purchasing US dollars which are accumulated by Chinese business and exporters.  The People’s Bank of China borrows renminbi in order to purchase these dollars.”

“Once purchased, the PBoC cannot sell renminbi as it would be inflationary. Same as the US with dollars.  In order to prevent excess inflation, the PBoC issues new debt and raises the required reserve ratio of capital held by Chinese banks.  This has led to the increase of domestic debt within China.”

This increase of domestic debt amounts to the large printing of renminbi which was used to purchase US dollars.  This is in essence the forming of a bubble within China.  This bubble debt was used to further modernize the country and build infrastructure and “ghost cities” which will be used to house a growing middle class as China migrates 100 million of its rural population into these cities between now and 2020.

The POM article continues:

“The effect of all this is that the PBoC owes renminbi which it sold at low valuations, based on the exchange rate, and owns dollars at high valuations, based on the same exchange rate.”

The article further explains why China could not simply “dump” US dollars as a method of financial warfare on the United States.  That is the most misunderstood part of the China/America dynamic.  The People’s Bank of China prints/borrows RMB to purchase the dollars which have accumulated in its foreign exchange reserves.

In order to reduce these USD denominated reserves, the PBoC has to sell USD from its foreign exchange reserves to buyback RMB from circulation.  As the Federal Reserve increases interest rates, the demand for dollars increases, at least initially, and it is expected that RMB will depreciate as investors fear a capital flight from China, or other emerging markets. Continue reading

The Daily Debt Rattle

Submitted by Raúl Ilargi Meijer  –  The Automatic Earth

• Why Are We Looking On Helplessly As Markets Crash All Over The World? (Hutton)
• China’s Stock Market Value Plummets By $600 Billion In One Week (Xinhua)
• The Ugly Subtext Beneath China’s Two-Track Economy Tale (FT)
• Buckle Your Seatbelts: China Could Rock Markets Next Week (CNBC)
• China’s Economy Grew By Around 7% In 2015, Premier Li Says (Reuters)
• The Fantasy And The Reality Of China’s Economic Rebalancing (CNBC)
• China Stocks Watchdog Acknowledges Flaws in Equities Regulation (BBG)
• China-Led AIIB Development Bank Aims to Swiftly Approve Loans (AP)
• Dallas Fed Quietly Suspends Energy Mark-To-Market On Loss Contagion Fears (ZH)
• Wall Street Braces for Bigger Shale Losses After Oil Drops Below $30 (BBG)
• With Liftoff Done, the Fed Revisits a $4.5 Trillion Quandary (BBG)
• Saudi Aramco – $10 Trillion Mystery At The Heart Of The Gulf State (Guardian)
• Market Meltdown Rattles Canadian Investors, Panic Sets In (BBG)
• German Lawmakers Urge Merkel To Tell Draghi: End Record-Low Rates (BBG)
• The Business Case For Helping Refugees (Gillian Tett)
• Schäuble Proposes Special EU Tax On Gasoline To Finance Refugee Costs (Reuters)
• Five Bodies Wash Up On Shore Of Samos (AP)