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Oil and Ruble Weakness Spook Global Markets

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Today's financial recap and tomorrow's financial outlook.

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Global risk assets all opened up stronger overnight with US equity futures almost 1% higher by the time trading opened. The S&P 500 (SPX) traded up as much as 0.82% in the opening moments before turning negative after the first 60 minutes and falling as much as 1%. Prices relatively stabilized from there and the benchmark index closed down 0.63%. European equities were also down heavily with the Italian FTSEMIB dropping 2.81%, the most of the major indices in the region.

The continued damage to some of the safer emerging markets caused a fair amount of anxiety that contributed to the weakness. Another 5% drop in WTi crude oil did not help, either.

West-Texas intermediate crude oil futures fell by 4.17% to close at 55.40. Over the weekend, the UAE energy minister said that OPEC would not consider adjusting its production target until crude oil fell below $40 and stayed there for at least three months. Similarly, the head of OPEC said that it was not overly concerned with the drop in crude and did not think that a production cut would even make a measurable effect on the price.

The damage from lower crude prices spread to emerging markets and it was not pretty. The Russian ruble fell by 10.22% against the US dollar, which was more than double the prior worst day, and the Russian government halted trading in the currency after the "official" close at 12pm ET, an unprecedented step. Earlier in the day the Russian central bank halted trading in some equity futures products because it suspected that the closing price was being manipulated. Additionally, there was speculation that the central bank was intervening to support the currency again by selling FX reserves.

Mexico and Brazil's stocks markets were down heavily. The Mexico IPC (IPC) fell by 3.31% and the Brazilian Ibovespa (IBOV) fell by 2.05%. Default probabilities for both countries also skyrocketed. 

The New York regional manufacturing survey showed a substantial drop for December. The Empire Manufacturing index fell by 3.58 (versus +12.40 expected) as new orders, shipments, and inventories all fell. The index is directly exposed to retail manufacturing. Conversely, industrial production rose by 1.3% in November from the prior month as a major increase in utility usage and the associated production boosted activity.

Tomorrow's Financial Outlook

A key talking point overnight will be whether or not the drop in the Russian ruble and crude oil persists and continues to cause major weakness across all assets. Today, in a blog posting, The Economist said that by August 2015 the Russian central bank will have effectively run out of FX reserves to help defend its currency.

The major US economic data report scheduled for tomorrow is November housing starts and permits. Starts are expected to rise to a 1.040 million annualized pace in November, up from 1.009 million in the month prior. The preliminary index of December manufacturing PMI is expected to rise to 55.2 from 54.8 in November.

Overnight, the major foreign economic report is the preliminary December HSBC China manufacturing PMI. Gains have moderated recently, and it is expected to continue to decline to 49.8 this month (from 50 in the month prior). However, this deterioration has been met by numerous calls for the government to ease financial conditions, which it has responded positively to. Also to be reported is EU new car registrations, a similar report for eurozone manufacturing PMI's, UK CPI, and the ZEW survey of German professional investors economic expectations.

The only two major earnings reports scheduled for tomorrow are Navistar International (NAV) and Darden Restaurants (DRI).


Twitter: @Minyanville

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No positions in stocks mentioned.

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