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News & Views: Tuesday, December 9


What you need to know for today's trading day.

This article was originally posted on the Buzz & Banter where subscribers can follow over 30 professional traders as they share their ideas in real time.

OPEC Early Meeting Seen More Likely by Analysts on Prices (Bloomberg)

Russia admits action to buoy ruble (BBC)

Iron Ore Outlook Cut by JPMorgan as BHP, Rio Shares Extend Slump (Bloomberg)

BP Weighs Future of Aging Norwegian Fields Amid Oil Crash (Bloomberg)

Greek Government Bonds Drop as Presidency Vote Brought Forward (Bloomberg)

Chinese equities are having the largest negative risk-adjusted return across all assets overnight. When the Shanghai Composite (SHCOMP) is six standard deviations away from its 20 and 30-day averages, violent pullbacks - or reversions to the mean - are to be expected. Additionally, it has been well telegraphed that margin trading has exploded from local accounts. New Chinese A-share accounts have risen by 364,000 over the past two weeks, to almost 600,000 in total. Ultimately though, while this pullback has been extremely violent and warranted, the trend is still up for Chinese equities.

Note that the Chinese Yuan has weakened by 0.6% against the US dollar in the past two days, which is an enormous move for this pair. The weakening is due to two reasons - the PBoC is no longer draining liquidity from the system through repos, and a RRR cut is negative for the currency. Lastly, China's clearing agency said yesterday that it won't allow bonds rated below AA to be used as collateral for short-term repo loans, which is almost certainly a precursor to higher money market rates. This may be why the country's central bank has chosen to halt draining liquidity from the system via reverse repos.

On an absolute basis, Greek equities are the worst performing asset this morning. The Athens Stock Exchange General Index (ASE) is down 10% or worse. Current Greek Prime Minister Samaras called for presidential elections to be pulled forward to next week. If his pick, former EU commissioner Stavros Dimas, is not successfully elected, then Greece's Parliament would be dissolved with the opposition Syriza likely gaining a majority in new elections. That would be highly negative for Greece and the Eurozone because Syriza has pushed for the country to leave the currency bloc.
In currencies, the South Korean Won (KRW) and Japanese Yen (JPY), which have been paired at the hip these days, are the best performers overnight on a risk-adjusted basis as the dollar has fallen substantially over the past two days. The Won move comes as more than one forecaster in the past week has pulled forward their first rate cut by the Bank of Korea (BoK) into early 2015.

Similarly, crude oil and gold are higher in sympathy to the weaker dollar. Last night, PDC Energy (PDCE) announced that they were cutting their capex budget by 14% (hat tip Branden Rife). Their areas of production are 55% natural gas (Utica) and 45% oil (Wassanger) where $70 oil becomes a problem for future rates of return.
Last night for the first time since the program began four years ago, the Bank of Japan (BoJ) purchased stock-backed ETF's while prices were rising. So not only are various funds - pension, insurance, hedge - forced buyers in rising markets, but now central banks are as well. Separately, the 10yr Japanese bond future rose to a new record high last night to an average yield of 0.41%.

To wrap things up, in conjuction with the noticeably weak UK manufacturing production, UK Gilts are the best performing fixed income asset this morning. Although the short Sterling curve is still priced for a likely hike by the Bank of England (BoE) at the end of next year, it continues to reduce the trajectory of those hikes to only 50bps over a one year period. I think this will happen in the US in due time.

- UK manufacturing production MoM (Oct) down -0.7% vs 0.2% expected, prior 0.6%
- UK industrial production MoM down -0.1% vs 0.2% exp, prior 0.6%
- German trade balance (Oct) little changed at 21.9B EUR vs 18.9B exp, prior 22.1B
-- Imports MoM down -3.1% vs -1.7% exp, prior 5.2%
-- Exports MoM down -0.5% vs -1.7% exp, prior 5.5%

Twitter: @MichaelSedacca

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No positions in stocks mentioned.

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