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News & Views: Wednesday, December 17


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.

Russian Government Tries to Support Volatile Ruble (NYTimes)

Bank of England committee remains divided over interest rate rise (Guardian)

Russia Crisis Hits Pimco Fund, Wipes Out Options (Bloomberg)

Shanghai Composite Rises to Four-Year High as Financials Advance (Bloomberg)

Gross Backs Krugman View of Fed on Hold in Weak Inflation World (Bloomberg)

The Norwegian OBX equity index is the top performing asset overnight on a risk-adjusted basis, led by energy stocks. This is despite both Brent and WTi crude oil being the worst performing commodities this morning. Statoil (STL), Norway's largest energy producer, which makes up 18% of the index, announced last night that it is pushing ahead with a $610mm plan to develop oil assets in the North Sea Rutil discovery even though energy costs have fallen. Other energy stocks have reacted positively to the development. This development is important because this morning the OBX opened at the same level it bottomed in October and made a "V" bottom. Considering the index's largest weighting in energy, and that has been a driving theme for global risk assets lately, the sentiment could be reaching exhaustion.
US Treasuries, specifically the front end of the curve, are the worst performing fixed income assets overnight on a risk-adjusted basis. Part of this is due to a snapback in the US dollar, which had been trading at the bottom end of its recent range, especially versus the Euro. Additionally, as I've mentioned lately, the call skew in Treasury options is "off the charts" which suggests that downside risk is now asymmetric.
The Russian ruble is up about 4% this morning against the US dollar. The Russian central bank (CBRF) said that it is exploring a probe into FX manipulation, but it is not discussing halting FX trading on the major exchanges. Information released today showed that the CBRF sold $1.96bln in FX reserves on Monday in an attempt to prop up the Ruble, when it fell 10% and local trading was halted. That is the largest single intervention by the central bank. More importantly, the Russian finance ministry said that it began selling residual FX from all of its accounts, and it has about $7bln available to sell. Additionally, Sberbank said that it is increasing the rate it pays on FX deposits by 3%, well above what it pays for local currency deposits.

Note that wheat is strongest performing commodity for a second day in a row on a risk-adjusted basis and is now up the last five days. The reason behind the increase is twofold, although both come from Russia. First, Russia will export a significantly smaller amount of its wheat next year, according to the government, because the drop in the Ruble makes it exponentially harder to obtain foreign food supplies. The Russian government said yesterday that it will pay a higher price for wheat to be used for domestic stockpiles and increase grain reserves by 5 million metric tons. Second, if capital controls are implemented, it will only increase the effect of domestic stockpiling because Russia will need to dramatically increase its current account balance.

The minutes of the Bank of England's (BoE) latest policy meeting continued to show 2 dissenters. That is not a negative, however, because that minority have already said publicly they only see very limited rate hikes. The "most significant developments" discussed at the meeting were the oil price drop and the decline in interest rates. The 10yr UK Gilt is now at 1.78% and yield declines have accelerated in the past two months. For example, the 10yr Gilt yield is now 18bps below the low yield on Oct 15. Lastly, and most importantly as it pertains to the US Fed, BoE policymakers said that they should look through the short-term oil price decline as it is a net stimulus for the UK economy. Although the market certainly has a different opinion on that subject, and rightfully so, this is important to shape the reaction function from the Fed today.

Lastly, note that UK wages accelerated in October after sharp drops in the months prior. UK Gilts have not reacted, although US Treasuries certainly could be.

- Japan trade balance (Nov) up to -925B Yen vs -982.8B expected, prior -985.1B
-- Exports YoY up 4.9% vs 7.0% exp, prior 9.6%
-- Imports YoY down -1.7% vs 1.6% exp, prior 3.1%
- UK ILO unemployment rate 3M (Oct) unchanged at 6.0% vs 5.9% exp, prior 6.0%
- UK average weekly earnings 3M/YoY (Oct) up 1.4% vs 1.2% exp, prior 1.0%
-- ex Bonus up 1.6% vs 1.6% exp, prior 1.2%
- Eurozone CPI YoY (Nov final) up 0.3% vs 0.3% prelim

Twitter: @MichaelSedacca

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