Asia started weak (again), not China, but the Nikkei (-1%) and HSI (-1%). China actually performed better (+2.27%) with dealers quoting the off-shore FX weakness as a consequence. The yuan (off-shore) lost around 1% to close at a low of 6.7315 (a five-year record low). Obviously, North Korea’s claim that it has successfully carried out a hydrogen bomb test shocked the markets early in the day and that lasted into the close of the New York session. North Korea’s leader being rash, young, and reclusive, keeps him in the category of a wildcard. The claim it has successfully carried out a hydrogen bomb test would be a first and a very significant advancement for its military capabilities. A hydrogen bomb is much more powerful than one based upon plutonium. The statement was blunt: “If there’s no invasion on our sovereignty we will not use nuclear weapon.” This is falling in line with our War Cycle moving into increased activity for 2017.
In Europe, equity markets lost, on average, 1% off of their days lows (of around 1.5%) but it was still a weak close for the first week of the New Year.
In the U.S., (DOW) futures were already leading the way for the cash open when they were trading 250 points lower. The U.S. saw quite volatile trading over the data and Fed minutes but closed 252 points down (-1.5%). S&P and NASDAQ did not suffer as much and both closed around 1.25% lower.
Overall, we now have growing concerns over global growth, an overhang of weak oil prices, and geopolitical concerns (Iran, Saudi Arabia, and now N. Korea) all combining to create the volatility mix they call the stock markets.
Oil prices have not left the front pages for the past seven/eight months and today was no exception. With WTI and Brent both losing over 5% today (both are trading around parity at $34.10) it is no surprise that stock markets around the world are taking this seriously. ADP came in better than forecast (257k) but with oil so depressed we need to wait until Friday’s NFP for additional reassurance.
Again, the flight to quality (as they like to call it) was in the U.S. bond market and gold. Gold rallied $14 and was last seen at $1092 (+1.3%) on the day. In the bond market, we saw good performances on both sides of the pond with bunds rallying (price) 4bp to close 10yr at 0.51%. In the U.S., 10’s outperformed that of Germany, rallying (price) 7bp to close 2.17%. U.S. curve saw a 7bp parallel shift from 5yr out. The 2yr only gained a marginal 3.bp; 10yr spread closes 166bp. 10yr Italy gained ground on Germany closing at 1.48% (+97bp over Germany).
In the FX world the USD gained against A$ (1.3%), Russian Rouble (+1.9%) and against Polish Zloty (+0.8%). It also made small gains (0.4%) against the GBP but it lost ground against the JPY (0.6%) and the Euro 0.4%, which is a couple of reasons why the DXY did not make additional headway today (it closed 99.30 -0.2%).