On the heels of another wild day of trading in global markets, today one of the legends in the business warns that all hell is breaking loose in Russia. Many are wondering if this crisis will morph into a disaster for the entire world.
By Art Cashin Director of Floor Operations at UBS
December 16 (King World News) – “On this day in 1773 (as you surely recall from Sister Herman Joseph's fourth grade class), a group of Colonists, disguised as Indians, boarded three British ships at dockside in Boston Harbor. And, as you probably also recall, they threw tons of British tea into the Harbor. And, you probably learned, this was all done to protest the outrageously expensive British tea.
Well, you can't be right about everything. The tea was not expensive; it was cheap – – too cheap. That was the problem. The good people of Boston had been making quite a living smuggling Dutch tea into the Colonies. Now the Brits had cut the price of tea to undercut the smugglers. So, a guy named John Hancock, who just happened to be making a fortune in duty free imports….(the Brits called him the head smuggler)….funded this little "tea party".
Sure, Americans have historically hated tyranny and taxation but if you really want to get them ticked off — try a dose of deflation.
There were several signs of deflation on Wall Street, Monday. They were in stock prices and oil prices.
Oil Goes South Again And Take Stocks With It – The equity market in New York opened better. The bounce was helped, in large part, by a small bounce in crude prices.
The opening pop took the Dow up about 112 points but there was little sign of frenzy or even short covering.
The celebratory mood had a shelf life of about 15 minutes as oil rolled over and seemed headed into negative territory yet again. That spooked the equity buyers and bids began to disappear all over the floor.
In mid-morning, I sent this note to some friends:
Opening bounce in Dow and S&P took you back to 3:00 p.m. Friday, regaining the final hour selloff. Weakness in oil made the rally evaporate.
S&P and Dow tested and then violated their respective 50 day moving averages.
By late morning, I sent this follow-up:
Having clearly taken out the 50 DMAs, the next technical becomes the 100 DMA (Dow 17,096; S&P 1987).
The selling in New York paled in comparison to the reaction in Europe. The German DAX plunged like it had an anvil hung around its neck.
Around noon, with Europe safely closed, things began to stabilize. Shortly after 12:15, I sent this note:
Oil came off the morning low and stocks followed.
Morning reversal brought a bump in volume. Run rate at 12:15 project to an NYSE final volume of 880/960 million shares.
(A surge in late selling swelled the final NYSE volume to 976 million shares.)
While it wasn't a direct influence of the market, the hostage event in Sydney provided a negative atmospheric backdrop that inhibited risk taking a bit, lest a new wave of lone wolf events sprang up around the globe.
Oil remained the Pied Piper for stocks although the tether became a bit more elastic in the final hours of trading.
While the S&P broke below its 100 DMA, the Dow held above its respective level.
The markets closed nervously with lingering concern that oil may be near freefall and that could spill into currencies and sovereign debt. Not a good session at all.
Overnight And Overseas – The world is in shock at the massive rate move by the Russian Central Bank in an effort to stem the hemorrhaging in the ruble. While it stemmed the selling for a brief moment, the sellers swarmed back in. Here's how my friend, Peter Boockvar over at the Lindsey Group described it:
Instead of attracting funds into the Russian ruble, the 650 bps spike to 17% by the Russian central bank in their benchmark rate instead repelled it. After plunging by 10% yesterday, the ruble is down by another 14% today. The ruble was at 35 to the US$ this summer. Today it takes 75 rubles to buy one dollar. In ruble terms, the Russian Micex is up by 2.7% but in dollar terms it’s also sharply lower by double digits. The Russian 5 yr CDS is wider by 47 bps to 600 bps, the highest since ’09. The ruble denominated 10 yr yield is higher by 258 bps to 15.55%. Other emerging market currencies are also down sharply vs the US$ but the yen is spiking higher as many carry trades get unwound here. Don’t forget the short yen trade that has been used to finance a lot of other speculative higher yielding activities. The euro too has been a carry trade currency and its jumping higher also.
Peter also took note of remarks by Jens Weidman that may present problems for Mario Draghi:
Lastly, while eyes tomorrow will be on the Fed, they still remain very much on the ECB and how they respond in January. The ECB member Jens Weidmann from Germany is again expressing his firm opposition to sovereign QE. “There are indeed a whole row of economic reasons that speak for the rejection of government bond purchases, before you even consider the legal question of whether they’re compatible with the ban of monetary financing, even if secondary market purchases AREN’T expressly forbidden.” On the high expectations that markets have for QE, “markets at some point have to learn, that not every expectations, not every wish, will be fulfilled.” On what the impact of sovereign QE would be, “the wealth effect, in contrast to the US, would scarcely play a role in the euro area. That’s because euro area households invest much less in the capital market, and they’d profit much less from a rise in them. Simulations, based on models, show that QE in the euro area would be able to lift the inflation rate, but one should not expect miracles. Significant volumes would have to be deployed, even to achieve a modest and uncertain effect.”
Net/net, destabilization rules the market. Dow futures were up 80 points around 6:00, they are now down about 80.
Oil is in virtual freefall again and Gulf stock markets are down from 6% to 8%.
On a flight to safety, the yield on the German bund is around 57bp.
Consensus – Seasonals have an uphill fight. Day before FOMC has a solid upside bias. The week of a December Expiration is one of the best weeks of the year for the S&P. Stick with the drill – stay wary, alert and very, very nimble. And, if you're celebrating, have a very Happy Hanukkah!
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