Seeing Red in Russia The yield on the 10-yr Treasury note has dropped six basis points this morning to 2.06%. Why lead with that? Because its a telling indication that market participants recognize something is amiss out there. The S&P futures tell the tale, too. They are down 6 points and are trading 0.3% below fair value. Notably, the S&P futures were up 10 points only a few hours ago, yet they reversed course sharply as losses in the Russian stock market, the Russian ruble, and oil prices mounted. One of the lead headlines today is that Russias central bank jacked up it key lending rate to 17% from 10.5% in a purposeful effort aimed at limiting ruble depreciation risks and inflation risks. The ruble got an initial boost on the headline, yet that bounce lasted as long as a Philadelphia 76ers winning streak. The ruble is down 13% against the dollar and the dollar-denominated RTS Index in Russia is down 12.7% (it had been down more than 16% earlier). Its just a real mess in Russia to say the least. That mess in turn is messing with the U.S. stock markets typically festive holiday spirit as it is evoking concerns about the potential for default risk, financial risk, and economic risk, never mind the potential for some geopolitical turmoil knowing Vladimir Putin must be feeling cornered by the economic sanctions imposed by the U.S. and EU. And then there is oil. We said yesterday that the direction of oil prices -- and the markets reaction to the direction oil prices go -- would be watched carefully as participants are looking for some bottoming clues. Well, oil prices fell further on Monday and the stock market fell along with them. Today, WTI crude futures are down another 3.2% to $54.10/bbl while Brent crude futures are down 3.6% at $59.02/bbl (first drop below $60 since July 2009). The HSBC Flash PMI report for China hasnt helped the demand outlook for oil. It revealed a contraction in manufacturing activity in December, slipping to 49.5 from 50.0 in November. Naturally, the Shanghai Composite rallied 2.3% on the news as it flipped the speculative switch that more policy stimulus will soon be seen. Japans Nikkei for its part dropped 2.0% as a strengthening yen continued to weigh on the market, which is down 4.0% this month. European bourses were helped along by some better than expected flash PMI reports and a stronger than expected business sentiment reading out of Germany. Still, the turmoil in Russia curtailed buying efforts. Separately, Boeing (BA), 3M (MMM), and CVS Health (CVS) gave investors something to cheer about as each of those blue chip companies increased their dividend by at least 20%. Companies dont typically raise their dividend (especially by that much) unless they are feeling pretty confident in their earnings and cash-slow generating prospects. That understanding could get lost in the macro jetwash this morning. On the economic front at home, housing starts in November declined 1.6% from the prior month to an annualized rate of 1.028 million units (Briefing consensus 1.035 mln). Building permits, meanwhile, dropped 5.2% to 1.035 million (Briefing consensus 1.060 mln). Single-family start were down 5.4% to 677,000 from an upwardly revised 716,000 in October. The latter was the highest level of starts since March 2008, so the pullback was perhaps only natural. There will be a pullback when the stock market opens for trading, but what remains to be seen is whether the natural tendency to buy on that pullback returns with any conviction. It has been M.I.A. this month with the S&P 500 down 3.8% so far.
Posted on: Tue, 16 Dec 2014 14:03:43 +0000
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