U.S. stock index futures turn negative in an illiquid, volatile session as investor sentiment has yet to stabilize amid doubts whether the U.S. equity selloff is over as yields remain just south of the critical 2.85% level. S&P E-mini contracts slid 0.1%, while the VIX is up 1% to 28.1 after 2 days of declines. Including fair value, the Dow is expected to have an implied open of over 200 points lower while the S&P will open around 2,665.

Meanwhile, in this post-VIX ETP world, liquidity remains non-existent, as this chart from nanex shows.

It’s not just the US however which can’t find its footin, as all risk-related assets trade under pressure in a generally muted session following yesterday’s whipsawed session which saw stocks spend much of the day in the green, only to slide at the close. 

European equity losses hit ~1.0% as the mining sector underperforms while banks are supported by decent earnings reports from Commerzbank, SocGen, and UniCredit. In terms of sector specifics, the financial sector is the outperformer with earnings from the likes of Commerzbank (+2.4%), SocGen (+4.1%), UniCredit (+2.6%) and Zurich Insurance (+3.8%) lifting the sector with Swiss Re (+3.8%) also lending a helping hand near the top of the SMI after news that Softbank could acquire a stake in the Co. Elsewhere, GSK (+2.3%) has been supported by news that Novartis’ launch of their Advair copy will be delayed. In terms of bourses, the CAC (-0.3%) has seen some modest outperformance, with domestic earnings from Total (+1.8%), Pernod Ricard (+2.2%) and Publicis (+3.8%) capping losses.

Earlier, shares in Japan closed higher after a turbulent session while China’s stocks fell for a third day, even as Hong Kong equities climbed. Australia’s ASX 200 (+0.2%) was lower for most of the day as weakness in the commodity complex weighed on mining names, however, the index then gradually pared losses as strong Chinese Imports provided some encouragement. The Nikkei 225 (+1.1%) outperformed with corporate earnings back in the limelight, while Hang Seng (+0.4%) and Shanghai Comp. (-1.4%) ignored strong trade data and were indecisive after the PBoC skipped open market operations for the 11th consecutive occasion, and with heavy losses seen across the big 4 banks in the mainland.

The biggest highlight of the overnight session, however, was the yuan which, as we reported overnight, fell the most since the currency’s devaluation in August 2015 after China reported a much narrower-than-expected trade surplus as imports jumped. According to Reuters, China has resumed its Qualified Domestic Limited Partnership plan after a two-year halt, granting licenses to about a dozen global money managers that can raise funds in China for overseas investments. Increasing imports and investment overseas both contribute to a weaker currency, and the result was a sharp plunge in the Yuan, a move which may again be criticized by Trump as indicative of currency wars.

“Selling of offshore yuan has spurred short covering of the dollar,” said Ko Haruki, head of the financial solutions group at CIBC World Markets (Japan) in Tokyo. “The dollar’s gain against the yuan is lifting dollar-yen, which had also seen short covering as the Nikkei 225 stayed in positive territory.”

In other words, in today’s interlinked market, the plunge in the Yuan, ended up boosting Japanese stocks by way of a dollar, that traded higher much of the overnight session.

Meanwhile, the all-important catalyst for the recent equity selloff, U.S. 10-year Treasuries, were steady after Senate leaders unveiled a bipartisan deficit busting deal while weak demand at Wednesday’s 10Y auction pushed the yield back toward the recent four-year high.

At the same time, the pound drifted higher before a Bank of England rate decision, and the euro weakened as ECB member Jens Weidmann said the central bank will monitor the impact of the currency on inflation. USD continues to find support across G-10, with ZAR and TRY particularly weak; yuan in focus after overnight selloff, which was driven by narrower trade surplus and increased outbound investment reports. 

A summary of key macro moves, courtesy of Bloomberg:

  • EUR/USD reached a two-week low of 1.2232 amid broad dollar strength; BBDXY rose for a second day and earlier reached its highest since Jan. 23
  • GBP/USD slips for fifth day, headed for its worst run in 11 months
  • USD/JPY climbed, as the yen tracked the plunge in the yuan
  • Yield on 10Y Treasuries little changed; dollar-curve bear steepened with 30Y underperforming

    • In commodities, WTI and Brent crude futures have seen relatively sideways trade overnight and this morning as prices remain in close proximity to yesterday’s lows seen in the wake of the ramp up in US production shown via the DOE’s with output above 10mln bpd and perhaps more crucially, above that of Saudi Arabia. Elsewhere, latest reports confirm that the Forties pipeline has now resumed operations. In metals markets, spot gold is trading lower as the yellow metal succumbs to the firmer USD, while copper’s attempt to nurse losses during Asia-Pac trade was restricted by the risk-averse tone in its largest consumer China.

    Bulletin Headline Summary from Ransquawk

  • European bourses trade lower across the board in sympathy with the pull-back seen on Wall Street yesterday
  • DXY has rallied above 90.000 and as far as 90.500. Nzd/Usd has pared some losses to trade back over 0.7200
  • Looking ahead, highlights today include the BoE rate decision and a slew of speakers including ECB’s Villeroy, BoE Governor Carney, Fed’s Harker, Fed’s Kashkari, BoC’s Wilkins

    • Market Snapshot

  • S&P 500 futures down 0.1% to 2,665.0
  • STOXX Europe 600 down 0.3% to 378.89
  • MSCI Asia Pacific up 0.3% to 173.47
  • MSCI Asia Pacific ex Japan up 0.09% to 566.67
  • Nikkei up 1.1% to 21,890.86
  • Topix up 0.9% to 1,765.69
  • Hang Seng Index up 0.4% to 30,451.27
  • Shanghai Composite down 1.4% to 3,262.05
  • Sensex up 1% to 34,405.30
  • Australia S&P/ASX 200 up 0.2% to 5,890.70
  • Kospi up 0.5% to 2,407.62
  • Gold spot down 0.6% to $1,309.95
  • U.S. Dollar Index up 0.3% to 90.53
  • German 10Y yield rose 1.9 bps to 0.764%
  • Euro down 0.3% to $1.2233
  • Brent Futures down 0.09% to $65.45/bbl
  • Italian 10Y yield fell 3.8 bps to 1.682%
  • Spanish 10Y yield rose 1.1 bps to 1.426%

    • Top Overnight News from BBG

  • Fed’s Kaplan: 3 hikes this year is appropriate; best way to continue expansion is to remove accommodation

  • Reuters: China revives QDLP outbound investment scheme; licenses granted for some funds to raise money in China for investment overseas ending a 2-year halt, according to people familiar

  • Japanese investors dumped U.S. sovereign bonds for a third month in December, taking sales last year to the highest in a decade. Total withdrawals for 2017 were 3.83 trillion yen, the most since 2007, when they offloaded 3.98 trillion yen. They were net buyers between 2014 and 2016.

  • Senate leaders in the U.S. announced a bipartisan two-year budget agreement Wednesday that would provide nearly $300 billion in additional funding, a crucial step toward averting a Friday government shutdown
  • The European Commission is struggling to translate the U.K.’s Brexit pledges on Ireland into a legally binding text, even before they present it to the U.K. in negotiations, according to people familiar with the EU side.
  • New Zealand’s central bank held interest rates at a record low and projected they will stay there until mid-2019 as inflation remains subdued amid slower economic growth.
  • Federal Reserve Bank of San Francisco President John Williams said he isn’t altering his view on the U.S. economy or preference for a continued gradual rate hike path after several days of volatile markets. “The risks seem to be moving toward the likelihood of more inflation, and that’s a good thing,” Federal Reserve Bank of Chicago President Charles Evans says
  • The greenback gained as much as 0.9% against the offshore yuan, while advancing 0.3% against the yen to 109.61 after earlier being down as much as 0.2%. The Nikkei 225 index climbed 1.1%
  • China’s yuan sank the most since the aftermath of the shock devaluation in August 2015. Reuters reported that the Chinese government will relax controls on investment fund outflows. China’s trade surplus figures missed estimates and speculation policy makers will step up efforts to rein in gains, pressured the yuan
  • Franklin Templeton bond chief, Michael Hasenstab, is doubling down on bets that Treasuries are doomed due to rising rates. He’s been loading up on wagers that protect against a spike in yields in his $38 billion flagship Global Bond Fund. The move has pushed average duration in the portfolio to the shortest on record.
  • The German grand-coalition agreement helped pare peripheral spreads versus bunds to the lowest since 2010, which should allow Greece to resume plans for a 7Y EUR note, Commerzbank analysts said in a note today
  • BOE Governor Mark Carney may be less reassuring if he signals more tightening today amid expectations the central bank will upgrade its quarterly outlook
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