Today's Major Market Move: UAE's DFM General Index Declines 8% WTD

The equity market in the UAE had been flying unnoticed off of our radar screen for the past few weeks. But then a couple of days ago we happened to stumble across the chart of the UAE benchmark equity index and we saw this rocket ride:

Click here to go to the live chart.

That ramp at the end represents a 33% gain in a month and a half. After seeing this we planned to feature UAE equities in one of our upcoming Major Market Move posts but we put it off for a few days. So of course then what happens but the market starts to correct to the tune of 8% in one week. The above chart now looks like this:

Click here to go to the live chart.

This article from the Gulf News pins the reason for the current decline on fears regarding the upcoming bond payment deadline for Greece.

The Dubai Financial Market (DFM) General Index slumped 4.82 per cent yesterday, the most in nearly two years, to 1,607.77 as local investors rushed to book profits from the recent bull-run rally ahead of a key deadline today for a Greek debt swap deal.

Seeing as how there were several episodes of Greek generated panic during that 33% run up (such as this one on February 10th), we remain skeptical that Greece is now all of a sudden the cause for this recent sell off. When one looks over a longer time horizon, the current volatility looks relatively tame, especially when compared to the sell off that occurred back in 2008. This chart shows the UAE equity indexes against GDP growth (actual and future).

Click here to go to the live chart.

Today's Major Market Move: Russian Stock Market Drops 4.5% in Today's Session

Today was one of those universal risk-off days that we haven't seen in awhile. Here are some numbers from the different asset classes: 23 out of 29 commodities declined (leading decliner was Coffee down 4.3%), 105 out 120 currencies were flat or weaker against the dollar (currencies most weakened were the Hungarian Forint and the Polish Zloty at 1.5%) and 73 out of 92 benchmark equity indexes were flat or down. Europe was hit particularly hard with many European markets down over 3% and the worst hit of all, where the decline in crude was also factored in, was Russia which dropped 4.5%. Here's the top 15 worst performers from today's session:

Click here to go to the live table.

The global sell off appears to have been precipitated by at least two factors:

1. The downward revision of GDP growth estimates to 7.5 which is below the minimum target of 8 that Beijing  has set.
2. Heightened uncertainty surrounding the Greek debt writedown agreement with private creditors.

Here's some more color from the NY Times regarding China's GDP announcement:

The Chinese economy, after nearly three decades of rapid, almost uninterrupted growth, seems to be settling down to a still strong but less blistering pace. But some sectors are struggling, including exports and luxury residential real estate construction.

Premier Wen said in his annual report to the National People’s Congress on Monday morning in Beijing that the government had scaled its economic growth target back to 7.5 percent this year, down from the 8 percent that Beijing has set as a minimum growth target in recent years. If growth does come in at only 7.5 percent, it will be the slowest pace in 22 years.

As of late last year the IMF had the growth estimate for China in 2012 at close to 11% so this has been a rather remarkable shift. Throw in the uncertainty surrounding China's official numbers that are released and you wouldn't be able to fault someone for thinking that the decline may be even steeper than reported. Here's a comparison chart of Chinese GDP growth against Chinese equity indexes:

Click here to go to the live chart.

Since the beginning of 2011, equity indexes stalled while GDP growth continued along a steady slope. From today's news it appears now that the GDP numbers may now trend down in the direction of where the equities are. It's also interesting to note that the Shanghai SE Composite, which is a broad based benchmark index like the S&P 500, is essentially flat going back to 2007.

Today's Major Market Move: Slovakia Stock Market Hits 52 Week Low

With Greece apparently saved and with Central Banks around the world continuing to add nitrous to the global economy, the phrase that applies to most equity markets is "off to the races". Even those stock markets ranked towards the bottom in terms of 2012 performance, such as in Greece and Cyprus, shot up initially, gave back some of the rally, and then flattened out. Very few equity markets have made or come close to new 52 week lows since the beginning of January, but one of the exceptions is in the Slovak Republic. The benchmark Slovak equity index, the Slovak Share Index, has been on a steady decline since last May and after a sizable 6.3% drop in Monday's session, hit a new 52 week low of 198.66.

Click here to go to the live chart.

On a relative basis, the decline in Slovak stocks since May isn't that all that notable: it was the 30th worst performing benchmark equity index out of the 91 that we track. With that being said, the decline has been steady and has continued through the 2012 rally.

Click here to go to the live chart.

The only specific news we could find related to today's drop was an announcement by Peugeot that they were reducing estimated 2012 automobile production by 20% (from 300K down to 240K). Although that number is still well above 2011 production of 185K.

Using the IMF's GDP estimates, we have a chart comparing GDP growth with equity index performance and there is quite the divergence. The chart is normalized in 2007 so it's possible that Slovak equities were significantly overvalued in 2007. However one can definitively say there's been a huge disconnect between the GDP numbers and the stock market starting in 2009.

Click here to go to the live chart.

Today's Major Market Move: Natural Gas Futures Start Off Week With 2.2% Decline

With commodity futures trading having just kicked off a little over an hour ago, one of the more notable movements is in front month Natural Gas futures which launched out of the gate with a 2.2% drop. Natty Gas is now almost back to the January 22nd low of 2.28 (it currently sits at 2.43).

Click here to go to the live chart.

That bounce off of the Jan 22nd low occurred because Chesapeake (ticker: CHK) announced they were shutting down wells and cutting production (you can read our January 23rd post about the announcement here). In that Jan 23rd post we wondered if CHK's main competitors Range Resources Corporation (ticker: RRC) and EQT Corporation (ticker: EQT) would follow suit with their own production cuts. We surmised that they wouldn't unless the price dropped through the January 22nd level and so far no additional cuts have been announced by anyone. All 3 stocks saw a nice pop after the production cut:

Click here to go to the live chart.

As the spread between crude oil and nat gas continues to widen, one would imagine that there is an increased focus around the world on using nat gas as a substitute. We expect that energy ministers around the world have been keeping a close eye on a chart similar to this one:

Click here to go to the live chart.

Today's Major Market Move: Cypriot Benchmark Stock Market Index Down 71.5% Since January 2011

As the European authorities finalize the details on the PSI and the 130 billion Euro bailout, both Cypriot and Greek equities remain in the doldrums. The benchmark Cypriot stock market index (General Market Index CSE) and the Greek Benchmark index (FTSE/ASE 20 Index) are down 71.5% and 54% going back to the beginning of 2011. They are both sitting just above their 2012 lows.

Click here to go to the live chart.

If we look at the performance of the benchmark equity indexes of the other PIIGS, we'll see that three of them (Spain, Italy and Portugal) are faring quite a bit better, with Ireland showing signs of a very strong recovery.

Click here to go to the live chart.

For Europe in general, the markets are expressing some concern (through the EURUSD) regarding the bailout and the 2nd iteration of LTRO by the ECB. LTRO v2 has expanded the ECB's balance sheet by another 528 billion euros.

Click here to go to the live chart.

Here's some more details on LTRO v2 courtesy of Seeking Alpha:

After the first long-term repo operation (LTRO) done last December by the European Central Bank (ECB), on 29 February, 2012, the ECB offered another unlimited 3-year LTRO, at a cost of 1% to European banks. In this operation banks raised €529.5bn, a small increase compared to the previous €489bn raised on the first LTRO. Around 800 banks receive this cheap funding, clearly above the 523 banks registered the first time. As discussed recently in my article "EUR/USD: What To Expect From Next Week's LTRO", this number is below expectations (survey from UBS) and possibly a sign that European banks are in better shape than expected.

So both the total amount and the number of banks involved were higher than LTRO v1, but because the numbers for LTRO 2 come in below UBS' estimates, banks are in better shape than expected. Hmmmm. How much does all of this extra liquidity by the ECB have to do with rising fuel prices? We think a lot, especially when considering that it's not just oil that is up significantly in 2012 but precious metals as well.

Today's Major Market Move: Venezuela Stock Market Index Gains 3.6% in Friday's Session

Back in our February 4th post we discussed how Hugo Chavez's cancer had returned, despite the Venezuelan leader's previous proclamations that the disease was in full remission. At that time Venezuelan equities where already up an eye-watering 88% since the beginning of 2011 and it was by far the best performing equity market over that time frame. Since the announcement that traces of the disease had again been detected, the benchmark Venezuela Stock Market Index has gone completely parabolic.

Most of this euphoria is the result of the belief that Chavez will be replaced by an administration with a pro-business sentiment. No doubt they are also receiving a boost by are rising crude oil prices. The numbers are truly remarkable when considering the recent stock market performance:

Friday 3/2/2012: Up 3.6% (#1)
February 2012: Up 20.4% (#2)
YTD 2012: Up 32.3% (#2)
Since January 2011: Up 135% (#1)
Since January 2010: Up 182% (#2)

Chavez recently underwent a second surgery in Cuba and not surprisingly, the official statement indicated that the surgery went well. So well in fact that the president is now "soaring like a condor". Unofficially, there are reports that the disease may have entered a terminal stage where doctors consider a recovery extremely unlikely. From Reuters via IOL:

Nelson Bocaranda, an anti-Chavez Venezuelan journalist who broke the news of his return to Cuba, and Merval Pereira, a well-known commentator for Brazil's O Globo network, have been quoting medical sources to suggest the Venezuelan leader's situation is much more serious than the official version.

The pair have been heavily criticised by Chavez allies.

In an increasingly vitriolic atmosphere, state TV was crammed with mockery of foreign and opposition media, while anti-Chavez activists have sarcastically dubbed Bocaranda the country's only reliable “information minister”.

Experts say the pathology results from Chavez's operation on Monday may take up to five days, while a normal recuperation period from that type of surgery would be a week to 10 days.

Today's Major Market Move: U.S. 30 Year Treasury Rate Flat Last 3 Weeks

Today we're doing something a little bit different. Instead of covering a change with a large magnitude, we're going to talk about a financial entity that, over a certain time frame, lacks any change at all. Over the past three weeks, while the prices of both Brent and WTI climb higher, the interest rate of the long bond has returned back to where it started. The following graph compares % change in the 30 year bond rate against the price of WTI front month futures:

Click here to go to the live chart.

If someone wants to find out who has missed the rallies in precious metals, oil and equities over the past 2 years, they need look no further than the bond market. Bonds have essentially remained flat over that time frame so that indicates that there are plenty of people out there who remain completely unconcerned by the threat of inflation. If the 30 year rate, which now sits at 3.10, were to double to a still historically below average 6.20, the current investors are going to get smashed.

Of course it's not just the U.S. Germany, the U.K. and Japan continue to see ridiculously low long term interest rates as well.

Click here to go to the live table.

What we find extremely interesting is that portfolio managers like Bill Gross, who runs one of the largest bond funds on the planet, on the one hand laments all of the liquidity that central banks provide but on the other hand parks 38% of the fund in Treasuries and Treasury related securities. It is because so many private investors continue to hold U.S. bonds that the Fed is able to keep the spigot wide open. Take this statement from Gross in a recent interview (courtesy of Reuters via CNBC):

"Over the past 30 years, an offensively minded Federal Reserve and their global counterparts," or other central banks, "were printing money, lowering yields and bringing forward a false sense of monetary wealth," Gross wrote.

The Fed has very little direct control over long term rates. It is fund managers that hold massive amounts of bonds, such as our friend Bill Gross, that keeps the rates so low.