The Shanghai Composite, the MICEX, and Crude Oil

Our View, S&P 500, The Opening Print


When China and Russia cemented billions of dollars worth of deals, China not only overlooked the sovereignty of Ukraine, but didn’t deny it was looking to partner with someone willing to challenge the United States, namely Vladimir Putin.

The Russian economy is fueled by high energy prices. With the drop in crude oil prices, the Russian government has now acknowledged that their economy will go into recession next year. The ruble has fallen to record lows against the dollar. Meanwhile, two arch-enemies, Iran and the US, could end up working together in the fight against ISIS and have already made moves to share intelligence. This has lowered the potential for a direct confrontation between the two old foes, and thus lowered the conflict premium that usually pushes oil prices higher. While it is yet to be seen what the total effects of the sharp drop in oil prices will have on the US economy, the US stock market has greeted it well.

But the sharp drop in oil has not been kind to the Russian stock market (MICEX) or to the ruble. Russia’s central bank has reportedly burned through $100 billion in foreign currency reserves trying to prop up the currency. Meanwhile, the coming recession is expected to lower per-capita GDP by nearly a third, from $14,000 to $10,000. Putin’s popularity remains at 85%, in large part because of his aggression in Ukraine and defiance of the US and its allies. But as people see that defiance hit their wallets, that support may erode.

Putin knew from the start that the West would impose economic sanctions. In fact, he counted on it as a way to strengthen nationalistic sentiment. His ace in the hole was always the steady supply of oil revenue, which sanctions wouldn’t affect. Now, that revenue is down 40% from what it was when he invaded Ukraine and seems unlikely to go back up. While the world’s conflict premium has gone down, the price of his Ukrainian adventure has exploded.

So what does China have to gain, besides the immediate payment, from new cooperation with Russia? China can let Russia do the dirty (and now very expensive) work of antagonizing the US and Europe while they continue making iPhones and watching AliBaba shares climb. With India and Japan making major new deals, China needs a friend with nuclear weapons besides unstable Pakistan and North Korea. Besides, China is working on solar panels so cheap and efficient that, if they succeed, oil will be a minor factor a generation from now.

And you thought all the price drop meant was lower gas and heating oil prices this winter.

In Asia 9 of 11 markets closed lower ( Shanghai Composite -5.4%) and in Europe 11 of 12 markets are trading lower. Today’s economic calendar: Redbook, S&P Case-Shiller PMI , consumer confidence, 4-week bill auction, farm prices and earnings from HD Supply Holdings (NASDAQ: HDS), AutoZone (NYSE: AZO), and UTi Worldwide Inc. (NASDAQ: UTIW).

11 Trading Days until Christmas, 16 Trading Days left in 2014

Our view: China took it on the nose last night. The high-flying Shanghai Composite (SSE) that has rallied 41% since June and over 15% in the last two weeks fell 5.43% from a new all-time high. Major Chinese banks and oil companies were down 10 percent, the daily limit. Stocks plunged after China’s clearing house for securities trades raised the minimum rating for corporate bonds it would accept in exchange for short-term credit, prompting concern about the availability of financing for trades. If you follow the Chinese stock market, you know it does not mean the boom is over.

Our view is exactly the same as yesterday, if there is going to be a down week in December this would be the week. By the way, if you have an education or retirement fund you are required to put money into before the end of the year, this is probably the week to do it, if that fund is mostly or all stocks. We may see some downside in Spring 2015 when interest rates go up, but we continue to believe there will be no crash.

This morning global markets are feeling the effects of China’s stocks, currency and corporate bonds suffering their largest tumbles in years, but when you look at the S&P futures this morning they are still holding just below yesterday’s lows. We have seen a decent amount of two-day selloffs and occasional 3-day selloffs and the latter puts us right into the PitBull’s Thursday / Friday low the week before the expiration. Volume did pick up yesterday: 1.4 million contracts of Emini S&P (ESZ14:CME) traded, but that is a very low number for a market that sold off 25 handles from high to low. It really shows how many of the big firms have closed their books for the year. It’s our guess we see some more downside this morning but we also think there will be a decent bounce. Crude oil is up 75 cents this morning and overdue for a bounce. There is no crash coming, this is just a pullback before the December Quad Witching and the Santa Claus year-end rally. 2049.00 was last week’s ESZ14 low, keep an eye on that level.

“Crude Oil Takes the S&P for a Ride”

December S&P Cash Study for the Dec expo:


As always, please use protective buy and sell stops when trading futures and options.

  • In Asia 9 of 11 markets closed lower: Shanghai Comp. -5.43%, Hang Seng -2.43%, Nikkei -0.68%
  • In Europe 11 of 12 markets are trading lower: DAX -0.88%, FTSE -1.07%, MICEX +0.47%
  • Fair value: S&P -0.46 , Nasdaq +0.16, Dow -7.19
  • Total volume: 1.4mil ESZ and 8K SPZ traded
  • Economic schedule: Redbook, S&P Case -Shiller PMI, consumer confidence, 4-week bill auction, farm prices and earnings from HD Supply Holdings (NASDAQ: HDS), AutoZone (NYSE: AZO), and UTi Worldwide Inc. (NASDAQ: UTIW)
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