Shanghai Comp closes marginally higher overnight

The Day So Far

A substantial turnaround in sentiment has been witnessed since the European open as oil has recovered from its brief flirt with the $30/bbl level (low $30.41). The move this morning came amid a flurry of negative bank calls with Barclays, Macquarie, BofAML, and SocGen cutting their 2016 Brent forecasts in the last 24hrs. Analysts at Standard Chartered have gone as far as calling for $10 given that no fundamental relationship is currently driving the oil market towards any equilibrium, and that prices are being moved almost entirely by financial flows caused by fluctuations in other asset prices.

A large degree of this renewed optimism on the intra-day perspective has emanated from the stabilisation that was seen in China overnight where by the Shanghai Composite closed up 0.2% amid further talk of state bank intervention in the offshore currency which saw the CNH/CNY rate hit parity for the first time since October last year. Although this move appears to have countered near term fears of large outflows in the region due to the depreciation of the Yuan, HIBOR (Hong Kong Interbank Offered Rate) jumped an unprecedented 53% overnight as liquidity gets sapped out of the H.K. market. As such although this latest measure from China has steadied nerves for the time being long term implications on the Chinese market could be severe should credit conditions deteriorate further. Finally, weaker than expected manufacturing and industrial production data from the UK has been the latest catalyst for the already weakening GBP as cable has touched fresh 5.5yr lows. The next big level is seen down at 1.4227 which was the low print in May 2010, and with Brexit fears lingering and investment bank community pushing back BoE rate hike calls further, weakness cannot be discounted in the near-term.

The Afternoon View

Market focus is still dominated by oil and although prices have bounced through the European morning we remain bearish on prices. If a firm break of the Asia session high ($31.39) is seen then we are looking to short at the daily pivot level ($31.74). We see a similar theme in the S&P 500 and should we add to current gains we are looking at a conservative short at the Jan 7th high (1969.00).

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