Futures Crater On Mutant Virus Panic, Energy Tumbles On UK Quarantine

Still, having read countless Wall Street research reports predicting a correction before year-end, traders sold first and didn't even bother to ask questions.

In FX, the Bloomberg Dollar Spot Index rose the most since March and the Treasury curve bull flattened as concern about a new variant of the coronavirus found in the U.K. fueled haven bids; the dollar rose against all its G-10 peers while risk-sensitive currencies plunged. Speculators’ dollar positioning remains broadly bearish, meaning the long-awaited short squeeze may finally come. The dollar index rose as high as 90.8, up more than half a percent, and well off last week’s 89.723 level that marked the lowest since April 2018. The new round of UK chaos sent the pound 2.5% lower below $1.32 putting it on track for its biggest daily fall since March.

Norway’s krone fell even more and posted the biggest slump since June as oil prices plunged on fears that the outbreak would hurt demand. The Japanese yen lost half a percent at 103.8 per dollar while the euro fell 1% at $1.216.

In rates, U.S. and German bond yields slipped, with 10-year U.S. yields down six basis points. British two-year borrowing costs hit record lows. Treasury yields were off the richest levels of the day, although remain lower in a sharp bull flattening move spurred by effects of fresh European curbs following a new coronavirus strain found in the U.K. European stocks subsequently under downside pressure along with S&P 500 e-minis, leaving Treasury yields lower by up to 5.5bp across the long-end of the curve. Treasury 10-year yields around 0.90%, richer by 5bp vs Friday’s close and outperforming bunds by 2bp; 10-year gilt yields down by 7bp following tighter restrictions on the U.K., while pound drops 1.9% The U.S. two-year/10-year Treasury yield curve, another gauge of growth expectations, flattened after rising to its steepest level in almost three years on Friday amid optimism about the stimulus bill.

2%. Gilt lead a broad-based richening move. Bunds and treasuries bull flatten, trading cheaper to gilts by ~4-5bps at the long end. Semi-core and peripheral spreads are wider with core markets doing most of the work as BTPs are little changed. In FX, the Bloomberg dollar index rallies ~1%, trading just off best levels. NOK lags G-10 peers. GBP drops over 2%, eventually finding support around a 1.32-handle. MEX and RUB are the worst hit in EM FX. Crude futures slump with WTI down 5.5% near $46.50, Brent trading down 5%, off lows of $49.20. After a brief look above $1,900, spot gold drops to lows of $1,855/oz before recovering. Base metals trade poorly, with LME lead down ~3.3%.

In commodities, Brent crude futures dropped more than 5% while copper fell off the $8000-per-tonne mark it recently scaled for the first time since 2013. “The message is clear: oil prices are still very much and will continue to be at the mercy of the pandemic,” said Stephen Brennock of oil broker PVM. Alternative assets such as bitcoin as gold reversed, with cryptos tumbling and the precious metal reversing an earlier gain to $1,900 and dropping 0.6% to $1,868. Gold's weakness on a day of a big equity selloff will rekindle memories of the market slump of March when investors sold assets en masse in a rush for the dollar.

Looking at the day ahead now, data releases will include UK retail sales for November, the Ifo business climate indicator from Germany for December, and the November leading index from the US. We’ll also get a monetary policy decision from the Central Bank of Russia.

Market Snapshot

  • S&P 500 futures down 1.8% to 3,639.00
  • MXAP down 0.5% to 195.48
  • MXAPJ down 0.6% to 645.05
  • Nikkei down 0.2% to 26,714.42
  • Topix down 0.2% to 1,789.05
  • Hang Seng Index down 0.7% to 26,306.68
  • Shanghai Composite up 0.8% to 3,420.57
  • Sensex down 2.7% to 45,681.32
  • Australia S&P/ASX 200 down 0.08% to 6,669.89
  • Kospi up 0.2% to 2,778.65
  • Stoxx Europe 600 down 2% to 388.14
  • German 10Y yield fell 3.1 bps to -0.602%
  • Euro down 0.4% to $1.2205
  • Italian 10Y yield rose 2.5 bps to 0.454%
  • Spanish 10Y yield fell 1.6 bps to 0.029%
  • Brent futures down 5.5% to $49.37/bbl
  • Gold spot down 0.5% to $1,872.86
  • U.S. Dollar Index up 0.5% to 90.51

Top Overnight News from Bloomberg

  • Congress reached a deal on a roughly $900 billion spending package to aid the U.S. economy. House passes a one-day stopgap bill to keep the government open
  • European countries suspended travel to the U.K., as a full lockdown came into force in London and southeast England. Sydney’s 5 million residents are being asked to curb activities over the next few days amid a growing outbreak, while Thai authorities closed a seaside province near Bangkok following a record spike in new cases
  • Japan’s cabinet approved a record budget for next fiscal year that tops $1 trillion and adds to the developed world’s heaviest debt burden
  • Oil fell below $48 a barrel in Asian trading -- after posting a seventh weekly gain -- on concern about a mutation of Covid-19 discovered in the U.K.
  • Japan will issue a record 221.4 trillion yen ($2.1 trillion) of debt next fiscal year, including a boost to 40-year bonds to meet investor demand for long-dated securities
  • Janet Yellen once touted the benefits of a weaker greenback for exports, but as the incoming Treasury secretary, she faces pressure to return the U.S. to a “strong-dollar” policy -- and may cause trembles on Wall Street if she doesn’t
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