- Vulnerable Chinese stock market keeps global stock markets on edge
- Crude oil prices fail to see much of a daily gain despite rupture of Saudi-Iranian diplomatic relations
- U.S. vehicle sales expected to edge lower but remain strong
- IA report expected to show unchanged level of U.S. crude oil inventories
Vulnerable Chinese stock market keeps global stock markets on edge — China’s CSI 300 stock index on Monday started off the New Year by plunging by the day’s limit of -7%, ending the day on a trading halt. The first trading halt occurred when the CSI 300 index fell by -5.0%, which led to a 15-minute trading suspension. When the market reopened, it took only 7 minutes for the CSI 300 index to fall by another -2% to -7%, leading to stocks being suspended for the remainder of the trading day. There is little doubt that the trading halt rules actually worsen panic selling since investors all race to sell at the same time before the trading halt rules lock them into the market.
The proximate cause for Monday’s Chinese stock market sell-off was some weak PMI data, but the PMI data wasn’t really weak enough by itself to explain a -7% stock market sell-off. The Dec Caixin China PMI, released on Sunday night, fell by -0.4 points to 48.2, which wasn’t a particularly large drop but was weaker than market expectations for a +0.3 point increase to 48.9. Meanwhile, the official Chinese manufacturing PMI index released on Friday actually rose by +0.1 point to 49.7. The official Chinese non-manufacturing PMI index, released on Friday, showed a +0.8 point increase to 54.4, showing that the non-manufacturing sectors of the Chinese economy remain relatively strong even as the manufacturing sector is being hurt by weak exports and overcapacity.
Monday’s sharp sell-off in Chinese stock market illustrates the lack of market confidence in the Chinese economy and stock market. The Chinese Shanghai stock index last summer plunged to a 1-year low and reversed much of the bubble rally that occurred in the first half of 2015. Chinese stocks recovered modestly in the last four months of 2015 but it remains to be seen whether the Chinese stock market can hold that late-2015 recovery rally or whether new 1-year lows will soon be forthcoming. The Chinese Shanghai index is still up by 75% from the mid-2014 level, which may be far too optimistic given expectations for a disappointing Chinese economy over at least the next few years as the economy tries to migrate to a consumer-based economy from one based on exports and investment.
Crude oil prices fail to see much of a daily gain despite rupture of Saudi-Iranian diplomatic relations — Feb Brent crude oil prices on Monday popped up to a 2-week high on the rupture of Saudi-Iranian diplomatic relations after Saudi Arabia executed 47 extremists including a Shiite cleric who was popular with Iran. Iran and Saudi Arabia are not about to go to war against each other, but this latest problem will likely lead to increased Saudi-Iranian proxy battles in troubled countries such as Yemen, Syria and Iraq. Still, there is not likely to be any direct military action between Iran and Saudi Arabia that would lead to any new disruption of oil supplies in the Middle East.
In fact, the more likely outcome is that the rupture of Iranian-Saudi relations will lead to an even worse oil glut, causing Feb Brent crude oil prices yesterday to fall back from the early rally and close the day only +12 cents (+0.32%) higher at $37.40. There is now even less chance that Saudi Arabia will make any attempt to cut OPEC’s production to make way for increased Iranian exports by the middle of this year when Iranian sanctions are due to be dropped. That means that the markets can only look forward to an even larger glut of oil by the middle of this year when Iranian sanctions are dropped. Iran has already made clear that it plans to ramp up its oil production and exports as quickly as possible when sanctions are dropped regardless of whether other OPEC members make offsetting production cuts and regardless of whether oil prices fall anew.
U.S. vehicle sales expected to edge lower but remain strong — The market is expecting today’s Dec total vehicle sales report to edge slightly lower to 18.00 million units from 18.05 million units in November. However today’s expected level of 18.00 million units would be just slightly below the 10-1/3 year high of 18.12 million units posted in October, illustrating that U.S. vehicle sales are still running at a very strong level that is providing support for the auto and manufacturing sectors.
The strength in vehicle sales is coming mainly from a surge in truck sales rather than in auto sales. U.S. auto sales in November were down -4.2% y/y at 7.53 million units, whereas Nov U.S. truck sales were up +14.8% y/y at a 10-1/3 year high of 10.52 million units. Truck sales have surged as the plunge in gasoline prices has made trucks much less expensive to operate.
EIA report expected to show unchanged level of U.S. crude oil inventories — The market consensus for Wednesday’s weekly EIA report is for an unchanged level of U.S. crude oil inventories, a +2.5 million bbl rise in gasoline inventories, a +2.5 million bbl rise in distillate inventories, and a +0.2 point increase in the refinery utilization rate to 92.8%.