Winners and losers of oil price drop.

Total Chaos: Massive Market Moves Spark Selling-Panic Into Close

Perhaps this sums up the day for many FX, bond, equity, and oil traders today...

Incredible Volatility today - 100 point roundtrip in the S&P, and 800 points in the Dow - all driven by a halt in Ruble Trading, the European close, and Kuwait pissing on the US market's fireworks...

Close-up on S&P 500 e-minis... the machines ran all the stops everywhere today...

The Russian markets dominated headlines...

but the US credit markets were more worrisome as it appears the risk has finally started to appear in the investment-grade credit market.

High yield bond yields hit 2-year highs... and spreads to 18 month wides...

And Investment Grade credit has become infected...

Longer-term...

 

The Russian Ruble Is Hereby Halted Until Further Notice

Earlier, we reported that various currency brokers such as FXCM and FxPro, would - as a result of the soaring liquidity in the USDRUB pair - suspend trading in the Russian Ruble (while other merely hiked margins to ridiculous levels). It appears things have escalated again, and as FXCM just reported, instead of just politely advising clients not to open new USDRUB position tomorrow, it has advised anyone long, or short, the USDRUB that their positions will be forcibly shut in moments.

So for those curious why there appears to be a collapse in Ruble volatility in the past few hours which in turn has sent both stocks and crude soaring, the answer is simple: nobody is trading it!

And this is what happened following the post: as soon as all those short the RUB (long USDRUB) realized they have to take profits, the USDRUB tumbled some 500 pips (!) in the process sending stocks surging.

The Carnage Continues - Middle East Stock Markets Are Bloodbath-ing

Following Friday's US weakness and UAE's hint that $40 oil is coming next, the crude carnage continues as Middle East markets are crashing. As WSJ reports, the bearish direction of oil prices again spooked investors in Dubai where the DFM General Index finished down 7.6%, extending Thursday’s 7.4% rout. The bloodbath extended across the entire region with Abu Dhabi down 3.6%, Qatar slid 5.9%, Kuwait fell 2.9%, and Saudi Arabia’s market, the largest bourse in the region, retreated 3.3%.

Bloodbath-ing...

As one analyst warned:

"the severity of this decline could very well be explained by investors covering margin calls as leverage was used on the way up over the past year."

And shows no signs of stopping...

Charts: Bloomberg

The Crude Crash Comes To Wall Street: Counterparty Risks Rear Their Ugly Heads Again

In late 2006, default rates on lower-rate subprime private MBS began to rise considerably. Though not a very transparent market to the mainstream media-watching world, bankers knew trouble was brewing as this had not happened before in such a benign house price decline. Banks, knowing what they had on their books, what they had sold to others, and what that meant for risk, began quietly buying protection on other banks as counterparty risk became a daily worry for desks across Wall Street.

The stocks of US financials continued to rise amid "contained" and "no problem" comments from the status quo but credit spreads for the major US banks kept leaking wider even as stocks rallied... then reality dawned on stocks and the rest is history.

Today, US financial credit spreads (wider) have decoupled once again from stocks (higher) and that divergence began as oil prices started to slump.

Are banks hedging counterparty risk once more 'knowing' what loans and exposures they have to the massively levered US oil industry? Or is it different this time?

Japan Aluminium stocks hit record high on increased imports

Aluminium stocks held at three major Japanese ports rose for an eighth straight month to hit a record high at the end of November on rising imports and softer demand at home.

Aluminium stocks held at Yokohama, Nagoya and Osaka rose 14 percent in November from a month earlier to 378,000 tonnes, the highest level in data going back to April 2000, trading house Marubeni Corp said on Friday.

"An increased number of aluminium ingots are coming to Japan to look for buyers amid slowing demand elsewhere in Asia as China steps up exports of cheaper aluminium products to neighbouring countries," said a Tokyo-based trader, who declined to be named.

Japan's import of aluminium ingot rose 16 percent to 1.43 million tonnes in the January-October period from the same period in 2013, according to the country's trade data.

The inventory increase also reflects slowing demand in Japan as consumption and exports remain weak, another trader said.

The world's third-largest economy has unexpectedly slipped into recession. Gross domestic product (GDP) shrank an annualised 1.6 percent in the July-September quarter after plunging 7.3 percent the previous quarter following a rise in sales taxes that clobbered consumer spending.

Recent economic data have also remained weak with falling machinery orders and inflation expectations, depressed sentiment in a government "economy watchers" survey and feeble capital-spending plans. 

What Do Falling Oil Prices Mean for Copper?

Oil prices have taken a dive this year, and far from occurring in a vacuum, that poor performance is likely to have a ripple effect on other commodities. Copper, which has been sitting below the $3 mark lately, is just one metal that could be vulnerable to the effects of weak oil prices.

As a recent article from Bloomberg explains, energy needs make up as much as 50 percent of the production costs for metals. That means cheaper oil should lead to lower production costs, which in turn should allow copper producers to hold up a bit better against falling prices.

Michael Haigh, head of commodities research at SocGen, told the publication, “[t]here’s been a structural change in oil, and there’s more to come. This will also ripple through other commodity markets, in some cases directly, and others indirectly.”

Remaining profitable

The ability to stay resilient under difficult conditions isn’t necessarily a bad thing. Although seeing copper at $2.90 might be uncomfortable for many base metals investors, it’s worth noting that plenty of copper projects will still stay afloat at those prices.

Back at the start of September — when oil prices were still a little higher than they are now — Stefan Ioannou of Haywood Securities told Copper Investing News that even higher-cost producers were still managing to stay profitable at $3 copper, and suggested that copper “would probably have to drop below the $2.50 range before impacting existing production associated with the upper end of the copper cash cost curve.”

Copper supply and demand

However, there’s another side to that issue that’s worth mentioning — falling costs can create a supply problem. In theory, lower prices for any commodity should shut out higher-cost producers, restricting supply and eventually driving prices up. However, if production costs keep going down as well, and demand doesn’t increase, all that supply stays on the market, and the bottom keeps moving lower and lower. That’s what’s happened with coal, according to Joe Aldina of Wood Mackenzie, who gives a good overview of the issue here.

Still, although some have pointed to a growing copper surplus, others are not so sure. While copper prices certainly haven’t had a breakout year, issues such as ramp up delays, growing impurities in copper concentrate and demand indicators are all factors worth considering.

Certainly, the teams at Thomson Reuters GFMS and the International Copper Study Group (ICSG) are still predicting a surplus in the near term, but those positive on copper are quick to note that the ICSG has drastically cut its forecast. In any case, investors will certainly be keeping an eye out to see how cheap oil will affect copper miners.

As of 5:15 p.m. EST on Wednesday, copper was trading at $2.895 per pound.