A Royal Shakeup, China’s Big Day Falls Flat, Crude Reality Bites

Ok, well for obvious reasons, the headlines overnight pretty much all revolved around:

Saudi Arabia
China
Oil

In Riyadh, Mohammed bin Salman consolidated still more power after replacing his cousin Muhammad bin Nayef as heir to the throne.

It was, as quite a few in the media noted, an “abrupt” change. But bin Salman was already running defense, oil, the economy, and damn near everything else, and it’s been clear for some time that his star is only going to rise.

“Prince Mohammed bin Salman has really been the powerful man in Saudi Arabia ever since his appointment as deputy crown prince,” said Ghanem Nuseibeh, founder of Cornerstone Global Associates. “The decision removes impediments that he had, in that he had someone more senior to him who was perhaps a bit more conservative [so] now he’ll have a freer hand.”

Of course he’s also behind “Vision 2030” which probably means two things: 1) they’ll be pushing even harder on the Aramco IPO, and 2) the push to transition the economy away from dependence on crude will accelerate.

And it’s a good fucking thing, because crude had another flash crash-ish moment overnight (after falling into a bear market on Tuesday), when Brent and WTI dove ~40c+ in a minute at about 8:23am London time on big volume.

We’ll have more on this shortly, but for now, note that the news, combined with MSCI putting Saudi Arabia on its watch list for potential classification as an EM (which would mean shares in the kingdom’s most-traded companies could be included in major indexes for developing-country stocks), pushed Saudi stocks sharply higher:

In China, stocks kinda shrugged at the MSCI inclusion announcement. Or at least at first, as the SHCOMP was only modestly higher. It did rally into the close (wouldn’t it be funny if the national team ended up buying stocks just to ensure the benchmark didn’t end in the red on MSCI day?):

“The FTSE China A50 Index is the immediate beneficiary of MSCI’s China A shares inclusion as the index composition shows a high resemblance to the top constituents in the MSCI A-shares Large-cap Provisional Index,” BNP Paribas equity and derivative strategist Shuai Chen wrote in an overnight note.

About 139 stocks of the 222 stocks that MSCI will be adding to its benchmarks rose in Shanghai and Shenzhen as of the midday trading break.

10-year yields in China jumped 5 basis points, the most since May 10, to 3.55% at one point. That follows an 8bps drop in last two days, which drove the yield to lowest since May 2 on Tuesday. Remember, you want to watch the curve there as it’s been inverted of late, sending a weird (and probably “dour”, although the shadow unwind muddies the waters) signal about the prospects for the economy.

“Regulators won’t change the policy direction of risk control, but at the same time they’ll control the pace,” Deng Zhiyi, head of trust supervision at CBRC, said at Lujiazui forum Wednesday. “A combination of the yield’s sharp decline and CBRC’s official comments on supervision are leading to the market moves,” says Zhongtai Securities analyst Qi Sheng notes.

Meanwhile, the yuan wasn’t feeling especially excited about the MSCI news either. The onshore spot headed for its longest stretch of declines since November 16 as the PBOC weakened its daily reference rate for a second day. Here’s a look at the offshore spot for some context on what’s happened since the PBoC’s move to introduce a “counter-cyclical adjustment factor” helped exacerbate a short squeeze late last month:

For the full breakdown on what the MSCI inclusion means for China, see: “MSCI China Inclusion: The Road To $430 Billion In Inflows.”

Finally, it’s worth noting that S&P Global’s chief ratings officer Moritz Kraemer told Reuters that a downgrade of China “is a real possibility,” and will depend on “whether China is able to move away from a credit-driven growth strategy based on investment towards a more balanced and sustainable growth strategy driven by domestic consumption.”

The yen rose against the dollar for a second straight day as Asian stocks fell on the heels of the MSCI China news and, honestly, because there’s so much shit going on that there’s a bid for at least one haven.

“The pullback in UST yields on the back of lower oil prices has supported the yen,” Rodrigo Catril, a Sydney-based currency strategist at National Australia Bank Ltd. said. “There are few reasons to sell USD/JPY aggressively,” Naoto Ono, forex analyst at Ueda Harlow Corp in Tokyo, wrote in a report: “Because players are taking cue from stock markets while waiting for fresh factors, caution is needed over political developments in the U.K. and U.S. oil inventory moves, which may affect stock prices.”

This assessment from an Asia-based FX trader probably summed up the situation best: “Leveraged funds have one eye on spot USD/JPY and the other on oil prices following news the Saudi King has removed the Crown Prince from his post.”

Here’s a snapshot of global equities: