Stocks plunge lower; Oil drops in risk-off mood

Summary:

• Stock markets hit with a wave of selling. DE30 falls to 11700. US30 to 26000

• US small caps continue to underperform

• Risk-off move also weighs on Oil as top traders offer conflicting views

• Is there a chance for a Soybean rebound?

• Crypto markets lower as Swiss regulator approves fund license

There’s been some sizable selling in stocks today with heavy declines seen amongst all the major indices. The DE30 briefly fell below 11700 to trade at its lowest level since February while the US100 has dropped more than 2%. There’s no real new news to support these declines with the markets seemingly coming back under pressure after a bit of respite in recent days.

Within the US it is interesting to note the underperformance of the small caps (US2000) in recent weeks compared to the large caps (EG US500).  One of the most plausible explanations for this is that smaller companies often carry higher levels of debt, and therefore the rise in yields is making this more expensive to service. The Russell 2000 (US2000 on xStation) currently has one of the highest net debt/EBITDA ratios seen in the past 30 years and well above its long run average. In contrast the S&P500 (US500 on xStation) is pretty much bang inline with its historical average. The Fed seem set to continue along their path of monetary tightening at a similar pace for the foreseeable future and even though President Trump commented last night that the Fed are hiking rates too fast, it seems unlikely he will try to intervene anytime soon.

This risk-off move can be seen elsewhere with the Japanese Yen rallying and also Oil moving lower. The fundamental outlook for crude isn’t too clear at the moment and this can be seen in conflicting views amongst some of the biggest traders. The Oil & Money conference today saw Ian Taylor, chairman of the world’s largest independent energy trader Vitol, state that he expected prices to eventually fall towards $65 a barrel, due to no shortage of crude in the market and early signs of weaker demand. In contrast, Jeremy Weir of Trafigura, a long time rival of Vitol, said at the same event in London that he expects to see oil prices hit three figures before the recent rally will fade.

soybean prices are grinding higher for the second straight month. Is such rebound justified? What is the current fundamental situation on soybean? In our view it is not so great. Thursday (11 October) will be crucial for the grains market. The CONAB report from the Brazil will be published at 1:00 pm BST and it is expected to show increase in production. The WASDE report will be published by the United States Department of Agriculture (USDA) just 4 hours later at 5:00 pm BST. When it comes to the latter report estimates point at higher stocks and production as well as significant upside in the crop yield. The expected production is anticipated to rise just modestly but expected ending stocks are set for another huge increase, even despite over 100% increase since June’s report. Higher ending stocks estimates are viewed to rise by 7%, just as it was the case in the previous month.

All 5 crypto markets are in the red today with the biggest losses seen in Litecoin which is lower by 2.5% at the time of writing. The other 4 markets are all down by between 1 and 1.7%. A story worth mentioning comes from Switzerland where the cryptocurrency investment company, Crypto Finance AG, obtained official license from the Swiss watchdog (FINMA) to manage digital assets. Thanks to FINMA license the company’s Crypto Fund AG can now act legally as an asset manager. The move reinforces Switzerland outlook as a crypto-friendly country and a destination of choice for companies seeking to operate in this industry. Apart from that, some time ago SEBA Crypto AG applied for banking and securities dealing license from FINMA trying to become a regulated cryptocurrency bank. The decision in this latter case was not announced yet.