What a day! At some point in NY trading on Wednesday we were confronted with this chart of WTI crude oil, as the March contract traded below $27.50/bbl. That's right, oil was down nearly 7% on the day.

Source: barchart

For some reason US equities are now trading in lockstep with crude oil. As a result the S&P500 was down over 3% (2-year low) during the day before recovering sharply later.

The S&P500 is actually one of the better performers among the major indices. Here are some others (a number are in "bear market").

Source: @FTMarkets

The reason behind this oil-induced fear in the equity markets remains a mystery. Here is a simple summary from the WSJ (Alan Blinder's article called "Markets Are Scaring Themselves") questioning this relationship.

Source: @BrattleStCapm, WSJ

So was there something else besides oil spooking US equity investors, pushing this CNN "fear & greed" gauge deep into the red? 

Source: CNN

The real concern should be around the Fed driving US dollar higher. The currency of one of these economies (in the chart below) has strengthened sharply in the past 2 years; can you tell which one?

Source: Morgan Stanley

However the Fed-related concerns should be easing. The January 2017 Fed Funds futures are now pricing in only a 23bp increase in rates by year-end (that means a high probability of one rate hike and a much lower probability of two). 

Source: barchart

In fact according to the CME, there is now only a 22.4% probability of 2 or more hikes this year and a 37.8% chance of "one and done" (no hikes). This dovish view from the markets should in theory arrest the dollar appreciation. Will it?

Source: CME

We have a one-question survey on the Fed at the end.

Given such extraordinary volatility let's take a look at a few recent trends in US equity and credit markets.

1. Banks and homebuilders came under increasing pressure with the markets seemingly pricing in a severe economic slowdown in the US.

Source: Ycharts.com

Source: Ycharts.com

2. US equity implied volatility contango (inverted volatility curve) deepened as VIX jumped above the 3-month VIX equivalent. This is typical of times of stress.

Source: Ycharts.com

3. High-dividend shares continue to outperform as long-term rates fell further.

Source: Ycharts.com

4. At the end of the day small caps outperformed - with Russell 2000 actually finishing up on the day. It's been a while since this happened. Are we seeing the end of the small cap underperformance?

Source: Ycharts.com

In credit markets, HY corporate bonds sharply underperformed leveraged loans this year (on a total-return basis). Part of the reason is higher energy mix in the HY index. A great deal of this is just sentiment. The second chart below shows the Merrill HY Index average spread.

Source: Ycharts.com

This year we've also seen the BDC market pummeled. Sanity/caution has has finally returned to middle market credit - which has been frothy for some time. It will be interesting to see how long BDCs continue to trade below their NAV levels (which the market obviously doesn't trust).

Source: Ycharts.com

Turning to the FX markets, a number of EM currencies sold off sharply.

1. The rupee remains under pressure in spite of the supposed intervention by the RBI. Capital outflows have accelerated.

Source: barchart

2. The Polish zloty is moving lower after the recent debt downgrade (chart shows EUR moving sharply higher against PLN).

Source: barchart

3. The Mexican peso (first chart below) and the Colombian peso (second chart) hit another record low. The selloff has been relentless.

Source: barchart

Source: @fastFT

4. Finally, the Russian ruble hit a record low (down 4% on the day!) in response to crude oil selling off.

5. Here is the year-to-date (just 3 weeks) performance of a number of EM currencies vs. USD.

Source: @lisalexanderson

Continuing with emerging markets, we have several other developments.

1. In China the PBoC injected RMB 400Bil into the interbank market to force the 2-week repo rate lower. The central bank has learned that allowing tight conditions in the interbank market could be disruptive and serves to cancel out the stimulus. 

By the way, China's investment levels remain highly elevated relative to other major economies.

Source: Goldman Sachs

What's concerning however is that incremental investment isn't as effective in improving growth as it used to be. That's why fiscal stimulus, while helpful, has not yielded the results some had hoped to see.

Source: Goldman Sachs

2. The Saudis are now trying to follow the PBoC's lead in restricting shorting of its currency. This type of action is quite shortsighted because a great deal of the short positions are hedges against domestic exposure. If you don't let people hedge, they will leave (take their assets out) - exacerbating capital outflows.

Source:Bloomberg.com

Source: @business

The Saudi stock market got hammered - down 5% on Wednesday.

3. Brazil's central bank unexpectedly left the benchmark rate unchanged in spite of the renewed currency weakness and rising inflation.

Source: Investing.com

Here is Brazil's 5yr government bond yield.

4. Taiwan's 2015 export orders fell the most in 6 years on weak global demand (particularly for semiconductors). More rate cuts are coming.

Source: Investing.com

In commodities markets oil of course was the big story, driving major indices to new lows. Here is the CRB Index and the Continuous Commodity Index.

Source:  ‏barchart

Platinum hit new multi-year lows - a helpful trend for Volkswagen who is likely to purchase the metal for its catalytic converters replacement.

Source: barchart

Other commodities sold off sharply in response to weaker EM currencies. Copper on the other hand moved higher - more on this later. Finally, Here are several developments taking place in Europe. 1. If oil prices and the euro stay at current levels, deflation (at least based on the headline figures) will return to the Eurozone. Will the ECB attempt to push the euro lower again?

Source: @CapEconEurope

2. Portugal's bond yields rose (in spite of the ECB/Eurosystem purchases) as investors question the new government's commitment to fiscal responsibility.

3. Shares of Italian banks plummeted as bad loans continue to mount.

4. Let's finish on a positive note. The UK unemployment rate is now the lowest in a decade and the employment level hit a new record. 

Source: Investing.com

Source:  ‏@fastFT

Turning to Food for Thought, we have 5 items this morning:

1. According to the latest findings, the orbits of objects in the outer reaches of the solar system suggest an existence of a large yet undiscovered planet (Planet X). This must be the reason for all the market volatility...

Source: @MaxCRoser

2. It's been really, really warm recently. 

Source: @voxdotcom

3. Which countries have the largest immigrant populations?

Source: @OECD_Social

4. R&D spending by country.  

Source:  ‏@wef 

5. Global VC fintech (financial technology) investment.

Source: @valuewalk , JPMorgan