The Daily Shot And Data - April 25, 2016
We begin the week with the United Kingdom.
1. Brexit risk weighs on UK businesses as the referendum approaches. Surveys show declining investment and hiring plans.
Source: Citi
2. The UK sovereign CDS spread remains elevated relative to the past couple of years.
Source: Citi
3. Short GBP speculative positions continue to build. We could see a sharp GBP rally if the "stay" vote prevails.
Now on to the Eurozone where we have the following developments.
1. Greek banks are up 37% over the past ten days on the (supposed) progress in the EU/IMF negotiations regarding the structure of the Greek bailout. There have been rumors that the IMF wants Greece to default because the bank views the debt as completely unsustainable. Lagarde denied it of course.
2. This chart shows total corporate bond issuance in euro. Thank you, Mr. Draghi.
Source: Morgan Stanley
3. The ECB's accelerated QE will hit the 33% limit of government bond purchases faster (% of total issuer balances). Will the ECB raise the limit to 50%? Note that 33% is already an increase from 25% (with some restrictions).
Source: Morgan Stanley
4. The Eurozone dodged a tightening in credit conditions in spite of elevated risk aversion in Q1. Many expected banks, whose equity and CoCos got hit hard, to pull back on lending.
Source: Deutsche Bank
5. French manufacturing is contracting faster than expected. The services sector is keeping the economy in growth mode for now.
Source: Tradingeconomics.com
The next 3 items focus on Japan.
1. Speculative accounts' net long yen positions reach new highs. It's time to get cautious on this trade as we could see a sharp dollar rally in an unwind.
Source: Investing.com
2. The 1yr JGB yield hits new lows just as longer-dated yields stabilize.
3. Mitsubishi Motors shares keep declining after the fuel scandal - down another 5.5% this morning.
Source: Google
Now a couple of observations on China.
1. Here is what's been driving bets on industrial commodities lately: China's "planned investment". The nation is having a tough time breaking its addiction to investment-based growth. This is also why Moody's has turned cautious on China's sovereign debt (which is used to finance some of this investment).
Source: Goldman Sachs
2. The renminbi continues to move lower. Note that if the dollar resumes its rally, Beijing may be forced to devalue CNY vs. the dollar in order to keep this trend going.
Source: Deutsche Bank
The US dollar remains the driver of risk asset valuations, especially commodities and emerging markets. If the dollar rally resumes, global financial conditions will tighten again and these assets will come under renewed pressure.
Source: Citi
Speaking of emerging markets, here is Goldman Sachs on the latest jobs data from Brazil. Ouch.
Source: Goldman Sachs
Saudi Arabia's equity market recovers nicely. However, tight interbank credit conditions persist as SAIBOR (interbank lending rate) rises further. This doesn't bode well for the GDP growth.
Source: @SoberLook
Next, let's cover some observations on the energy markets.
1. Citi researchers are bullish on crude oil.
Source: Citi
2. Many are projecting the oil oversupply to ease in the next year, which should support prices. Perhaps.
Source: @IIF
3. US oil rig count continues to decline, almost in a linear fashion.
4. This chart shows crude oil storage capacity utilization at Cushing, OK remaining elevated.
Source: CLSA
Now, let's take a look at US equity and credit markets.
1. Energy shares have outperformed year-to-date.
Source: Ycharts.com
2. Here are the cumulative flows into equity and credit funds. A mini "rotation"?
Source: BAML
3. US CFOs are not optimistic about earnings.
4. US investment-grade corporate bond spreads drop to lows not seen since last July. Credit is back in fashion - for now.
5. We see the first material increase in loan loss allowances in the US in 6 years. Banks are taking some debt writedowns probably on weak energy credits.
6. US consumer loan growth on banks' balance sheets hits 8% per year. Again, it's hard to find evidence of tightening credit conditions in the US.
LIBOR-Repo spread rose as new money market fund regulations force these funds out of commercial paper (CP) and into treasury repo & bills. Note that rising financial CP rates raises LIBOR - both represent short-term funding rates for banks.
Source: Morgan Stanley
Bitcoin hit a 3-month high, supposedly due to a growing popularity of the currency. Perhaps.
In commodities, wheat futures have met hot money, with grains selling off as sharply as they rallied. Incredible.
Source: investing.com
Source: investing.com
Below is the net speculative position in silver. One would hate to be long when this unwinds.
Finally, we have some updates on the US economy.
1. According to Markit Economics, US manufacturing is in the worst shape since 2009. Just take a look at the commentary.
Source: @MarkitEconomics
Next two slides show the two key components of the manufacturing PMI: output and employment. The recent dollar rally is still reverberating through the economy.
Source: @MarkitEconomics
By the way, here is the percentage of countries seeing improving PMIs. Based on the above, the US is not one of them.
Source: @fundstrat
Things are apparently looking better going forward. The ECRI weekly index of leading indicators continues to rise.
Source: ECRI
The futures-based probability of a US June rate hike is at 20%. As discussed last week, some believe it should be higher.
Source: BAML
Speculative accounts are net short the US dollar (slightly) for the first time in a couple of years. Once again, if the market perceives that the above probability is materially above 20%, a sharp dollar rally could ensue.
Source: Credit Suisse
Turning to Food for Thought, we have 5 items this morning:
1. US government R&D spending.
Source: BAML
2. US working-age population projection. Maintaining economic growth with poor labor productivity growth and falling working-age population will prove to be a challenge. That's why a smart immigration policy is so vital.
Source: Citi
3. Related to the above, by 2040 US federal healthcare expenditure will be a third of all federal spending.
Source: Citi
4. It begins. Next we'll have dog loan securitization and an out-of-control puppy price bubble.
Source: @BarbarianCap, @NickatFP
5. Apparently counterfeit goods account for 2.5% of the world's imports.
Source: @StatistaCharts, h/t Jake
Sign up for Sober Look's daily newsletter called the Daily Shot. It's a quick graphical summary of topics covered ...
more