The Daily Shot And Data - February 12, 2016
Let's begin with the extreme market pressure on the global banking sector that now dominates investors' concerns (even more so than crude oil). At the center of this turbulence of course is Deutsche Bank. Here is the firm's senior debt CDS spread which continues to rise.
Source: @AlasdairPal
News headlines such as the one below aren't helping.
Source: Reuters
Even the 1-year DB CDS spread has climbed sharply.
Source: @Schuldensuehner
Moreover, Deutsche's subordinated debt CDS spread widened to record levels.
Source: @Sunchartist
As a result of the above, the German sovereign CDS also rose on Thursday, indicating that the market is pricing in some probability that Germany will be bailing out Deutsche Bank.
Source: @BTabrum
Other banks have been under pressure as well. Here are the shares of Credit Suisse (US-listed ADR) - the lowest in almost 30 years. That's quite alarming.
Source: Google
At this point, shares of European financials are down over 30% in the past 6 months.
Source: Ycharts.com
Below is the S&P Bank Index vs. the S&P500 - relative performance. Given that US banks are generally quite healthy, is the selloff overdone.
Source: stockcharts.com
One of the concerns around financials has to do with negative rates. The fear is that central banks across the globe will push rates deeper into negative territory forcing banks to take losses on their reserves.
In fact Sweden's Riksbank just did that.
Source: Investing.com
Source: Bloomberg.com
Part of the goal here was to weaken the krona vs. the euro. However as we've seen in Japan recently, the effectiveness of such actions by central banks is becoming short-lived. The krona fell sharply initially (chart shows the euro rising) but quickly recovered. Central banks are facing what amounts to "law of diminishing returns".
Global safe-haven bond yields fell sharply in response to the financials' jitters. The 10y treasury yield fell below 1.6% before recovering somewhat.
Source: @MatthewPhillips
The UK government bond yields fell to record lows.
Source: @ScouseView
Eurozone periphery bonds came under pressure as a result of the jitters in the banking sector and rising risk aversion. Here is Portugal 10y spread to Germany.
Source: @Schuldensuehner
Other risk aversion indicators are flashing red as well.
1. US implied vol curve is inverted again. VIX is once again higher than the 3-month VIX equivalent.
Source: Ycharts.com
2. DAX volatility index (VIX-equivalent) jumped to multi-year high.
Source: Investing.com
3. Dollar-yen fell below 112, with demand for the yen as a safe-haven currency rising. Also shorting the yen as a carry trade has been quite popular in Japan in recent years - now that trade is unwinding.
Source: @markets
4. Gold is approaching bull market levels.
Source: @DavidInglesTV
5. The Bloomberg Financial Conditions Index indicates elevated level of stress.
Source: @Schuldensuehner
Once again, some of these measures could be viewed as contrarian indicators, making this a very interesting time to invest.
Let's take a look at the energy markets - where it all began.
1. Inventories at Cushing, OK (the delivery hub for WTI) rose to a new record.
Source: @JavierBlas2
2. WTI futures dropped to a 12-year low before recovering 5%.
Source: barchart
The jump was related to some comments by the OPEC energy minister that raised hopes of a coordinated production cut. It's hard to imagine such an action at this point but some oil producing nations are getting desperate.
In the meantime WTI oil continues with this unusually regular downtrend pattern.
WTI crude oil curve upward slope (contango) continues to rise. The 3-month contango is now the greatest since 2011, increasing demand for storage.
Source: @JavierBlas2
Now let's review some developments in emerging markets.
1. The Mexican peso fell to 19 to the dollar - a record low. Mexico will be facing rising inflation at these levels.
Source: Investing.com
2. We also had a new record low for the Colombian peso.
Source: Investing.com
3. The Indian rupee is approaching record lows as well. This means no more rate cuts for the RBI in the nearterm - and potentially higher inflation.
Source: Investing.com
Note that while the traded dollar index (DXY) has declined sharply, the broad trade-weighted dollar index has not. The weakness in some emerging market currencies (above) which are not included in DXY explain that difference.
Source: barchart
5. Venezuela's local currency government 5y bond yield is now above 40%. Real yield is still negative.
Source: Investing.com
6. Here is an updated chart of China's capital flows. Not a great situation.
Source: @IIF
The yen strength combined with negative rates potentially hurting Japanese banks is resulting in Japanese equities being hammered. The Nikkei 225 is down 5% on the day.
Here is the Tokyo Stock Exchange startup index (MOTHERS). Ouch!
Here are the latest developments in the United States.
1. The Cleveland Fed US financial stress index continues to rise.
2. US investment grade corporate bond spread is also rising.
3. The 5y5y forward US inflation expectations hit another post-recession low (lowest since March-2009). The 10-year breakeven rate is similar. How can anyone be thinking about raising rates in this environment?
4. Speaking of raising rates, the short-term rate curve is flattening as rate hike expectations get pushed out. Here we have the Jul-16 and the Jan-17 Fed Funds futures converging.
In fact the average slope across the first 20 quarterly LIBOR futures contracts is now the lowest since 2008.
Source: @boes_
5. Here is the current futures implied probability of rate hikes in 2016.
Source: CME, @SoberLook
By the way, this is what it looked like a month ago. Amazing.
Source: CME, @SoberLook
6. On a positive note, according to the Fed, the US tech sector is doing well. "The index of the health of the tech sector rose to the highest level since 2008". Let's see what this looks like in a couple of months ...
Finally, here are a couple of charts on the equity markets.
1. US homebuilders are getting hammered as luxury home demand is expected to drop.
Source: Ycharts.com
2. On a total return basis, the S&P500 is down about 10% over the past year; Russell2000 is down double that.
Source: Ycharts.com
Turning to Food for Thought, we have 5 items this morning:
1. Union membership by state.
Source: @BLS_gov
2. Flash as a platform for online media is disappearing, with fewer browsers now supporting it (particularly on mobile devices).
Source: @StatistaCharts, h/t Jake
3. Confidence in the court system by country.
Source: @conradhackett
4. According to Pew Research, "older adults are increasingly using online dating".
Source: @pewresearch
5. Finally, the selfie-related causes of death - this is a classic.
Source: @StatistaCharts, h/t Jake
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