The Daily Shot And Data - July 6, 2016

By Walter Kurtz

Wednesday, July 6, 2016 3:14 PM EDT

Greetings,

We begin with some of the recent developments in the United Kingdom. Those who thought the situation would quickly normalize after the referendum are in for quite a surprise.

1. The British pound fell below 1.30 for the first time in over 30 years.

Source: @barchart

2. The unprecedented currency decline resulted in bifurcation of UK businesses - those who generate much of their revenue abroad and those who are domestically focused. The divergence between the FTSE 100 and the FTSE 250 is a good example of this dynamic.

Source: @fastFT

Source: Ycharts.com

3. The Bank of England made its first post-Brexit easing move by loosening capital requirements for banks.

Source: Business Finance News

4. The UK 10yr government bond yield dropped below 80bp - a record low.

5. The event that spooked the markets the most was a series of fund redemption freezes by some UK real estate income funds. These funds should not have allowed short-term liquidity to begin with, especially when many investors use them in lieu of money market funds. A total of about $12 billion of property assets is now frozen.

This event brought back memories of the Bear Stearns subprime funds.

I. Standard Life UK property fund.

Source: BBC

Standard Life shares were hammered on the news.

Source: Google

II. Aviva property fund.

Source: @FT

III. M&G Property Portfolio.

Source: M&G

6. Banks with significant UK property exposure saw their share price come under pressure. For example, Shawbrook Bank has decided to merge its commercial and secured lending divisions - an excellent way to bury the losses. That didn't help the stock price.

Source: Google

7. UK REITs are also under pressure.

Source: Google

8. The UK construction sector started shrinking even before the referendum results, with the construction PMI coming in well below expectations.

Source: @tEconomics

9. The whole of UK service sector is expected to begin contracting. Take a look at the pre-brexit results below from Markit.

Source: @MarkitEconomics

10. The latest economic/business uncertainty measures show a sharp decline in confidence. Here are the indicators from Markit and YouGov.

Source: @MarkitEconomics

Source: YouGov

11. According to Morgan Stanley, Brexit has exacerbated UK pension deficits - which are now expected to hit a new record. The collapse in bond yields will make it increasingly difficult to fund liabilities. Here is a summary of the impact.

Source: Morgan Stanley

1. Turning to the Eurozone, Italian banks were hammered again on Tuesday. As discussed before, this situation could easily spin out of control if not addressed quickly. The Eurozone playbook is to implement "bail-ins" by forcing bond investors to take a haircut. The Italian government is not (yet) prepared to do that.

Source: Investing.com

As an example, it's amazing that the world's oldest bank's (BMPS) equity has been wiped out while some bonds still trade with "normal" yields.

Source: Google

CDS spreads are now pricing in bail-ins for subordinated debt.

Source: Bloomberg

2. It's not only the Italian banking sector that has issues. Here is Deutsche Bank's relentless selloff.

Source: Google

3. Over 60% of German government bonds are no longer eligible for the ECB's QE because the yield is below negative 40bp. The ECB's rule book on the allocation of purchases across various countries will now need to be completely rewritten. The outcome is likely to irritate many in Germany because it will probably involve more periphery bond purchases.

Source: @fwred

4. On a positive note, the ECB's monetary transmission seems to be working by lowering loan rates across the Eurozone. That's, of course, assuming that lending volumes continue to improve.

Source: @MikaelSarwe

5. As discussed before, the main risk to the Eurozone's economy now is that the pressure on the banking system will choke off the nascent improvement in credit conditions.

Source: ‏@HolgerSandte, @enlundm

6. Here is how the Brexit-based economic uncertainty spread globally. The Eurozone is heavily impacted.

Source: @Rupert_Seggins

7. French government bond yields are hitting record lows.

Source: Investing.com

The Swiss 30y yield is also at record lows. In fact, the whole Swiss curve is now negative - out to 50 years. Amazing.

Source: @RBS_Economics, @TheStalwart

Separately, Credit Suisse shares are trading near record lows. Imagine if you got these as your bonus but weren't allowed to sell them.

Source: Google

As a side note, this is an interesting diagram showing the various trade relations in Europe. How will the "sandbox" be redrawn now?

Source: @business

1. Turning to emerging markets, Beijing continues to push the RMB lower vs. the dollar.

Source: ‏@barchart

2. Related to the above, Macquarie asks how the PBoC would justify lowering the yuan against the dollar last week.

Source: @Macquarie

3. China's service sector activity rose to an 11-month high. However, because of weakness in manufacturing, the composite output index is relatively weak. The Caixin PMI Momentum Index is deteriorating again according to Nordea.

Source: @MarkitEconomics

Source: ‏@AmyYuanZhuang

4. Here is China's service sector's contribution to the GDP with and without financial services.

Source: @BofAML

5. In other Emerging economies, the Mexican peso is under pressure again - down 2% vs. USD on Tuesday.

Source: Deutsche Bank, ‏@historysquared

6. Brazil central bank continues to unwind its FX swap position.

SourceL Barclays, ‏@joshdigga

7. Russia has nearly used up one of its sovereign wealth funds.

Source: Reuters

As expected, there is a spike in uncertainty levels in Australia after the elections.

Source: @BofAML, ‏@joshdigga

The global search for yield is sending Australia and New Zealand bond yields to record lows.

Switching to Japan for a moment, dollar-yen is now below 101. This tremendous yen appreciation is a nightmare for the BOJ and is likely to put the central bank in play quite soon. A policy easing or even a direct intervention in the currency markets by Tokyo is possible.

Source: @barchart

1. Back in the United States, the 30y treasury yield hits a record low.

2. The yield curve continues to flatten (the 10yr - 2yr spread is 80bp).

Source: @ReutersJamie

To best visualize the flattening, here is the yield curve now and three years ago. The market is pricing in a substantial economic slowdown.

Source: @ReutersJamie

3. US manufacturers' new orders volume came in below expectations. Excluding defense and aircraft, orders are at the lowest level in over five years

4. In US equity markets, utilities are up 24% year-to-date. This preference for utilities shows tremendous risk aversion.

Source: Ycharts.com

5. According to Morgan Stanly, US commercial mortgage defaults seem to be on the rise.

Source: ‏@tracyalloway, Morgan Stanley

Globally, the JPMorgan PMI shows the weakest quarter in terms of economic activity since 2012.

Source: ‏@MarkitEconomics

1. Finally, we look at commodities, where according to one research group, the US has a great deal of oil relative to other nations. Of course, extraction costs are considerably higher than in many other countries.

Source: @business

2. Crude oil took a real beating on Tuesday (falling even more than the chart below shows).

Source: @barchart

3. US grains continue their spectacular tumble in response to large crop expectations as well as favorable weather. Are some agricultural banks exposed here?