The Daily Shot And Data - June 29, 2016
Greetings,
Let's begin with several developments in emerging markets.
1. Emerging market bonds performed superbly through the Brexit fiasco and continue to rally. Here is the Brazil and Russia 10yr local currency government bond yield.
Indeed, in the equity markets, there was a drastic contrast between developed and emerging markets volatility during the past few days.
Source: Bloomberg.com
Source: Bloomberg.com
On Tuesday, as the risk-off sentiment eased, emerging markets currencies rallied sharply. Here is the Brazilian real - up 2.6% vs. the dollar.
Source: @barchart (chart shows the number of reais one dollar buys)
Part of the reason for the real's rally was some hawkish messaging from Brazil's central bank.
Source: Bloomberg.com
Business confidence in Brazil clearly shows signs of stabilization. Analysts expect economic activity to follow.
Source: @lisalexanderson
An ugly political battle is unfolding in Venezuela where Maduro is attempting to dissolve congress (by influencing the courts). This action is in response to the legislative body trying to recall him.
Source: Digital Journal
Source: Digital Journal
Meanwhile, Venezuela's citizens continue to struggle.
Source: The Wahington Post
Indonesia's government is focused on stimulating the economy, which has resulted in higher than typical fiscal deficit.
Source: Barclays, @EMgist
Turkey's tourism industry is in trouble as the number of foreign arrivals collapses. Stores, restaurants are going under in large numbers. That's why Turkey moved to restore ties with Russia. However, the terrible events at Istanbul Airport on Tuesday will likely further curtail foreign arrivals.
Mainland China's demand for Hong Kong shares has risen sharply. However, the "northbound" flow (HK to Mainland) isn't increasing.
Source: @vikramreuters
Turning to the UK-EU ordeal, here are a few updates.
1. Merkel, Hollande, Renzi are telling the UK "no negotiation until UK's PM triggers Article 50."
Source: Goldman Sachs
2. As the EU prepares to meet Cameron, it's either "married" or "divorced" - can't use Facebook's "it's complicated" status.
Source: @FT
3. The BoE injected some liquidity into the banking system to keep the funding markets oiled.
Source: Independent
4. As the risk-off sentiment eases, British pound options bets/hedges are unwound.
5. As inflation expectations in the Eurozone and the US fall, the UK sees a sharp increase due to the massive currency devaluation.
Source: @acemaxx, @greg_ip, @wsj
6. Draghi sees the Brexit shock cutting the Eurozone GDP by as much as 0.5%. This reduction in growth is something the euro bloc can ill afford at this point.
Source: @BloombergTV
7. There has been an amazing "shareholder value" destruction in the European banking system. Banks' credit downgrades are coming.
Source: @WSJGraphics
Separately, Italian consumer confidence hit a 10-month low. Brexit is not going to help.
Spanish 2-year government bond yield is back in negative territory as periphery yields decline across the board. It's risk-on again.
Sweden's PPI (YoY) is approaching record lows while the overall economy remains strong.
Source: Morgan Stanley, @joshdigga
Sweden's retail sales picked up sharply again, for example.
Source: @anwallstrom
1. Turning to Japan, all JGB yields traded below 10 basis points on Tuesday for the first time in history.
Source: @fastFT
2. Japan's retail sales came in at -1.9% year-over-year - way below consensus. This data adds to the widely-held view that the BoJ is likely to boost stimulus soon.
Source: @tEconomics
3. This year, the euro and the dollar have remained relatively stable on a trade-weighted basis. It's been all about the pound and the yen. This yen appreciation is not going to help the BoJ with its inflation target.
Source: @ericbeebo
4. Loan-to-Deposit Ratios have declined globally. The longest decline has taken place in Japan. Note that QE increases deposits without raising loan balances.
Source: Morgan Stanley, @joshdigga
1. Back in the United States, consumer sentiment (from the Conference Board) unexpectedly improved. It will be interesting to see how much the current events in Europe end up dampening US consumer confidence.
There is still a big divergence between US consumer expectations and current conditions (from the Conference Board report).
Source: Natixis
US consumers are projecting higher wages going forward.
Source: @JohnKicklighter
There is also a large divergence in consumer confidence by age.
Source: @LizAnnSonders, @bespokeinvest
2. In other US economic developments, the Economic Policy Uncertainty Index jumped sharply on Brexit news. This index tends to be quite noisy - it remains to be seen how persistent the uncertainty levels will be in the next few weeks.
3. US gross private investment is no longer growing. The last time that happened was in 2009.
4. The Johnson Redbook Index (YoY) shows weakness in US retail sales and the consumer economy in 2016.
5. Speaking of consumer economy, retail businesses in Texas are not optimistic.
6. Houston's economy seems to be contracting.
Source: @DallasFed
7. The final piece of Economic data from the US shows publicly held US government debt as a percent of the GDP.
1. In US rates markets, the treasury curve continues to flatten, pricing in a more tepid growth and weak inflation ahead. Term premium in longer-dated treasuries remains negative.
2. Falling treasury yields increase mortgage-backed securities (MBS) prepayment speed expectations. That, in turn, lowers the duration of these securities (mortgages get refi'd earlier) forcing portfolio managers to reduce hedges. Reducing hedges means buying back treasuries (or swaps) which pushes treasury yields lower. There has been a significant duration reduction over past few weeks.
Source: @stevefeiss
3. As discussed earlier, the US 5y5y forward (TIPS-based) inflation expectation fell sharply.
4. Currency basis spread eased in response to the risk-on sentiment. It indicates less demand for dollar funding abroad.
Source: @boes_
5. However, the Fed Funds rate is grinding higher. Similarly, the short-term financials CP rate is rising as well.
6. Even on the risk-on day (Tuesday), the Fed Funds futures curve is still inverted (rate cut priced in).
1. In the equity vol markets, the US vol curve is back in contango.
Source: Ycharts.com
2. The Skew Index spiked. Typically this shows rising demand for out of the money equity puts (protection). However, some suggest that this is more of a technical spike due to algo options trading.
Source: @barchart
3. The CBOE had a great month with VIX futures.
Source: @CBOE
Finally we take a look at commodities.
1. US natural gas rally continues.
Source: @barchart
2. Copper is holding up well since Friday.
Source: @barchart
3. The risk-on day gave us quite a bounce in crude oil.
Source: @barchart
4. According to Bloomberg, "cheap fuel puts $20 billion extra in American pockets, AAA says". This has to provide some tailwinds for the consumer.
Source: @business
Turning to Food for Thought, we have 5 items this morning:
1. According to Kaiser, "deductibles, coinsurance paid by workers is growing faster than payments by health plans".
Source: @KaiserFamFound
2. Marathon finishing times are not "smoothly" distributed.
Source: @paul1kirby, @nytimes
3. Sources of income by age.
Source: @BLS_gov
4. Apparently, 60% are streaming music but only 10% are paying for it. They must be ok listening to commercials on Pandora?
Source: @globalwebindex
5. Online lending in China surges. Safe investment.
Source: @pdacosta, @ChorzempaMartin, @ChinaEconWatch
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