The Daily Shot And Data - October 18, 2016

By Staff

Tuesday, October 18, 2016 4:19 AM EDT

Emerging Markets

1. Let's begin with emerging economies where Gulf-based bank shares are seeing sharp declines. One of the reasons for the sell-off is the loss of bank deposits.

The correction is not limited to Saudi Arabia as Abu Dhabi banks also come under pressure - pushing the nation's overall stock market lower.

Elevated Saudi interbank borrowing rate (LIBOR equivalent) shows how these bank withdrawals ended up tightening liquidity.

2. The Turkish lira hit another record low against the dollar on US rate hike expectations.

3. Russia's economy is facing a setback as the nation's industrial production contracts again.

Moreover, as the oil rally stalls, Russian bond yields are on the rise.

4. Of course, Russia is not the only EM country heavily exposed to commodity prices. Colombia's budget is under pressure due to declines in oil revenue.

Source: Deutsche Bank, @NickatFP, @joshdigga

5. This next chart shows commodity exposure across developing economies.

Source: HSBC, @NickatFP, @joshdigga

6. In other developments, Indian banking system's non-performing loan balances have risen significantly in recent years.

Source: Goldman Sachs, @NickatFP, @joshdigga

7. Philippine government bond yields are on the rise as investors pull back. Rodrigo Duterte's policy pivot away from the US is popular domestically, but it makes international investors uneasy.

8. Inflation across emerging economies has been moving lower. However, given the Fed's expected action, monetary policy easing in some countries may be limited.

Source: HSBC, @NickatFP, @joshdigga

9. Brazilian and Argentinian stock markets have been on fire as investors bet on growth under the new governments.

China

1. Turning to China, the nation's bond yields have been declining recently as foreign investors step in. Here is the 2yr government bond yield.

2. This next chart shows rising offshore interest in China's fixed income.

Source: Deutsche Bank, @NickatFP, @joshdigga

3. China's bank loan balances as a percentage of outstanding credit have been on a decline since the Great Recession as the corporate bond market and shadow banking take higher market share.

Source: Morgan Stanley, @NickatFP, @joshdigga

Asia

1. Elsewhere in Asia, bond yields have been on the rise lately. Here are the South Korean 30yr and Australian 10yr bond yields.

2. As discussed yesterday, Singapore's economy hit a wall. Here is the nation's new business formation.

Source: Credit Suisse, @NickatFP, @joshdigga

Japan

1. Japan's industrial production showed an improvement on a year-over-year basis.

2. Japanese companies continue to downgrade their inflation expectations (both short- and long-term). This trend does not bode welll for BoJ's inflation target.

Source: Barclays, @NickatFP, @joshdigga

Europe

1. Switching to Europe, we continue to see Czech short-term yields move deeper into negative territory as investors brace for deflation after the central bank abandons the peg (cap) against the euro (next year).

On the other hand, Czech longer-term yields are on the rise as the yield curve steepens sharply. It seems that the Czech government is about to unleash some fiscal stimulus which will put the government into deficit for the first time in years. Teachers' and other public workers' wages are going up while the government boosts infrastructure spending.

2. As discussed before, Sweden's economic reports have been surprisingly weak lately. This economic slowdown, combined with some dovish comments from Riksbank, resulted in a dramatic decline in the krona.

Source: Morgan Stanley, @NickatFP, @joshdigga

3. The Eurozone consumer inflation is finally rising, although higher energy prices drove a good portion of the increase. Nonetheless, this is a small victory for the ECB.

4. This surprising chart from HSBC shows that in decades to come, Germany will face greater long-term pressure on its public finances. Aging population tends to do that.

Source: HSBC, @NickatFP, @joshdigga

5. UK's insurance firms prefer to run a duration matched portfolio (matching durations of assets and liabilities). That's why extremely low long-term yields are painful for the industry.

Source: Credit Suisse, @NickatFP, @joshdigga

However, in the past few days, things moved in the direction of UK's insurance firms, as longer-dated gilts got hammered.

Source: @fastFT; Read full article

The United States

1. Let's begin the US coverage with a portion of Stanley Fischer's speech. The Vice Chairman paints a gloomy picture of structural changes in the US and global economies that make in difficult to raise rates. At the same time, keeping rates close to zero is not healthy.

Source: FRB; Read full article

2. Market-based US inflation expectations continue to grind higher.

3. US economic data remains mixed. Industrial production and capacity utilization have been soft as the boost from utilities (due to hot summer) wanes.

The New York Fed regional manufacturing activity stumbles again.

4. Foreign investors have been less active in US 10yr note auction. A temporary adjustment or a more permanent shift?

Source: Barclays, @NickatFP, @joshdigga

5. Vehicle miles traveled metric continues to grow at around 2.5 - 3%. Cheap auto financing and cheap gasoline have been helpful.

Global

In global developments, Citi points out that while volatility has been near multi-year lows, kurtosis (fat tails) has been elevated across assets and regions.