Bond Markets

Let's begin with this week's the global bond selloff.

1. We continue to see sharp yield increases in the Eurozone. For example, here is Italy, France, and Germany of varying maturities. Note that the 10yr Bunds are now firmly in positive territory.

 

 

2. Elsewhere in Europe, here are bonds from the UK, Denmark, and Poland. 

 

 

Even in Sweden, where the central bank signaled potential additional QE and "lower for longer" rates (more on this shortly), the yield curve steepened.

Source: Bloomberg

3. Bonds in other parts of the developed world got slammed as well. Here are government debt yields in the US and Australia.

 

4. Long-term rates also rose in emerging markets. Argentina's dollar-denominated bond yield rose in part as a result of the overhang (Argentina has sold a lot of bonds since reentering the international debt markets).

Other examples include Mexico and the Philippines.

 

Why this sudden selloff? In part, we have a bit of an overhang of new issuance, triggered initially by Austria's new 70yr bond as well as sales from Portugal and Germany on the following day. Moreover, there is a now some concern that while markets have been pricing no or negative inflation for years to come, we have signs that the global disinflationary pressures are easing. For example, we've seen massive rallies in certain commodity prices, especially metals. As China's PPI turns positive, the US and other nations' import prices stop declining.

Source: ‏Barclays, @NickatFP, @joshdigga

Wage increases in the US represent another sign. Again, we are not talking about any significant inflationary pressures - only somewhat faster price increases than the bond markets have been pricing in.

Source: ‏Barclays, @NickatFP, @joshdigga

The CPI in some of the large economies has been on the rise, and while the absolute levels are relatively soft, the trends are making some bond investors uneasy. 

Source: @WSJ; Read full article

Even inflation figures from Japan this morning were a bit firmer than expected. Here is Tokyo CPI for example (which comes out a month before the national measures).

We are also seeing rising inflation expectations in the bond markets. Here are the 5yr, 5yr forward inflation measures for the US and the Eurozone.

 

As discussed before, investors' sentiment on inflation sometimes shows up in fund flows into inflation-linked securities. Shares outstanding in this large TIPS ETF (TIP) , for example, are rising daily.

The world economy isn't growing fast enough to sustain significant inflation, but given the expectations of "lower for longer," even small inflation surprises can send bond investors running for cover.

The Eurozone

1. It seems that the increases in the Eurozone's loan growth have stalled, potentially as a result of the recent recapitalization pressures in the banking system. Loan growth for both corporations and households has leveled off.

 

Perhaps the latest rally in European bank shares will ease some of these pressures, for now.

2. Here is what Barclays views as the potential next steps by the ECB - with the likelihood level attached. The focus in December, however, will be on the pace of the QE taper.

Source: ‏Barclays, @NickatFP, @joshdigga

3. Spain's unemployment rate is declining faster than expected (although still at extremely high levels). 

Spain's mortgage approvals moved back into positive territory when compared to last year.

4. Italy's manufacturing confidence surprised to the upside. Consumer confidence, which continues to fall, was nonetheless better than expected.

Italian wage growth remains at historical lows (at least in recent history) - there are certainly no inflationary concerns here.

5. Finland's consumer confidence rises to the highest level since early 2011.

Europe

Sweden's central bank struck a decisively dovish tone, sending the nation's currency to the weakest level since 2010. The chart below shows the Swedish krona declining against the euro.

Here is a good summary from the Financial Times:

The Riksbank ... said it is "ready to extend" bond purchases in December.
...
While government surveys released on Thursday showed more evidence of strength in Sweden's economy, the Riksbank's focus on inflation prompted it to say that it does not expect to begin raising interest rates "until early 2018".

Prior to the monetary policy meeting in December, the Executive Board is also prepared to extend the purchases of government bonds. As the current asset purchase programme will run for the remainder of the year, there is thus opportunity to await further information that can affect the decision to extend the purchases.

Indeed, Riksbank's announcement came on the same day as Sweden's latest economic data that showed several improvements. Here are the consumer and manufacturing confidence measures - both are better than economists' forecasts.

 

Moreover, lending to households, which had slowed in recent months due to new mortgage regulation, has stabilized.

The United Kingdom

1. UK's GDP surprised to the upside, suggesting that the impact of the EU Referendum vote has been contained thus far. Economists warn that it's too early to get excited about these results because the hit to the nation's service sector exports due to a "hard Brexit" could be painful.

2. UK's retail sector data also surprised to the upside. 

Emerging Markets

1. Brazil's budget deficit continues to grow, with the latest figures worse than expected. 

But who is worried? Brazil's stock market keeps grinding higher.

2. Speaking of stock market rallies, here is Kazakhstan's equity index. Of course, this is denominated in Kazakhstani tenge, which has had a massive devaluation. Nonetheless, some international funds are now dabbling in this market as a result of stronger oil prices in recent months.

3. Not all "frontier markets" are doing well. Here is Mongolia's stock index. 

4. The Turkish lira continues to trade near record lows vs. the dollar.

5. Markets are betting on further renminbi weakness. Here is the 1-month USD/CNY FX forward rate.

Asia

1. Elsewhere in Asia, we see more evidence of Taiwan's recovery, as the GDP beats forecasts.

2. Hong Kong's exports surprise to the upside. Is this a sign of China's economic activity firming a bit? 

3. The Singapore dollar is under pressure, hitting the lowest level since March, as the nation's economic prospects turn sour. 

 

Source: Channel NewsAsia; Read full article

4. Japan's labor markets continue to tighten. The country has no choice but to start bringing in foreign workers (which Abe's government is supposedly working on) or face deflation and weakening growth. 

The United States

1. The durable goods orders and shipments activity in the US continues to be a disappointment.

 

2. US exporters will be facing renewed pressures from a stronger dollar. 

3. Pending home sales trend remains soft, coming in below expectations on a year-over-year basis. While some point to the month-over-month improvement in pending sales, it's worth noting that the National Association of Realtors' seasonal adjustments are not always reliable.

4. As discussed before, the US is facing a housing shortage, which will become acute in the next few years. This chart shows the total housing stock vs. the population over time.

Commodities

Aluminum prices in Shanghai continue to rise. Here is further detail on the situation, although much of the rally is still driven by speculative activity.

 

Source: @StephanieAYang; Read full article

Bitcoin

Here is a letter to the editor outlining the bull case for Bitcoin.

Why so negative on Bitcoin... seems to me it has tons of upside:

* The supply, limited but infinitely divisible, cannot be controlled by a government as our current fiat money systems.
* Unlike dollars, euros, yuan or gold it can be moved (if you need to the heck out, like many unstable places in the world; China, Syria, Russia, etc.) with ease and cannot be frozen or taken away for political or other reasons.
* It enables privacy protection. For example, rather than being the product in internet-based commerce, the person again becomes the customer without having to give up identity to get content (the cost of content will be transparent and become far more market-based).
* It takes banks and credit card companies out of the middle of transactions, reducing the cost of commerce. Why do we need a middle man when the technology exists to remove him?
* Bitcoin exchanges have been hacked, but the blockchain has not. Wasn't it just a couple months ago that the SWIFT system was hacked? Was that the beginning of the end for traditional banking and money movement?
* Since Bitcoin's inception, seven years ago, it has risen from .0001 of a dollar to $680. Seems like there is something there of value.

James

Credit

1. As a result of higher rates, high-yield bonds have been outperforming investment grade debt on a total-return basis.

2. REITs were down sharply again on Thursday as bond yields rose.

Equities

1. The sector trends discussed yesterday intensified on Thursday. Here is the relative performance of banks as well as retail shares vs. the S&P500.

 

2. Finally, the market was quite disappointed with Amazon's (AMZN) earnings report.

 

Source: @WSJ; Read full article

Food for Thought

1. Let's begin today's Food for Thought^™ with some interesting US presidential elections poll data (via a Daily Shot reader). 

Source: IBD, h/t John; Read full article

 

Source: IBD, h/t John; Read full article

2. Is all the negative campaigning in swing states hurting consumer confidence? 

Source: @economics , @Tmp_Research; Read full article

3. States with fewer insurers see bigger increases in health insurance premiums. 

Source: @voxdotcom, @Tmp_Research; Read full article

4. Grants are increasingly going to older researchers. 

Source: @paul1kirby, @Tmp_Research; Read full article

5. Financial planners say that younger investors should hold less cash in their portfolios than the older generations. In practice, just the opposite seems to be true.

Source: @WSJThinkTank, @charliewwells , @Tmp_Research; Read full article

Have a great weekend!