The Daily Shot; August 2 - Global Macro Currents

By Walter Kurtz

Tuesday, August 2, 2016 11:37 AM EDT

Greetings,

We begin with the Eurozone where the troubled Italian bank Monte dei Paschi arranged a last-minute sale of its bad loans just as the ECB stress test results were released.

Source: Google

However, while Monte dei Paschi shares were up, other Italian/Eurozone banks, such as UniCredit, tumbled. In fact, trading in UniCredit was halted for a while due to this sharp selloff.

Source: Google

Source: ‏@fastFT

Why is the Monte dei Paschi rescue not received well by the banking sector investors? Here is a good summary from the WSJ.

Source: @WSJ

As a whole, Italian banks were down 5% on the day.

Below is a comparison of non-performing loans in the banking system for select Eurozone economies.

Source: ‏@fastFT

This next chart shows the "expected default frequency". The Italian banking system remains a major issue for the Eurozone.

Source: @joshdigga

Nonetheless, Monte dei Paschi's success sent Italian government bond yields to the lowest level since early 2015.

Source: ‏@fastFT

Speaking of falling yields, Spanish 10y government bond yield is approaching 1%.

Source: Bloomberg LP

Separately, while the overall Eurozone manufacturing sector growth remains stable (albeit slow), Spanish and Italian manufacturing has been softer than expected (although still expanding).

One area of contrast between Spain and Italy is the growth in productivity. Spain is one of the few countries that saw its productivity improve since the Great Recession. Italy, on the other hand, is all the way on the right side of the chart.

Source: @CardiffGarcia, @joshdigga, @JmBadalamenti

In other Eurozone developments, Paris hotel occupancy has been hit hard by the horrific terrorist attack last November.

Source: @NickatFP

The final chart on the Eurozone shows projections of the government debt to GDP ratios for select nations.

Source: @joshdigga

Switching to the UK, more evidence is emerging of an economic fallout related to the EU Referendum. Here is a summary of the manufacturing sector situation.

Source: @MarkitEconomics

Indeed, we see more signs of margins being squeezed for UK manufacturers as input prices rise.

Source: @MarkitEconomics

Separately, the GBP/USD risk reversal (spread between out-of-the-money call and put vol) is returning to normal. The pound downward bias is nearly gone.

Source: Bloomberg LP

Norway's manufacturing surprised to the upside as the PMI hit the highest level in over four years.

Switching to Japan, are the Japanese government bond yields reversing the multi-year trend?

Source: Bloomberg LP

While outright "helicopter money" seems to be a stretch for Japan in the near-term, some officials are talking about debt monetization. In some ways, the two are similar except with monetization the central bank has the "helicopter" hovering over the government buildings. Moreover, some would say the BoJ is already involved in debt monetization because it will be nearly impossible to shrink the central bank's balance sheet - even decades into the future.

Source: Bloomberg.com

The New Zealand 10yr government bond yield continues to fall as investors search for yield.

Source: Investing.com

Similarly, Australian government bond yields are hitting new lows.

Source: Bloomberg LP

Separately, the RBA cut the benchmark rate to record low this morning - which was largely expected. The Aussie dollar recovered after the initial selloff.

Source: Bloomberg LP

1. Turning to emerging markets, South Korea's CPI (YoY) was below forecasts, as disinflationary pressures persist. (Please forgive us if you don't like seeing South Korea in the emerging markets bucket).

2. The Shanghai Composite is having trouble staying above 3,000 for very long.

Source :Investing.com

3. China's manufacturing PMI surprised to the upside, which should ease some of the concerns about hard-landing (for now).

4. South Africa auto sales weakened considerably since last year. A temporary blip or something more persistent?

5. The recent spike in Russian inflation has been brutal in damaging consumers' buying power. Take a look at real wages below. Now that inflation has eased, it's time for more rate cuts. Except that weak oil prices could pressure the ruble again.

Source: Natixis, @joshdigga

6. Mexico's manufacturing PMI saw a sharp downturn. Is this a reflection of slower economic activity in the US? Here is a good summary.

Source: @MarkitEconomics

7. Brazil's manufacturing PMI seems to show signs of "green shoots".

Source: @MarkitEconomics

1. Back in the United States, the ISM manufacturing report missed projections. The employment sub-index print was 49.4 vs. 50.3 forecast.

Source: ISM

2. On the other hand, the PMI report from Markit shows "green shoots" in the US manufacturing sector.

Source: @MarkitEconomics

3. US construction spending stalled, with residential construction spending (second chart below) falling below 2.5% of the GDP again.

By the way, US roads and healthcare facilities construction spending (YoY) showed sharp declines. The US needs its own infrastructure-focused sovereign wealth fund.

4. The Goldman US Financial Conditions Index shows further easing. This trend should provide economic stimulus - and potentially improve growth - for the second half of the year.

Source: Bloomberg LP

5. More Fed officials are jawboning the markets with rate hike threats (hoping to avoid market "froth"). This strategy only goes so far before the central bank loses credibility.

Source: Reuters

6. The Fed's leading economic indices show US Southwest economies being hit hard this year. Other indicators seem to support this trend. Here are Colorado and Nevada. More on this later.

7. According to one measure, the average national US mortgage rate hit a record low in recent days. This may provide some tailwinds to the housing sector in the second half.

Source: @business

1. In credit markets, US investment grade debt now accounts for 75% of global corporate yield income. And investors want more.

Source: BofAML

2. Microsoft's (MSFT) latest bond issue ($20bn) is the 5th largest on record. Apparently, the demand was quite high. Also, the 40-year tranche from Microsoft's sale (yielding about 4%) put some pressure on the 30-year Treasuries prices.

Source: @FT, @EricGPlatt

3. Here is an updated oil - HY comparison (the second chart does the spread comparison). Will we see more pressure on high-yield bonds?

Source: @jsblokland, @JmBadalamenti

1. Speaking of oil, WTI crude dropped below $40/bbl on Monday. It has since stabilized in after-hour trading.

Source: Bloomberg LP

2. In other commodity news, palladium has been ripping higher, with funds moving in. Below is a summary explanation.

Source: barchart.com

Source: Bloomberg.com

3. Soybean and soy meal futures got slammed.

Source: barchart.com

4. Corn continues to sell off.

Source: barchart.com

6. In fact, here is the CRB Commodities Index, which tends to be heavier weighted in agricultural commodities.

Source: Investing.com

1. In the equities markets, we had a nice rally in biotech lately. Is there more interest in the sector all of a sudden?

Source: Ycharts.com

2. M&A tends to spike when profit growth stalls. In the past, the peak in M&A predicted recessions.

Source: @MA_CapitalMkts, ‏@joshdigga ·

In asset management, the State Street's large institutional investors survey tells a story of a horrible mismatch in expectations. Institutions are targeting 11% returns in their overall portfolios. Someone forgot to tell them that the 90s are over.

Source: State Street, @joshdigga

Separately, the chart below shows the debt composition for households with different levels of net-worth.

Source: @NickatFP

Finally, bitcoin mining revenue continues to fall after the halving of the "rewards" last month. If bitcoin prices decline further, there is going to be some serious pain (and consolidation) in this sector.