The Daily Shot; July 26 - Global Macro Currents

By Walter Kurtz

Tuesday, July 26, 2016 7:53 AM EDT

Greetings,

Let's begin by taking a look at a few developments in emerging markets.

1. Growth in Mexico's retail sales has been solid, consistently beating expectations.

2.. We know that a portion of these improvements in Mexico's retail sales has been driven by remittances (due to stronger US dollar). Is the nation's credit expansion also responsible for increased spending?

Source: ‏@CapEconEmerging

3. Brazil's consumer confidence rose more than expected. Green shoots?

3. The Nigerian naira continues to weaken (hitting another record low) as the country's FX reserves dwindle. The chart below shows one dollar buying a larger amount of naira.

Source: tradingview.com

4 Here is a scatter plot showing sovereign CDS spreads vs. government bond ratings. NGN stands for Nigerian naira.

Source: Credit Suisse

5. The Russian ruble weakens for 5 days in a row on falling oil prices (chart shows # of rubles one dollar buys).

Source: barchart.com

6. According to Goldman, Russian oil production will accelerate sharply in the next couple of years. It will be interesting to see how the Saudis will react to this.

Source: ‏@vexmark, @business

5. Indian shares continue to rally, approaching a one-year high.

Source: ‏Ycharts.com

6. Turkish shares bounce back.

7. Poland's unemployment rate hits the lowest level since 2008.

8. As China devalues the RMB not just against the dollar but against the currency basket (which the yuan is supposed to track), other nations start paying attention. Will this trigger "competitive devaluation" (otherwise known as "currency wars")?

Source: WSJ

9. China's stock market volatility has fallen dramatically as speculators move to greener pastures (such as cotton futures, Macau, etc.).

Source: ‏@markets

10. Emerging markets sentiment recovers with commodities.

Source: ‏@Callum_Thomas, ASR

11. The Merrill Lynch investor survey shows alocators gradually moving back into emerging markets.

Source: BofAML

1. Switching to Japan, the yen is gaining sharply this morning on renewed uncertainty. Markets are concerned that the BoJ may disappoint.

Source: barchart.com

2. The BOJ is under pressure to accelerate QE as the country's inflation weakens.

Source: WSJ, ‏@pdacosta

3. Here is what Merrill Lynch's clients think about the BoJ's next policy decision.

1. We now go to the Eurozone where Germany's Ifo Business Climate Index beats expectations (lower left).

Source: Ifo

2. Separately, German compensation cost historically lagged France and Italy but is catching up now.

Source: Goldman Sachs

3. Also, SocGen points out that only ten years ago, the German unemployment rate was materially above that of France and Italy. The (relatively weak) euro has been good for Germany. The pro-business government is helpful as well.

Source: SocGen, ‏@vexmark

4. Greece loosened capital controls with the hopes that depositors will be more willing to bring some of their cash back into the Greek banking system. Good luck with that. Greek banks were down 5% on the day.

Source: @FT

5. Italian bank Monte dei Paschi stock was suspended from trading on Monday as the share price dropped 8%. Investors are concerned about the results of the ECB's recent bank stress tests.

Source: Google

6. The chart below shows Bloomberg's consensus (survey) for the 2017 GDP growth in select Eurozone economies. The downgrades started after the EU Referendum in the UK.

Source: ‏@MxSba

By the way, here is the Merrill Lynch investor survey result for global economic growth.

1. Turning to the UK, a large publicly traded property fund seems to be recovering. Is sentiment on the nation's property markets improving?

2. Speaking of sentiment, UK consumer confidence fell sharply. Will the retail sales follow?

Source: ‏BofAML, @joshdigga

3. UK private new car registrations decline.

Source: ‏BofAML, @joshdigga

4. As discussed yesterday, UK's business sentiment has fallen sharply. Capex expectations collapsed.

Source: ‏BofAML, @joshdigga

A report on Monday showed Britain's manufacturers' sentiment at the lowest level since the financial crisis.

Source: @clusterstock

5. The probability of a BoE rate cut in August is near 90%.

Source: Natixis, ‏@joshdigga

Back in North America, how about those Vancouver home prices? Is this driven by foreigners?

Source: ‏@MatthewPhillips

1. In the United States, the Citi Economic Surprise Index continues to rise.

Source: Yardeni Research

2. Here is the trade-weighted US dollar index.

3. The January Fed Funds futures gave up most of the Brexit gain and now imply roughly even odds of a rate hike this year.

Source: barchart.com

Here are the rate hike probabilities over time.

Source: ‏@jbjakobsen

4. The 2yr treasury yield rose in response to soft demand at the latest auction.

Source: @FastFT, ‏@acemaxx

5. The Dallas Fed Manufacturing Index unexpectedly stabilizes.

6. Given the upcoming US presidential elections (and in the wake of the Brexit vote), it's interesting to see that the Merrill Lynch investor survey shows "protectionist" policies as the #2 risk to financial market stability.

Switching to the funding markets, here is a nice summary of the looming money fund regulation driving LIBOR (and commercial paper) rates higher.

Source: @WSJMoneyBeat

Source: stockcharts.com

1. In the equity markets, the Merrill investor survey shows that a significant number of investors have bought out-of-the-money equity puts (and other protection). That has been one of the reasons for the equity rally recently.

2. Here is the same survey's relative investor positioning. Is the short British pound position a crowded trade?

3. Separately, US homebuilders' shares have outperformed over the last five days on D.R. Horton's earnings beat. US housing inventory remains tight, creating demand for new homes.

Source: Ycharts.com

1. In commodities markets, crude oil remains under pressure due to elevated inventories, rising rig count, demand concerns, stronger US dollar, etc.

Source: barchart.com

2. As discussed before, crude oil has diverged from US HY bonds. Something has to give here.

Source: ‏@Callum_Thomas

3. The US soy complex (soybeans, soy meal, soy oil) is getting hammered as a result of mild temperatures and rain in major Midwest crop areas. The weather has been cooperating. As discussed yesterday, in some situations this will put pressure on farm credit - especially if the Fed hikes rates.

Source: barchart.com

Source: Google

4. Orange juice futures were up almost 4% on the heatwave in Brazil which has doubled the cost of production in 2016. Yields in some areas are down 15%.

Source: barchart.com

5. Cocoa prices are falling with the market back in surplus mode.

Source: barchart.com

In private equity, the "harvesting" of portfolio holdings has picked up as hold periods decline.

Source: @PitchBook

Finally, here is a note from one of our readers on global trade imbalances.

Turning to Food for Thought, we have 5 items today:

1. An interesting note from the WSJ on changing US labor force.

WSJ: - This year marked the first time college-educated workers, now 36% of the workforce, outnumbered those with a high-school degree or less. The share of the workforce with a high school diploma or less dropped to 34%, down five percentage points from 2007. That’s because the vast share of the 11.6 million jobs gained in the recovery — 73% — went to those with bachelor’s degrees or higher, according to the report.