The Daily Shot And Data - April 8, 2016

Greetings,
Let's begin with the global financial markets where the risk-off sentiment has returned. Dollar-yen hit 108, which is quickly becoming a disaster for the BoJ - potentially reigniting deflationary pressures. Many anticipate the BoJ to intervene in some fashion to stem the yen appreciation. The rise in yen is viewed as a sign of risk aversion.

Source: barchart (note: this chart shows the US dollar buying fewer yen, i.e. the yen strengthening)

Japan's shares remain under pressure as the Nikkei 225 is now down some 9% since March 29th.

Source: barchart

Global bank shares underperformance continues to worsen. Below is the US bank shares index relative performance vs. the S&P500.

Source: stockcharts.com

The situation in Europe is similar with the European financials vs. the Core MSCI Europe index relative performance shown below.

Source: stockcharts.com

Here is the Deutsche Bank share price - the selloff is just brutal. While many point to DB's derivatives book as one of the key problems, that concern is misdirected. The fact that the gross notional figure is large means little in the derivatives world. Long and short a bunch of rate swaps or FX forwards is not a big deal. A greater concern is the business model in the new world of negative rates, challenging regulatory environment and weak demand for investment banking services. A large hung deal on the balance sheet (discussed earlier) doesn't help either.

Source: Google

Furthermore, Italian bank shares are down 50% from last summer's highs, now at levels not seen since the Eurozone crisis.

Another concern weighing on the equity markets is the looming earnings season with analysts expecting the worst quarterly drop in earnings since 2009.

Source: @business

It's important to note that the CS Fear Barometer has been elevated, suggesting that speculative accounts may be quite short equities. That's one of the reasons it's hard to imagine a deep correction in the equity markets at this point.

Source: Credit Suisse

Another market move that spooked some investors was this sharp correction in copper prices.

Source: barchart

The reason has to do with China who stores 78% of the world's copper inventories. Now a few large trading firms are getting ready to dump some of this copper into the market.

Source: Reuters

There are also renewed concerns in the Eurozone as the Portuguese government bond yields rise again.

Here is one of the reasons.

Source: @FT

This comment on Twitter was right on the money: "Bail-ins have consequences... especially ones that are capricious and screw foreign investors." (via @DonutShorts)

Below is a quick summary of the political situation in Portugal that is causing concerns.

Source: UBS

Adding to the market uncertainty was the sterling 3-month implied volatility, which jumped above 16% as the Brexit referendum looms.

Source: ‏@FTMarkets

The unease in global markets sent bonds and rate futures higher. The Jan-17 Fed Funds futures now imply a rate of 53bp at the end of 2016 - that's only 16bp above the current level.

Source: barchart

The futures-implied probability of no Fed rate hikes in 2016 rose to 50% on Thursday.

Source: CME, @SoberLook

As global bond yields fell, the New Zealand 10-yr government bond yield hit a new low.

Let's turn to the Eurozone where the ECB minutes showed divisions within the Governing Council. Some, for example, opposed buying corporate bonds because it could lead to market distortions. And other central bank activities don't?

Source: @fastFT

Ireland's deflationary pressures reappeared as consumer inflation fell more than it has at any time since 2010. This was a bit surprising given Ireland's economic strength.

Greek unemployment rate stalls above 24%.

In the UK the Halifax Index showed robust house price appreciation as the housing shortage in some areas drives up prices.

Next let's look at emerging markets, starting with China.

1. China's FX reserves are no longer declining. A portion of this stabilization is related to the revaluation of reserves and some suggest that capital outflows are continuing.

Steel prices in Shanghai continue to rise. This is in part driven by speculative activity as traders bet on new stimulus.

Source: barchart

2. We see further signs of economic stabilization in Russia.

Source: Goldman Sachs

3. The Mexican government is artificially holding down inflation via price controls (in spite of weak peso). Over time, inflation is expected to pick up forcing the central bank to raise rates further.

Source: Goldman Sachs

Now let's look at the credit markets in the US where some 28% of all US consumer debt (~$1 trillion) is currently held directly by the federal government. Yes, these are student loans.

Next, consider the fact that (according to the Wall Street Journal) "more than 40% of student-loan borrowers aren’t making payments". This is not going to end well.

Source: @WSJ

Credit card balances in the US are now growing at 5.7% per year; much faster than wages.

Next, we have the auto loan balances in the US.

And here is the breakdown of prime vs. subprime auto ABS over time (asset-backed securities collateralized by auto loans).

Source: Morgan Stanley

While this growth in sub-prime auto securitization in the US is making many uneasy, except for one deal, Morgan Stanley does not see significant risk to existing auto ABS senior tranches.

Source: Morgan Stanley

In corporate credit, leveraged loan fund flows have turned negative again. And this time, the CLO market isn't robust enough to absorb significant outflows.

Source: @lcdnews

Separately, the US 30-year mortgage rate declined to a 14-month low. This should give some tailwind to the housing market.

Source: @fastFT

Now let's look at a couple of macroeconomic trends in the US.

1. Here is the US unemployment rate vs.the natural rate of unemployment. Some would suggest that this is when wage pressures and inflation should start ticking up. Perhaps.

2. Below is the US productivity growth vs. real earnings. There is quite a bit of debate about this divergence.

Source: @guardian, h/t Charles

We turn to the energy markets where Deutsche Bank paints a bearish picture for oil. DB does not see the oil production "freeze" having any impact on rising OPEC output.

Source: Deutsche Bank

Moreover, this capitulation by the short-side of speculative accounts in oil suggest some room to the downside.

Source: Deutsche Bank

Next, we have a number of charts on the energy markets from the Dallas Fed.

1. There is a divergence in the forecasts for how quickly the massive US oil inventories will be drawn down.

Source: @MarathonWealth, @DallasFed

2. The next chart shows that while shale production is declining, the non-shale output remains stable.

Source: @MarathonWealth, @DallasFed

3. US natural gas rig count has collapsed.

Source: @MarathonWealth, @DallasFed

4. US energy firms' CAPEX is gutted in 2016.

Source: @MarathonWealth, @DallasFed

Finally, Credit Suisse points out the sharp increase in gold ETF AUM. A bearish sign? Perhaps.

Source: Credit Suisse

Turning to Food for Thought, we have 5 items this morning:

1. Some have suggested that this trend (driven by rising minimum wage) will increase illegal immigration to California by lifting demand for cheaper labor. Will it drive some businesses out?