The Daily Shot and Data - August 10

Greetings,

We begin with emerging markets where bond yields are falling as foreign fixed income money pours in.

1. Below we have Brazil, India, and China 10y government bond yield.

The next chart shows shares outstanding in the JPMorgan's emerging markets debt ETF (one of the largest in the space) - more than doubling since February.

Source: @lisaabramowicz1

2. Related to the above, the Brazilian real continues to strengthen (chart shows the number of reals one dollar buys).

Source: barchart.com

As an aside, helped by a stronger real as well as less-than-favorable weather conditions in India, sugar resumes its rally.

Source: barchart.com

3. Next is Goldman Sachs' comment on Brazil's retail sales outlook. Recovery is ways off.

Source: Goldman Sachs

4. The Dubai economy seems to be stabilizing on firmer crude oil.

Source: @MarkitEconomics

5. Mexican stock market is having a good month.

Source: Investing.com

6. Is Chile's booming construction sector about to slow?

Source: ‏@business

7. Taiwan's stock market is having a good year.

Source: barchart.com

8. The China Economic Policy Uncertainty Index spiked recently but it's not immediately clear what (specifically) is driving this. Some suggest it's related to the tensions in the South China Sea. As we see below, there is a development in the region almost daily - driving the uncertainty index higher.

Source: @Callum_Thomas

Source: Reuters

9. The South African rand continues to strengthen rapidly. This trend is not only driven by emerging markets inflows but also by rising anti-ANC sentiment in the country.

Source: barchart.com

Source: NT Times

1. Next, we turn to the UK, where the Northern Ireland PMI shows an economic contraction. Moreover, rising input cost will put pressure on margins.

Source: @MarkitEconomics

2. UK trade deficit was worse than forecast. With a much weaker pound, this trend should reverse soon as demand for the (now more expensive) foreign goods/services moderates.

3. UK corporate pensions' deficit continues to rise as interest rates collapse.

Source: @fastFT

4. In fact, gilt yields are hitting new lows, with the 10yr approaching 50 basis points.

5.. With the above as the backdrop, something unusual happened. The Bank of England's QE ran into trouble trying to purchase bonds because institutional investors (including corporate pensions and insurance firms) have nothing to replace these securities with - even if they make a significant profit. These organizations need a yield that covers their liabilities and cash is not going to get them there.

Source: @FT

1. Switching to the Eurozone, it's so far so good for Ireland's construction activity. There is no visible Brexit effect - for now.

Source: @MarkitEconomics

2. On Tuesday, we saw new lows for Ireland's 10y government bond yield.

3. The German Dax index is pushing toward new highs for the year - entering into bull territory. Hopes of further easing by the ECB in September got investors excited. Stronger bank shares also helped.

4. Indeed, European bank shares are recovering on Monte dei Paschi bailout and the BoE action.

By the way, here are several EU banks: capital shortfalls vs. historical dividends.

Source: ‏@joshdigga

5. Greek industrial production jumps on stronger manufacturing activity and higher electricity production. Green shoots?

6. According to the FT, "Spain and Portugal will avoid becoming first EU members to be hit with budget fines".

Source: @fastFT

7. Here is the Italian 5y government bond yield. Spectacular.

Speaking of low yields, the 30y Japanese government bond (JGB) yield has reversed sharply. A 40bp correction is about an 11% hit to the price on these high duration bonds. Painful.

1. Back in the United States, wholesale inventories rise more than expected in June. This was a surprise. Perhaps the Q2 GDP was understated?

2. US equipment sales have picked up recently. Is the non-energy Capex beginning to recover?

3. The NY Fed and the Atlanta Fed nowcast GDP tracking models are over 1% apart for the Q3 growth.

Source: @NYFedResearch, @AtlantaFed

4. While the Atlanta Fed (GDPNow) figure seems aggressive (3.7%), a big portion of the result is driven by gross private domestic investment - which has suddenly moved higher (chart below). This lends support to the US equipment sales chart (above), suggesting a pickup in Capex.

h/t @MattGarrett3

5. The Gallup US Job Creation Index seems to suggest an ongoing improvement in the labor market.

Source: @Gallup

6. US productivity unexpectedly fell for a third straight quarter. As labor costs rise, companies will need to invest in efficiency improvements in order to preserve margins.

7. Here is another gloomy take on the US economy (and the Obama Administration) from NFIB' Dunkelberg (NFIB represents US small businesses).

Source: @NFIB

NFIB's data points out that US small businesses are struggling with overregulation.

Source:@NFIB

8. Next, we have a long-term plot of US consumer credit (excluding real estate debt) as a percent of the GDP. This works at extremely low interest rates.

9. The post-recession US auto finance trend is "more" for "longer".

10. US market-based inflation expectations and crude oil have converged again.

US natural gas was down over 4.5 % on Tuesday, hitting the lowest level since mid-June. That's a bit surprising given the forecasts for the next two weeks call for hot weather. Some point to the possibility of rising overcapacity this fall.

Source: barchart.com

In other natural gas developments, Turkey agreed to move Russian natural gas to Europe via its Turkish Stream pipeline. As discussed earlier, Turkish dependence on Russian gas will influence Erdogan's foreign policy.

Source: RT

In credit markets, here is the 2015-2016 cumulative US energy debt in default (secured and unsecured).

Source: ‏@haynesboone, @BlackDiamondRsc

In the funding markets, US 3m LIBOR rose above 80bp for the first time since 2008. Financial commercial paper rates also increased materially.

Below is a nice summary of the reasons behind rising LIBOR and CP rates.

Source: @KrishnaMeman; h/t @dynamicvol

The next two charts show the widening basis spreads (discussed above) resulting from the insufficient access to US dollar funding by foreign banks. More on this later.

Source: Deutsche Bank @joshdigga

Source: Natixis, @joshdigga

1. Turning to the equity markets, here comes the big one, finally...

Source: Twitter

2. On a more serious note, the equity market does feel a bit stretched - especially in areas such as high-dividend shares.

Source: ‏@joshdigga, Bernstein

3. On the other hand, growth stocks are trading near the lows relative to the overall market.

Source: ‏@joshdigga, Bernstein

4. A rather compelling indicator that should make equity investors cautious is in the next chart. It shows speculative accounts' net VIX exposure. Shorting VIX has become a massive (and very profitable) carry trade, indicating heightened risk appetite.

In the asset management world, according to Bloomberg/Barclays, "the rate of hedge fund liquidations will exceed launches this year for the first time since 2009".