The Daily Shot And Data - February 17, 2016

Greetings,

Let's start with the energy markets where some of the major oil producers agreed to cap production.

Source: Reuters

Now the Russians will try to convince Iran to join in. Assuming Iran is allowed to significantly increase production before being capped, it might play ball.

What's the impact of this deal? The latest forecasts show that this arrangement will not have a material impact on the near-term oversupply problem.

Source: T Neville

Crude oil markets weren't impressed by the deal. This must be extremely frustrating for oil producing nations.

Source: barchart

One item worth noting here is that crude oil and equity markets diverged during the day. Will this divergence last?

Source: ‏@Not_Jim_Cramer

(ESA = S&P500 futures, CLA = WTI crude futures)

Staying with the energy markets, we continue to hear from many investors who are short the largest oil ETN called USO. Participating dealers are creating new USO shares, lending them out (to short-sellers), and hedging their long position in the futures market. In effect the dealers are giving investors (expensive) access to the futures market. Investors can use USO shares to make money on contango (riding down the steep curve). These positions are accumulating and it will be interesting to see what this looks like when this buildup unwinds.

Source: ‏@FTMarkets

By the way, the latest BAML survey shows investors viewing short crude oil plays as a crowded trade - right behind the long dollar trades.

Source: ‏@NickatFP, BAML

Louisiana crude oil has been almost flat to WTI on weakening refinery demand, cheap oil imports. This will continue to put pressure on storage at Cushing, OK and is bearish for WTI.

Source: Scotia Howard Weil

US natural gas remains firmly below $2/mmbtu - a tough situation for the industry.

Source: barchart

Since we are on the topic of oil producers, let's shift to emerging markets.

1. The Venezuela CDS spread is rising as default looms. The output cap was the nation's latest hope but it looks to be like too little to late. This could turn into a major humanitarian crisis.

Weak oil and other commodity prices as well as the peso at record lows have pushed Colombia's consumer confidence sharply lower.

3. While Norway doesn't belong in the emerging markets section, consumer sentiment there collapsed as well, with weak oil prices taking their toll.

4. Brazil retail sales (year-over-year) are shown below. Compare the latest results with the 2008-2009 period ...

Source: Investing.com

Note that Brazil's CDS spreads also remain elevated.

Source: ‏@pdacosta

5. The Korean won fell to a 5-year low (chart shows how many won one dollar buys). The central bank did not cut rates at the last meeting but given the global situation it is widely expected to do so shortly.

Source: barchart

6. China's private sector is reducing its foreign currency liabilities. Are they expecting further RMB weakness? There are also stories that external lenders to Chinese firms have pulled back.

Source: The Daily Speculator

Monetary conditions in China are too tight. Here is a measure of real rates. Apparently Beijing wants to concentrate on fiscal stimulus instead of lowering rates or reducing RRR. The PBoC certainly has the room to ease policy as well.

Source:Credit Suisse

While China's steel prices are about a third of what they were 5 years ago, it looks like they have bottomed out. Below is the steel rebar futures contract on the Shanghai exchange.

Source: barchart

Hong Kong term money market rates remain elevated - above those in the US. This is unusual and should be watched closely.

HIBOR rates

Migration to China's cities from rural areas has ground to a halt as demand for unskilled labor wanes. In fact according to the NY Times, the economic slowdown is sending some city workers back to the farms.

Source: T Neville

7. To take your mind off your worries, Bloomberg is suggesting a few carry trades, taking advantage of negative rates in some developed nations (assuming one can even execute these trades). Good luck with that.

Source: @business, @MattJones2401

Turning to Japan, how does the BoJ increase its quantitative easing program when it currently already buys almost all of new JGB issuance?

Source: Citi

Here is a bit more subtle item worth noting about Japan's markets. The longer dated basis swaps hugely favor swapping out of yen assets into other currencies. Part of this is driven by the demand for yen-denominated fixed income product in Japan (and limited supply of such product per above).

Source: Citi

In the Eurozone we see German economic sentiment (ZEW) coming in weaker than expected. Market jitters and softer industrial demand are taking their toll.

Source: ZEW

Speaking of softer industrial demand, let's shift to the United States where we see the following developments.

1. The Cleveland Financial Stress Index remains elevated.

2. The NY Fed (Empire) Manufacturing Index came in below consensus, now with 7 consecutive months of contraction.

Source: ‏‏Investing.com

3. Here is another ominous economic indicator: distillates demand growth. There could be other factors driving this slowdown, but it is another data point nevertheless.

Source: Barclays, T Neville

4. US homebuilder optimism index continues to soften. Is this related to softer demand for luxury homes we've seen in other indicators?

Source: Investing.com

5. BAML's latest survey suggests that investors believe the global economy is in the "late" part of the cycle.

Source: @NickatFP

Now let's review a few items in the equity markets.

1. Continuing with BAML's survey, an increasing number of investors want firms to cut their leverage - potentially at the expense of dividends or share buy-backs.

Source: @NickatFP

2. US retail shares outperform sharply over the past 2 days. Was the market underestimating the US consumer? Will retailers weather a potential slowdown better than some had thought?

Source: Ycharts.com

3. A handful of banks makes 50% of all sell-side fixed income revenue (revenue curve shown below). The situation in equities is similar.

Source: JPMorgan

4. Investors have built the largest cash positions seen in years. This can often be a good contrarian indicator.

Source: ‏@NickatFP

Finally, we take a look at some trends in global credit markets.

1. Spreads on US corporate CDS indices (CDX HY & IG) remain elevated.

Source: JPMorgan

2. US HY default rates are still low but starting to rise.

Source: BAML

3. Get your cheap auto loan while you can. Here is the ABS issuance volume over time.

Source: JPMorgan

4. While liquidity is often an issue in the equity markets, it has been a real problem in the credit markets as many bonds trade "by appointment". Nonexistent dealer inventories (and no risk appetite) as well as "gutted" trading desks are making the situation worse.

Source: @NickatFP

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

1. Low oil prices are apparently creating problems for the pirate business ...

Source: Bloomberg.com, h/t @JavierBlas2

2. Bloomberg had a good article on the Chicago schools: "School of Debt: How to Bankrupt Public Education, Chicago-Style". Just terrible.

Source: ‏@business

3. Apparently, daughters of poor parents tend to do better than sons. The situation however reverses at higher incomes.

Source: @pdacosta, nber,org

4. NY Times: Two-thirds of the entire world faces water shortages at least one month every year.

Source: ‏@nytimes, h/t Jake

5. Google search frequency for "Who is Alexander Hamilton" spiked after the musical "Hamilton" won Best Musical Theater album at the Grammys. And people wonder why we complain about US schools ...