The Daily Shot And Data - February 19, 2016

Greetings,

Let's start with the energy markets where fundamentals continue to create headwinds for oil prices.

1. US crude oil inventories reach the highest level since the late 1920s.

2. Inventories at Cushing, OK (the WTI futures settlement hub) rise to record levels.

3. US oil output is barely budging in spite of a number of producers operating at a loss or extremely thin margins.

4. And it's not just about shale: offshore oil production in the Gulf of Mexico is expected to hit a new record next year.

Source: EIA

5. Perhaps the most striking aspect of crude oil fundamentals is what's happening with US refined products. US gasoline inventories hit another record.

Moreover, the demand for distillates (such as diesel and heating oil) is far below last year's levels.

Also, here is the amount of fuel ethanol now in storage.

There seems to be some price stabilization in a number of other commodities however.

1. Here we have iron ore futures (Singapore) - still a fraction of the highs reached over the past decade but showing signs of life.

Source: barchart

2. Nitrogen fertilizer (urea) futures have spiked sharply after a multi-year decline.

Source: barchart

One commodity that continues to struggle is sugar. The "sugar high" is over, as the bets on El Niño related damage hadn't worked out too well.

Source: barchart

Turning to emerging markets, the Argentine peso hit a record low (chart shows the number of pesos one dollar can buy).

Source: Investing.com

Argentina reported its first trade deficit in 16 years. Why all of a sudden? It turns out that the figures reported by the previous administration weren't exactly clean and in the spirit of more transparency the new government revised the results, showing weakening exports. This revision of economic data is a positive development and Mauricio Macri’s government should be applauded.

Source: Investing.com

2. Brazil's recession is deeper than what we saw in 2008-09. Moreover, S&P just cut Brazil's debt rating deeper into junk territory (BB). However there may be signs that the recession (which really should be classified as a depression) is bottoming - more on this later.

‏Source: @Schuldensuehner

3. Nigeria is facing Venezuela's problem of currency controls creating an active black market for US dollars. And in these markets the dollar is far more expensive than what the government prints as the official exchange rate. This type of divergence is never a good sign.

Source: ‏@business

4. A higher frequency Hong Kong property index shows a correction taking place. This was long time coming.

Source: @DavidInglesTV

5. As discussed before, here is another chart showing China's incredible dependence on investment relative to two other economies. The latest fiscal stimulus continues to keep investment elevated and it will be extraordinarily difficult for China to shake this addiction.

Source: @sobata416, Credit Suisse

In the Eurozone the ECB minutes show a decisively dovish tone, focusing on rising risks to the area economy. The euro fell below 1.11 as another round of ECB's easing approaches.

Source: Investing.com

Euro-yen has been especially hard-hit with the yen strengthening recently.

Source: Investing.com

As shares of financials remain under pressure, European leveraged loans continue to sell off - the longest losing streak since the financial crisis. More on this later.

Source: @pdacosta

With more QE on the way in the Eurozone, take a look at the latest French 5yr government bond auction.

Source: Investing.com

Why do people buy bonds with negative yields? It's all about deflation risks.

The forward implied inflation expectations in the Eurozone and in the US have nearly converged - both falling sharply.

Source: @acemaxx, @MorganStanley

In fact in the US, deflation risk concerns created high demand for out-of-the-money treasury calls (shown as "skew"). This is positioning for the "tail-risk" of treasury yields potentially looking similar to what we have in the Eurozone.

Source: Credit Suisse

Here are several other developments in the United States.

1. The St. Louis Fed Financial Stress Index has risen sharply but is still below normal.

2. US housing starts stall. Market jitters over the past few months probably didn't help.

3. The Citi Economic Surprise Index has stabilized, but only because analysts have sharply downgraded their expectations.

Source: @IlyaSpivak

4. The Philly Fed index shows manufacturing contracting for 6 months in a row. This latest decline however wasn't as severe as some economists had predicted.

Nonetheless, the conditions in manufacturing remain poor. Here we have the unfilled orders index and the employment index.

5. The US M1 money supply growth is slowing sharply. It remains to be seen if this spills over into the broader money supply - which could be an indication of weaker credit expansion.

6. This next chart is quite important. It shows a spike in retail money market funds holdings - an indication of retail investors moving into cash. Some view this as a good contrarian indicator for equities.

Next are several international market developments that are worth reviewing.

1. Correlations across asset classes have declined as risk aversion eases.

Source: @mcdonaldsarahj, Bloomberg.com

2. The following graph shows how global financials have performed relative to US treasuries. Dips tend to correspond to significant central bank actions. What should we expect this time?

Source: ‏@NickatFP, BAML

3. Here is an example of why negative rates put pressure on shares of banks. Danske Bank's deposit margins are negative, creating a material drag on earnings.

Source: ‏@valuewalk

4. The OECD cut its 2016 global growth forecast - again.

Source: ‏@TomOrlik

5. Anglo American's bonds were cut to junk by S&P. The firm is apparently buying some of its bonds back (at a significant discount) in order to cut leverage.