The Daily Shot And Data - March 16, 2016

Greetings,

We begin with Brazil where the political situation remains fluid. The rally in the nation's currency and equity markets has ended for now.

The stock market was down nearly 4% on the day.

Source: barchart

The Brazilian real took a 3% hit.

Source: barchart

All of a sudden investors realized that Dilma Rousseff is not just going to step down in response to the massive protests - in spite of the ongoing scandal/investigation. Moreover, the opposition has not offered up an acceptable alternative candidate.

Source: @fasrFT

Additionally, the recent proposal to use Brazil's FX reserves for fiscal stimulus poses serious risks. Raiding the central bank to pursue populist agenda is not going to end well.

Source: Barclays

Here are a few observations on other emerging markets.

1. The mess in South Africa continues as the Finance Minister got into a spat with the police over some of the activities in his previous role with the government. Further debt downgrades remain likely and the traders used this risk-off day to sell the rand.

Source: barchart

2. The Ukrainian currency took a 5.6% hit as the government is under pressure to sell assets. It's hard to see the situation stabilizing anytime soon.

Source: barchart

3. Poland's deflation remains entrenched, with the CPI coming in below consensus. Anecdotally, there seems to be some downward pressure on wages as well.

4. South Korea's jobless rate jumped to 4.9% and the nation's youth unemployment is at a record high of 12.5%. China's slowdown is taking its toll.

5. Speaking of China, the nation's home sales are undergoing a seasonal rebound. Other housing data suggest that property markets are firming up.

Source: Macquarie

6. Emerging markets bond fund flows seem to have picked up momentum, with three weeks of consecutive inflows for the first time in a year.

Source: Deutsche Bank

In Japan, the central bank has left policy unchanged but further rate reductions have not been ruled out. As discussed previously, with inflation remaining stubbornly low the BoJ may be forced to ease again this year. For now the yield curve is the flattest it has been since the early 90s.

Source: Deutsche Bank

Turning to the Eurozone, here is the latest:

1. The ECB ignited demand for domestic investment grade corporate paper. Sales rose in response.

Source: @FT

Note that foreign firms trying to issue debt in euros will have a tougher time selling bonds because they don't qualify for ECB purchases. In fact, the Australian firm Transurban pulled its euro-denominated bond issuance due to lack of demand.

2. Here is how one arrives at the ECB QE-eligible corporate bond universe.

Source: BAML

The next chart shows the ECB QE-eligible corporate bonds by industry.

Source: BAML

3. Draghi's latest monetary policy easing is a "bazooka" indeed. Depending on the TLTRO uptake, the rate of ECB balance sheet expansion could exceed that of the BoJ's.

Source: Deutsche Bank

Back in the United States, we've had several positive economic reports.

1. US retail sales ex gas stations are growing at 4.8% on a year-over-year basis. So far there is no evidence of consumer recession. The second chart below shows sales at US gas stations falling sharply as gasoline prices declined.

Source: @stlouisfed

2. We had a surprising bounce in the NY Empire State Manufacturing Index.

3. The FNC US residential housing index shows a 6.4% year-over-year increase. This is too fast given soft wage growth.

Source: FNC

With some of the positive US economic reports lately the Citi economic surprise index has been rising. And with it the expectations for rate hikes this year.

Source: @IlyaSpivak, h/t Jake

With the FOMC decision coming up, let's look at some trends in US inflation measures.

1. Shelter costs could continue putting upward pressure on US consumer inflation.

Source: BAML, "OER" = owner's equivalent rent

2. Downward pressure on consumer import prices in the US could persist. This is positive for consumer spending.

Source: BAML

3. US PPI is stabilizing and should provide support for the CPI in the months to come.

Now let's take a look at some results from the latest Merrill Lynch investor survey.

1. Here is what the survey participants said regarding where we are in the economic cycle.

Source: BAML, @NickatFP

2. Fewer investors want to see companies focus on dividends and buybacks. They would like companies to concentrate on rebuilding their balance sheets and deleveraging.

Source: BAML, @NickatFP

3. The survey seems to indicate that hedge funds have been deleveraging. We have certainly seen this with the HY selloff and sharp corrections across the crowded equity trades.

Source: BAML, @NickatFP

Switching to the equity markets, Valeant hit the news again with an ugly preliminary fourth quarter 2015 results. The accountants are still having trouble figuring out the financials and if they don't get there within a few weeks, the firm could be in default.

The chart below is not a typo - the company dropped half of its market value on Tuesday.

Source: Google

Pharmaceuticals as a group were down 6.17% in response to Valeant. Here is the relative performance.

Source: Ycharts.com

Source: Stockcharts.com

The Valeant fiasco did some serious damage to Pershing Square (a prominent hedge fund). Here is what the fund's listed shares did on Tuesday. The second chart below shows the main fund's performance through the end of February vs some other funds. It will be difficult for Pershing Square to recover from this.